APPRECIATION Definition

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APPRECIATION is the increase in the value of an asset in excess of its depreciable cost, which is due to economic, and other conditions, as distinguished from increases in value due to improvements or additions made to it.

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PREPAYMENT RISK, in the area of mortgage-backed securities, which are backed by loans on property, is the possibility that home owners will payoff their mortgages early, returning the investor's principal earlier than expected. This typically occurs during a declining inter­est rate environment, when home owners can refinance at lower rates, leaving investors vulnerable to the risk of reinvestment at lower rates.

NET PROFIT MARGIN (NPM After Tax) measures profitability as a percentage of revenues after consideration of all revenue and expense, including interest expenses, non-operating items, and income taxes. For a business to be viable in the long term profits must be generated; making the net profit margin ratio one of the key performance indicators for any business. It is important to analyze the ratio over time. A variation in the ratio from year-to-year may be due to abnormal conditions or expenses which need to be addressed. A decline in the ratio over time may indicate a margin squeeze suggesting that productivity improvements may need to be initiated. In some cases, the costs of such improvements may lead to a further drop in the ratio or even losses before increased profitability is achieved. Generally, if the NPM history is >20% annually, it is an indicator that the firm enjoys a sustainable competitive advantage. If the average NPM is <10%, it usually indicates that the firm is in a highly competitive business. Formula: Net Profit After Tax (EAT + DII + OI) / Net Revenue

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