25% Rule

AAA

DEFINITION of '25% Rule'

1. The idea that a local government's long-term debt should not exceed 25% of its annual budget. Any debt beyond this threshold is considered excessive and a potential risk, since the municipality may have trouble paying the cost of debt.


2. A technique for determining royalties which stipulates that a party selling a product based on another party's intellectual property must pay that party a royalty of 25% of the gross profit made from the sale, before taxes. The 25% rule applies to trademarks, copyrights, patents and other forms of intellectual property.

INVESTOPEDIA EXPLAINS '25% Rule'

1. Municipal governments looking to fund projects through bond issues have to make assumptions about the revenue they expect to bring in, which in turn will allow them to support bond payments. If revenue falls short of expectations those municipalities may not be able to make bond payments, which can hurt their credit rating. Municipal bond holders want to make sure that the issuing authority has the capacity to pay without getting in too deep.


2. Setting the value of intellectual property is a complex matter. The 25% rule does not closely define what "gross profit" includes, which creates ambiguity in the valuation calculation. Because it's a hard-and-fast rule, it does not take into account the costs associated with marketing the product. For example, the holder of a copyright will receive a 25% royalty, though the party doing the selling usually incurs the cost of creating demand in the market through advertising.

RELATED TERMS
  1. Tax-Exempt Sector

    The market niche comprised of investment vehicles exempt from ...
  2. Municipal Bond Fund

    A mutual fund that invests in municipal bonds, or "munis." Municipal ...
  3. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  4. Royalty

    A payment to an owner for the use of property, especially patents, ...
  5. Patent

    A government license that gives the holder exclusive rights to ...
  6. Trademark

    A symbol, word, phrase, logo, or combination of these that legally ...
RELATED FAQS
  1. How can I create a yield curve in Excel?

    You can create a yield curve in Microsoft Excel if you are given the time to maturities of bonds and their respective yields ... Read Full Answer >>
  2. What are the most popular and useful measures of credit spread?

    The most popular and useful measures of the credit spread, also known as the yield spread, are the z-spread and the option-adjusted ... Read Full Answer >>
  3. What risk factors should investors consider before purchasing a callable bond?

    A number of risk components should be considered in regard to any bond investment since bonds, like any investment, do carry ... Read Full Answer >>
  4. Under what circumstances might an issuer redeem a callable bond?

    The primary circumstance under which a bond issuer redeems a callable bond is a drop in interest rates. When rates fall, ... Read Full Answer >>
  5. How does an investor make money on a zero coupon bond?

    An investor makes money on a zero-coupon bond by being paid interest upon maturity. Also known as a discount bond, a zero-coupon ... Read Full Answer >>
  6. What are the advantages of investing in a callable bond?

    The biggest advantage of investing in callable bonds is that the issuer almost always offers a higher interest rate than ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Patents Are Assets, So Learn How To Value Them

    Innovation is the key to staying on top. Find out how companies protect their ideas and how to figure out how much they're worth.
  2. Bonds & Fixed Income

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  3. Bonds & Fixed Income

    How Bond Market Pricing Works

    Learn the basic rules that govern how bond prices are determined.
  4. Taxes

    Avoid Tricky Tax Issues On Municipal Bonds

    Learn the rules every investor should know before buying into this "tax-free" investment.
  5. Mutual Funds & ETFs

    Why You May Want To Be (And Stay) In Bonds

    Bonds are complicated, and it’s easy to feel intimidated or confused. Fortunately, you don’t need to be a numbers geek to be an informed investor.
  6. Mutual Funds & ETFs

    How To Short The U.S. Bond Market

    The U.S. bond market has enjoyed a strong bull run over the past few years as the Federal Reserve has lowered interest rates to historic low levels.
  7. Mutual Funds & ETFs

    The EMAG Emerging Mkts Bond ETF: Worth the Risk?

    The Market Vectors Emerging Markets Aggregate Bond ETF (EMAG) might offer long-term rewards, but is now the best time to jump in?
  8. Investing

    Feeling Risk-Averse? Consider These Investments

    These investments offer risk-averse investors resiliency to bear markets while paying sustainable dividends or interest.
  9. Mutual Funds & ETFs

    Is the DSUM Yuan Fixed Income ETF a Good Bet?

    An an depth look at PowerShares Chinese Yuan Dim Sum Bond ETF and its risks.
  10. Mutual Funds & ETFs

    Pros & Cons Of Bond Funds Vs. Bond ETFs

    Understanding the pros and cons of bond funds and bond ETFs will help you choose the instrument that is best for building your diversified bond portfolio.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center