HERA was passed in 2008 in response to the subprime mortgage crisis that rocked the entire economy and left many Americans underwater on their mortgages. People would need to refinance their mortgages and this bill approved the funding to help that happen. The Housing and Economic Recovery Act did several things, all aiming to help American consumers and lending institutions get out of the recession left by the subprime mortgage bubble in 2008. 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...
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...
In 2009 the Federal Housing Finance Agency (FHFA) commissioned the HARP program to help Americans upside-down on mortgages to get approved for mortgage refinancing. This is only available to people whose mortgages are already owned by Freddie Mae and Freddie Mac. Many Americans find themselves upside-down, or underwater, on their home mortgages, particularly after the housing bubble popped in 2008. To be underwater means that there is more owed on the loan than the home can serve as collateral for. Continue reading...
In contrast to the term “home owner,” home debtor is reserved for those who will seemingly never be able to pay off the mortgage(s) on their home, or who have already defaulted. Most Americans live in homes that they pay on, but are still primarily owned by the bank that loaned them money. Banks have insurance to protect them against mortgage defaults. Home mortgage loans are the primary way that Americans by homes today. Continue reading...
The Housing and Economic Recovery Act of 2008 took several steps to patch up the housing market after the subprime meltdown, one of which was the authorization of states and municipalities to issue mortgage revenue bonds (MRBs) which they could then use to help local lending institutions fund mortgages for lower-income Americans. Housing bonds are issued by state and local governments as a way to raise revenue that can help local banks and lending institutions fund mortgage loans to the community. Continue reading...
The possibility of a company or municipal government defaulting on their bond obligations, usually by going bankrupt, is a real one. For this reason, all bonds are rated according to the financial stability of the issuer. A look at the history of corporate and municipal debt will illuminate the fact that the possibility of the issuer being unable to pay its obligations to bondholders is a very real one. There is an established system of bond ratings that gives a rough estimate of the bond's reliability. Continue reading...
An interest rate is a simple financial principle that’s been around for centuries, whereby a borrower has to pay for money borrowed. The interest rate is agreed to between the lender and the borrower, and there may be provisions under which the rate could change over the course of a loan. In simple terms, an interest rate is the cost of money. Continue reading...
A rate swap is the exchange of cash flows on underlying principals which are not exchanged. It is an over-the-counter contract between two institutions to trade the cash flows on two comparable principal amounts, but not to exchange the actual principal amounts. Institutions might prefer this arrangement because they only have access to floating interest rates or are overweight in them and would prefer to have some fixed rate interest cash flow, or vice versa. These swaps might occur between banks on opposite sides of the world to take advantage of rates elsewhere or to simply diversify their risks. Continue reading...
Run rate is a term that can be applied to a certain type of accounting and management estimation or to the depletion of equity options. The first kind is when a current metric (such as sales revenue for a quarter) is assumed to extend out to the end of the year or accounting period for estimation or valuation purposes. The second kind uses the average dilution from the past three years, generally, to show the effect that convertible securities are having on the share price of a company. Continue reading...
This term might apply to bonds or pensions and other financial instruments which build up interest value which is paid out at a later time. Accrual Rate is the rate at which a nominal interest rate is credited to an account that will be paid out at a later time. A bond sold in the secondary market, for instance, will take the accrual rate into account if the sale takes place in between coupon payments. Continue reading...
The Discount Rate can actually have multiple meanings, but the most prevalent one is in regards to the minimum interest rate the Federal Reserve will charge for lending to commercial banks. The Federal Reserve sets the discount rate in an effort to discourage or encourage commercial banks to borrow, depending on the economic conditions. The discount rate also refers to the rate used to calculate the present value of future cash flows, as part of Discounted Cash Flow (DCF) analysis. Continue reading...
The interbank rate is the average lending rate used between banks of comparable size and creditworthiness when they borrow money from each other. The Federal Funds Rate is the benchmark in America, while LIBOR (the London Interbank Offered Rate) is more prevalent elsewhere. These are indexes which are used to determine rates and terms for other financial instruments and swaps. The Prime Rate, or the rate banks will used for their most credit-worthy customers, is tied to the interbank rate but is slightly higher of course. In America the Federal Funds Rate is so called because the Central bank participates in the lending. This is sometimes called the overnight rate when it refers to money that is lent between banks overnight. Continue reading...
The dividend rate is basically just the value of the annual dividend of a company, stated as the monetary value. Not to be confused with the dividend yield, or the dividend growth rate, both of which are percentages. Dividend yield and dividend rate are slightly different from one another. The dividend yield is the size of a dividend in relation to the share price, and is stated as a percentage. The dividend rate is actually the amount of money paid out per share, per year, stated as a dollar amount. Continue reading...
There are a few ways to measure unemployment, but it is normally interpreted as a percentage of the working-age population that does not have a job. The statistics that are used to determine unemployment rate typically use the number of unemployed people who are actively searching for a job. The Bureau of Labor Statistics conducts a monthly poll called the Current Population Survey which goes out to about 50,000 households, and this is a significant source of unemployment data. 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...
The prime rate is the lowest interest rate that banks will charge on loans at a given time, based on the Federal Funds Rate. Individual banks set their own prime rate, which they may also call their "Reference Rate" or "Base Lending Rate." It is the least they will charge for a loan at a given time, based on the creditworthiness of the customer, and the only clients whose risk of default is low enough to approach the prime rate are very large commercial clients. Continue reading...
A+ — S&P / Fitch A1 — Moody’s In the spectrum of ratings given to bonds and companies, A+/A1 is a very good rating to get, even if it is the 5th rating from the top. The Big Three ratings institutions, which are Fitch, Moody’s, and S&P, give ratings for creditworthiness after inspecting the books of companies who issue bonds. There are credit ratings given for companies and credit ratings given to bond issues. Continue reading...
The federal funds rate is the overnight rate at which commercial lenders lend excess reserves to other institutions, on an un-collateralized basis. This term is unique to the United States, though other central banks around the world also have an overnight rate. The federal funds rate is a closely watched and crucial rate for determining how easy capital is to access. The lower the fed funds rate, the more accessible the Federal Reserve is trying to make cash - to inspire banks to borrow and lend. The opposite is also true, where the Fed may raise the fed funds rate if an economy is overheating or lending needs to be curbed. Continue reading...