Cost of debt The cost of debt is computed by taking the rate on a risk free bond whose duration matches

the term structure of the corporate debt, then adding a default premium. This default premium will rise as the amount of debt increases (since, all other things being equal, the risk rises as the amount of debt rises). Since in most cases debt expense is a deductible expense, the cost of debt is computed as an after tax cost to make it comparable with the cost of equity (earnings are after-tax as well). Thus, for profitable firms, debt is discounted by the tax rate. The formula can be written as (Rf + credit risk rate)(1-T), where T is the corporate tax rate and Rf is the risk free rate.The yield to maturity can be used as an approximation of the cost of debt. HEDGING A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment. In simple language, Hedge (Hedging Technique) is used to reduce any substantial losses suffered by an individual or an organization. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of over-the-counter and derivative products, and futures contracts. What are Accounting Standards? Accounting Standards are the statements of code of practice of the regulatory accounting bodies that are to be observed in the preparation and presentation of financial statements. In layman terms, accounting standards are the written documents issued by the expert institutes or other regulatory bodies covering various aspects of measurement, treatment, presentation and disclosure of accounting transactions. The basic objective of Accounting Standards is to remove variations in the treatment of several accounting aspects and to bring about standardization in presentation. They intent to harmonize the diverse accounting policies followed in the preparation and presentation of financial statements by different reporting enterprises so as to facilitate intrafirm and inter-firm comparison. The Institute of Chartered Accountants of India (ICAI) recognizing the need to harmonize the diverse accounting policies and practices at present in use in India constituted Accounting Standards Board (ASB) on April 21, 1977. The main role of ASB is to formulate Accounting Standards from time to time. GAAP: The term "GAAP" is an abbreviation for Generally Accepted Accounting Principles (GAAP). GAAP is a codification of how CPA firms and corporations prepare and present their business income and expense, assets and liabilities on their financial statements. GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions. The basic principles underlying GAAP accounting are set forth below. When preparing financial statements using GAAP, most American corporations and other business entities use the many rules of how to report business transactions based upon the various GAAP rules. This provides for consistency in the reporting of companies and businesses so that financial analysts, banks, shareholders and the SEC(Securities & Exchange Commission) can have all reporting companies preparing their financial statements using the same rules and reporting procedures. This allows for an "apples to apples" comparison of any corporation or business entity with another. Window dressing can be used by companies and mutual funds.A company can use window dressing when preparing financial statements to improve the appearance of its performance or liquidity. In this case, window dressing may consist of changing asset depreciation or valuation policies, making short-term borrowings, or engaging in sales and leaseback transactions at the end of a period. By doing so, management embellishes the companys results or liquidity and obtains some benefits. Other examples of window dressing by companies may include advertising, selling, and marketing. In these cases, window dressing occurs when positive characteristics of products or services are a little exaggerated to increase demand for them while negative characteristics are not mentioned or kept hidden.