Leverage Build Up

The term leverage build up has several applications in the financial arena. It can refer to the accumulation of additional debt to raise capital to enter an equity position that has the potential for large returns. In essence, borrowing large amounts of money to invest in equity with a high expected return. For a corporation, this could involve issuing new bonds. For an individual, it may involve taking out loans. From the perspective of portfolio management, leverage build up involves partaking in excessively leveraged positions for the opportunity to magnify returns. Leverage build up also occurs in corporate takeovers where a highly leveraged company purchases another leveraged company. Thus, the total debt of the parent increases.

Leverage build up, whether referring to portfolio management or corporate finance, increases the risk exposure of the investment. Leverage, in general, increases the associated payoffs or losses of an investment. If the position does not pay its expected returns, the debt must still be repaid in a timely manner in order to avoid bankruptcy.