Bad credit implies that an individual or business has a low credit score or rating. Credit histories are reported and kept in publicly accessible databases. FICO (Fair Isaac & Company) is a credit rating institution that gives individuals a credit rating score based on reported credit histories. Scores range from 300-850, generally, but they also issue ratings based on auto loans and credit cards, which are on a scale from 250-900. Continue reading...
The Foreign Credit Insurance Association protects American businesses from non-payment in international trade deals where goods were sold on credit. The Foreign Credit Insurance Association (FCIA) is a group of insurance companies which underwrite the foreign credit insurance sold by the Export-Import Bank of Washington DC. The Export – Import Bank, also known as the Ex/Im Bank, is an independent government entity that facilitates and encourages some international trade activity of American companies. Continue reading...
A credit crunch is when access to liquidity dries up dramatically in rapid fashion, or becomes less accessible due to a spike in borrowing rates. Central banks will often step-in to try and curb the lack of liquidity by offering the markets access to cash at lower than market rates, in the event of a crisis. Perhaps the most famous credit crunch in history occurred in late 2007 and early 2008, when bank balance sheets became highly leveraged overnight due to mark-to-market accounting rules that were applied to the mortgage backed security portfolios on their balance sheets. Continue reading...
The risk-free rate of return is the rate an investor can get on a risk-free asset at a given time. It is usually the current yield on a 10-year treasury, which is backed by the full faith and credit of the US Government and is considered risk-free. The risk-free rate is used in several calculations and considerations in finance, to show what return can be earned in the current market environment without being exposed to any risk. Continue reading...
Hedge funds have historically been very secretive. They still mainly fall under Regulation D and private-placement laws, but their reporting requirements have been slightly expanded after the Dodd-Frank Act in 2010. Now, they are a little more transparent, but not fully. Up until the Dodd-Frank Act, it was basically impossible to know what hedge funds were investing in and who was involved. Hedge fund managers and their investment banks were under no obligation to report the holdings, and they generally avoided leaking any information about their market positions for fear of damaging their advantages. Continue reading...
A letter of credit is a provided by a bank or financial institution on behalf of a borrower or buyer, to ensure the seller that payments will be made on time and in full. In the event that the buyer is unable to make payment on the purchase, the bank will have to step-in to cover the full or remaining amount of the purchase. Letters of credit are often used in international transactions to guarantee that payment will be received. Continue reading...
Credit debt or credit card debt is a type of consumer debt that is incurred through a short-term revolving loan facility. The most common of course is a credit card company issuing a card to a client to make purchases, with the client being responsible for minimum payments plus whatever interest rate applicable. Removing credit card debt from one’s balance sheet is often an effective way of improving your financial life. Continue reading...
For comparisons of the risk/return ratio of an investment, one must start with a benchmark of a risk-free rate of return in the current market. Since U.S. Treasury bills are backed by the full faith, credit, and taxing power of the U.S. Government, they are considered “riskless,” or as close to riskless as we can get. The current yield on a 10-year Treasury note is generally considered the risk-free rate of return. Continue reading...
Federal Credit Unions are essentially banks that are owned by their clients instead of publicly traded or what-have-you. Instead of being part of the FDIC, they have the National Credit Union Association (NCUA). They tend to be able to offer higher interest rates on savings and lower interest rates on loans than banks can, due to their mutual-ownership structure. Credit Unions operate as non-for-profit businesses, which can allow their management to use 457 retirement plans, but they are not associated with the Federal government. They do, however, charter under federal regulations, as opposed to state banks. Continue reading...
Stemming from the hedging strategy of Credit Default Swaps, an entire speculative derivatives market continues to grow, in which tranches of credit risk and indices are traded. With the ballooning of consumer credit in recent years, it is only natural that a credit derivatives market would follow it. In essence, the risk associated with a loan or bond is separated from the actual asset and is passed on to a counter-party for a premium, and then other market participants become involved, perhaps in the form of futures contracts or other derivatives. Continue reading...
A market-on-close order is used to execute a trade at the last possible moment before the market closes for the day. This may be an order to sell or buy. Market-on-close orders are instructions to execute a trade just before the market closes for the day, at the best price available at the time. The exchange will actually settle all of the market-on-close orders at the same price. Why would an investor enter this kind of trade order? Continue reading...
Bank Credit is the amount of loaned capital that an individual or business is capable of getting from a bank at a given time. This amount will be based on a series of evaluative metrics such as the total amount of assets an individual has, home equity, income, liquid net worth, work history, credit rating, and so forth. An individual can only borrow so much at a time, and, using these variables, a banker can essentially estimate how much credit could be extended that a given individual at that time. Continue reading...
B- — S&P / Fitch B3 — Moody’s In the world of junk bonds, a B3/B- rating is about as low of a rating as most investors will venture to explore. Bonds are rated by independent ratings institutions known as the Big Three: Moody’s, Fitch, and S&P. Two companies, S&P and Fitch, use the same symbols, and the B- in this example belongs to them. Moody’s has its own system, and the B3 in this example is theirs. Continue reading...
CTRs (Currency Transaction Reports) are required filings to the Financial Crimes Enforcement Network (FinCEN) to report all transactions and deposits in cash (in any currency) worth over $10,000. This includes multiple transactions that add up to over $10,000. This rule is closely tied to Anti-Money Laundering (AML) rules and reporting requirements which have become more stringent since the turn of the century. Continue reading...
Credit Spread is an indication of the default risk perceived in corporate bonds at the current time. The credit spread is the difference between the yield on the safest bonds and the riskiest bonds. How much does it cost corporations to issue bonds, in terms of the yield expected by investors in the current market? Typically, a higher spread indicates a more unstable economy. Buyers of large quantities of bonds tend to insure their purchases, and the cost of the insurance is usually reflected in so-called CDS's (Credit Default Swaps). The more expensive the CDS's are, the more risky it is to purchase the bond. Continue reading...
AAA — S&P / Fitch Aaa — Moody’s AAA/Aaa rated bond issues have an almost nonexistent chance of defaulting, according to the major ratings institutions that issue the ratings. AAA/Aaa is the highest rating a bond issue or company can get. In the aftermath of the 2008 financial crisis and recession, many companies, and the US Government itself, were downgraded from AAA to AA+. Only two companies in the US still retain the AAA rating: Johnson & Johnson and Microsoft. Continue reading...
B+ — S&P / Fitch B1 — Moody’s B+/B1 is within the range of ratings given to High Yield Bonds, also known as Junk bonds. B+/B1 is the 14th rating rating from the top rating of AAA/Aaa in the scales used by the Big Three credit ratings institutions, which are Fitch, Moody’s and S&P. They evaluate the fundamentals of companies, municipal entities, and their bond contracts to determine how much risk of default is present. The limit for the category of Investment Grade bonds is BBB-, and there are a few categories of BB above B. Continue reading...
B — S&P / Fitch B2 — Moody’s A bond issue that has a moderate chance of default but a high yield might be given a B2/B rating by the major ratings institutions. Bonds are rated based on their risk of default by the Big Three ratings institutions: Moody’s, Fitch, and S&P. The latter two use the same symbols, so if the algorithms and analysts at the two ratings institutions come to similar conclusions, a company might have the same rating from each of them, such as the “B” in this example. B2/B ratings are the 15th ratings down the scale from the top rating of AAA/Aaa. Continue reading...
Also known as Business Combination Accounting, there are specific guidelines and bits of information that must be documented on the books during an acquisition. Acquisition Accounting is a standardized way to account for the assets and liabilities of companies who are part of a merger or acquisition. International Financial Reporting Standards (IFRS) stipulate that even in a merger where a new company is formed, one company must play the role of acquirer and the other of acquiree, but that rule really only applies outside of the US. Continue reading...
A 10-k is an annual filing required by the SEC for companies over a certain size, which provides the regulators with more detail than can be found in an Annual Report. If a company has over $10 Million in assets and equity shares divided among 500 or more people, it must file a 10-K within 60 days of the end of the fiscal year, as well as 10-Q filings quarterly, whether it is publicly or privately traded. The 10-K will include specific details that companies may not have put in their Annual Report to shareholders, such as executive compensation, subsidiaries, audited financial statements, lawsuits, and so on. Continue reading...