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. Intellectual Property

    A broad categorical description for the set of intangibles owned ...
  3. Mello-Roos

    In the U.S., a form of financing that can be used by cities, ...
  4. Municipal Bond Fund

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

    A debt security issued by a state, municipality or county to ...
  6. Patent

    A government license that gives the holder exclusive rights to ...
Related Articles
  1. Patents Are Assets, So Learn How To ...
    Investing Basics

    Patents Are Assets, So Learn How To ...

  2. The Basics Of Municipal Bonds
    Bonds & Fixed Income

    The Basics Of Municipal Bonds

  3. How Bond Market Pricing Works
    Bonds & Fixed Income

    How Bond Market Pricing Works

  4. Avoid Tricky Tax Issues On Municipal ...
    Taxes

    Avoid Tricky Tax Issues On Municipal ...

comments powered by Disqus
Hot Definitions
  1. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  2. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  3. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  4. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  5. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
  6. Direct Participation Program - DPP

    A business venture designed to let investors participate directly in the cash flow and tax benefits of the underlying investment. ...
Trading Center