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What is a Capital Account?
The Capital Account in a company is where paid-in capital, retained earnings, and treasury stock is accounted for. In macroeconomics, the Capital Account shows the national net change in ownership of assets. In accounting and bookkeeping, the Capital Account tracks the amount of Capital on hand at a company, which is the sum of the paid-in capital, the retained earnings, and the value of the treasury stock. Paid-in capital is the money collected from investors during an IPO or other stock issue. Continue reading...
What is a Treasury Note?
Treasury notes are government-issued coupon bonds with maturities between 1 and 10 years. A large secondary market exists for Treasury Notes, and they can be acquired at issue in a competitive bid or a noncompetitive bid auction. They are extremely popular for their marketability and six-month interest payment schedule. They do have interest rate risk, since treasuries issued with higher interest rates will make the ones already issued with lower rates less valuable. Continue reading...
What is the Federal Home Loan Bank Act?
The Federal Home Loan Bank Act was signed into law by President Hoover in 1932. The goal of the legislation was to make liquidity more accessible to banks for the purpose of making home loans, so that more Americans could acquire permanent residences. The bill established the FHL Bank system, which now consists of 11 FHL banks. The Federal Home Loan Bank Act of 1932 established the FHL Bank system, which is a co-operative banking network for banks and other lending institutions who make home loans. The FHL banks are owned by their member institutions, who purchase stock in the bank and are then permitted to take loans out from it, using that money to provide loans to customers. Continue reading...
What is a Run Rate?
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...
What is a Money Market?
Money markets are very short duration debt securities, essentially the equivalent of cash traded between banks and offered to investors at a very nominal interest rate. Money market securities are essentially IOUs issued by governments, financial institutions and large corporations, and they’re traded between each other in very high denominations. Retail investors can gain access to money markets via money market funds, which generally pay very low interest rates. Continue reading...
B-/B3 — credit rating
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...
What Types of Bonds Are There?
Bonds are divided into a several categories, and it is possible to get substantial diversification within a bond portfolio alone. Bonds may be categorized into several types. There are investment grade bonds which are conservative and safe, high-yield bonds which are relatively risky and profitable, floating rate bonds whose coupon rate is not fixed, zero coupon bonds which only pay at maturity, and foreign bonds, and so on. Continue reading...
What Does Opportunity Cost Mean?
Opportunity cost is a fundamental concept in economics and decision-making. It refers to the potential loss of choosing one option over another and helps individuals and organizations make informed decisions by considering the potential benefits and costs of each option. Opportunity cost also plays a significant role in macroeconomics, trade, and determining the price of goods and services. Understanding opportunity cost is essential for making trade-offs, allocating resources, and achieving long-term success. Continue reading...
What are TIPS?
Treasury Inflation Protected Securities (TIPS) are coupon-paying treasuries issued by the US Government whose principal amount adjusts with inflation. When a consumer buys Treasury Inflation Protected Securities (TIPS), they experience a few benefits when compared to other investment options. One benefit is that the security is backed by the full faith and credit of the US Government. Another benefit is that the principal amount adjusts automatically for inflation with the Consumer Price Index. Continue reading...
What is a Debenture?
A debenture is a non-secured loan, meaning that it is not backed by collateral or other assets. In other words, it is a loan backed by general credit. Corporations and governments issue debentures regularly, and an example of a government debenture would be a U.S. Treasury. Continue reading...
What Does Market Risk Premium mean?
Market Risk Premium refers to the expected return on a risk asset, minus the risk-free rate. A good barometer for the risk-free rate is using a U.S. Treasury bond, which is largely considered a risk-less asset if held to maturity. To give an example, let’s say the annual expected return on Stock ABC is 11%, and a 1-year U.S. Treasury pays 2%. In this case, the market risk premium is the difference between the two, or 9%. Continue reading...
What is a Fixed Income Security?
A fixed income security is one designed to pay interest/coupon payments on a predetermined basis, or a fixed schedule. Fixed income securities are often used by late stage retirees who need safe, reliable income streams. Fixed income securities still have risk, such as interest rate risk where if interest rates rise the price of a fixed income security can fall. Examples of fixed income securities are U.S. Treasuries, municipal bonds, or CDs. Because fixed income products carry relatively low risk, it generally translates into relatively lower returns. Continue reading...
What is an Inverted Yield Curve?
An inverted yield curve occurs when long-term treasuries have a lower yield than short-term treasuries. Normally, investors would not be interested in a such an arrangement and the yields would have to come up to generate some demand. However, if investor sentiment is bearish enough on bonds, they will seek to avoid the interest rate risk of short-term bonds, which will expire sooner and leave them unable to find a good rate at that point potentially. Investors with that mindset will pile on demand for long-term bonds, which drives the price up and the yields down. Continue reading...
What is the currency carry trade?
Assets that are held are sometimes analyzed in terms of the cost of carrying them, called the cost of carry. In certain situations, there may be a potential for profit if an asset that might otherwise have a cost of carry could be traded for an asset that actually generates profit. The arbitrage opportunity that exists in that space, and the market formed by it, is sometimes called the carry trade, or the currency carry trade where it applies to currency. Continue reading...
What is the ‘Risk-Free Rate of Return’?
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...
What is the Size of our National Debt?
The total United States national debt is $19.3 trillion as of fiscal year (FY) 2016. Total debt is near what the U.S. produces in annual GDP, and a majority of our national debt is public debt — money owed to those who have Treasury obligations. The U.S. also owes a large amount of money to foreign countries (foreign debt), but a majority of U.S. debt is held domestically. As of June 2012, the three countries who hold the most of our national debt are: Continue reading...
What is Bond Insurance?
Bond insurance is a contract that protects the issuer and the holder of bonds from the risk that bond payments will not be made. Bond issues from the corporate or municipal world, or from derivative sources as with asset-backed securities and CDOs, come with the risk of default-- that is, that payments will not be made on time. The major credit ratings agencies (CRAs) assign a risk of default to each bond issue with proprietary analysis methods and ratings. Continue reading...
What is the “Riskless” (or Risk-Free) Rate of Return?
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...
What are Mortgage-Backed Securities?
Mortgage-backed securities (MBS) are products that bundle mortgages together and are traded like securities for sale on the markets. Typically investment banks build these products by bundling mortgages with different interest rates and risk premiums, with the hope of the investor gaining a higher yield than can be found from traditional risk-free products, like U.S. Treasuries. Mortgage-backed securities got an infamous name during the 2008 financial crisis, as many of the packaged loans were subprime in nature. Many MBS products lost incredible value during the crisis, particularly following ruling FAS 157, which required banks to mark their value to market. Continue reading...
What is foreign debt?
Foreign Debt is also called International Debt or External debt. It is the amount of debt that is owed by one country to other countries or entities outside of the borrowing country’s borders. A country may find it easy to raise capital for operations and projects by issuing lots of bonds and taking on lots of debt obligations. If this proves to be unsustainable, or if the sheer amount of debt has investors worried, it can have significant detrimental effects and send an economy spiraling out of control. Continue reading...