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what is anchoring and adjustment | anchoring and adjustment is a phenomenon wherein an individual bases their initial ideas and responses on one point of information and makes changes driven by that starting point the anchoring and adjustment heuristic describes cases in which a person uses a specific target number or value as a starting point known as an anchor and subsequently adjusts that information until an acceptable value is reached over time often those adjustments are inadequate and remain too close to the original anchor which is a problem when the anchor is very different from the true answer understanding anchoring and adjustmentanchoring is a cognitive bias described by behavioral finance in which individuals fixate on a target number or value usually the first one they get such as an expected price or economic forecast unlike the conservatism bias which has similar effects but is based on how investors relate new information to old information anchoring occurs when an individual makes new decisions based on the old anchor number giving new information thorough consideration to determine its impact on the original forecast or opinion might help mitigate the effects of anchoring and adjustment but the characteristics of the decision maker are as important as conscious consideration the problem with anchoring and adjustment is that if the value of the initial anchor is not the true value then all subsequent adjustments will be systematically biased toward the anchor and away from the true value however if the anchor is close to the true value then there is essentially no problem one of the issues with adjustments is that they may be influenced by irrelevant information that the individual may be thinking about and drawing unfounded connections to the actual target value for instance suppose an individual is shown a random number then asked an unrelated question that seeks an answer in the form of an estimated value or requires a mathematical equation to be performed quickly even though the random number they were shown has nothing to do with the answer sought it might be taken as a visual cue and become an anchor for their responses anchor values can be self generated be the output of a pricing model or forecasting tool or be suggested by an outside individual studies have shown that some factors can influence anchoring but it is difficult to avoid even when people are made aware of it and deliberately try to avoid it in experimental studies telling people about anchoring cautioning them that it can bias their judgment and even offering them monetary incentives to avoid anchoring can reduce but not eliminate the effect of anchoring higher levels of experience and skill in a specific field can help reduce the impact of anchoring in that subject area and higher general cognitive ability may reduce anchoring effects in general personality and emotion can also play a role a depressed mood increases anchoring as do the personality traits of agreeableness conscientiousness introversion and openness 1 anchoring and adjustment in business and financein sales price and wage negotiations anchoring and adjustment can be a powerful tool studies have shown that setting an anchor at the outset of a negotiation can have more effect on the final outcome than the intervening negotiation process setting a deliberate starting point can affect the range of all subsequent counteroffers 2 for example a used car salesman or any salesman can offer a very high price to start negotiations that are arguably well above the fair value because the high price is an anchor the final price will tend to be higher than if the car salesman had offered a fair or low price to start a similar technique may be applied in hiring negotiations when a hiring manager or prospective hire proposes an initial salary either party may then push the discussion to that starting point hoping to reach an agreeable amount that was derived from the anchor in finance the output of a pricing model or from an economic forecasting tool may become the anchor for an analyst one possible way to counteract this is to look at multiple diverse models or strands of evidence social psychology researcher phillip tetlock has found that forecasters who make predictions based on many different ideas or perspectives foxes tend to make better forecasts than those who focus on only a single model or a few big ideas hedgehogs 3 considering several different models and a range of different forecasts may make an analyst s work less vulnerable to anchoring effects | |
what is an angel investor | an angel investor provides initial seed money for startup businesses usually in exchange for ownership equity in the company the angel investor may be involved in a series of projects on a purely professional basis or may be found among an entrepreneur s family and friends the investor s involvement may be a one time infusion of seed money or an ongoing injection of cash to get a product to market angel investors aren t usually in the loan business they re putting money into an idea they like with the expectation of a reward only if and when the business takes off laura porter investopediafeatures of angel investorsmost angel investors are relatively wealthy individuals who are looking for a higher rate of return than can be found in more traditional investment opportunities they search for startups with intriguing ideas and invest their own money to help develop them further the ventures are by nature extremely risky a survey by the angel capital association estimated that only 11 of such ventures end with a positive result their investments in each venture are relatively modest averaging about 42 000 1most angels keep their involvement in startups to no more than 10 of their portfolios 1an entrepreneur may seek an angel investor over more conventional financing the terms tend to be more favorable and in fact the angel investor doesn t expect to get the money back unless the idea succeeds they often seek an equity stake and a seat on the board angel investors focus on helping startups take their first steps rather than getting a favorable return on a loan angel investors have also been called informal investors angel funders private investors seed investors or business angels they seek prospects through online crowdfunding platforms or join networks that pool capital for greater impact origins of angel investorsthe term angel investor originated in the broadway theatrical world where plays were often financed by wealthy individuals rather than formal lenders and payments were due only when and if the production was a success the term angel investor was first used by the university of new hampshire s william wetzel founder of the center for venture research wetzel completed a study on how entrepreneurs gathered capital 2these days silicon valley is the center of the angel investor s world and the ideas being financed are related to the internet software or artificial intelligence who can be an angel investor angel investors have a genuine interest in innovation and a desire to be involved many have been entrepreneurs in the past anyone who has the money and the desire to provide funding for startups can be an angel investor they are welcomed by cash hungry entrepreneurs who can t get conventional bank loans or don t want the burden of big debt until their ideas take off angel investors have often obtained accredited investor status although this isn t a prerequisite accredited investor status is a formal designation regulated by the u s securities and exchange commission sec that gives individuals access to the private capital markets based on their assets and financial acumen the sec defines an accredited investor as an individual who has a net worth of 1 million or more in assets or has earned 200 000 in income for the previous two years or a couple with a combined income of 300 000 applicants must also demonstrate an understanding of sophisticated investment proposals 3sources of angel fundingangel investors usually are using their own money unlike venture capitalists who pool money from many investors though angel investors are usually individuals the entity that actually provides the funds may be a limited liability company llc a business a trust or an investment fund these are vehicles that the investor sets up for tax purposes or legal protection investment profileangel investors who seed startups that fail during their early stages lose their entire investments this is why professional angel investors look for opportunities that have a defined exit strategy an acquisition opportunity or participation in an initial public offering ipo the effective internal rate of return for a successful portfolio for angel investors is about 22 according to one study 4 this may look good to investors and too expensive to entrepreneurs but other sources of financing are not usually available for such business ventures this makes angel investments a good fit for an entrepreneur with a good idea and little or no cash to pursue it | |
what kind of ideas get angel investor financing | it may be most closely associated with the silicon valley tech industry but some angels look far afield for good ideas to bankroll ask for funding a site for entrepreneurs lists recent ideas that have gotten backing from their members they include a plan to build a franchise of archery facilities a quick dissolving tablet created by an anesthesiologist and a developer of carriers for electronic instruments however many of the pitches were from business owners and would be business owners seeking to establish or expand a business a new york marijuana dispensary wants to expand its reach a ups worker wants to open a franchise 5 | |
what s the difference between an angel investor and a venture capitalist | venture capitalists deploy vast sums of cash pooled from many investors they have big money to spend and tend to spend it only on existing businesses that they think have an opportunity to turn a substantially bigger profit for example they might buy a moribund retail chain with the goal of revitalizing it over the next two years angel investors are a different breed they are individuals who are looking to put their own money into good ideas at their earliest stages of becoming successful businesses they are committing their own money in hopes of making a good idea a reality | |
what are the disadvantages of angel investing to an entrepreneur | the entrepreneur is giving up a share of the company and its future profits in return for angel investing many angel investors want some control over the development of the product as well they often want a seat on the board or its equivalent the bottom lineangel investing has grown over the past few decades into a primary source of funding for many entrepreneurs in the early planning stages of turning their ideas into businesses this in turn has fostered innovation that translates into economic growth for the entrepreneur an angel investor provides a much needed lifeline that is not available through more conventional funding sources for the angel investor involvement in early stage startups has big risks but the potential for big rewards including personal participation in an innovative project | |
what are animal spirits | animal spirits is a term coined by the famous british economist john maynard keynes to describe how people arrive at financial decisions including buying and selling securities in times of economic stress or uncertainty in keynes s 1936 publication the general theory of employment interest and money1 he speaks of animal spirits as the human emotions that affect consumer confidence today animal spirits describe the psychological and emotional factors that drive investors to take action when faced with high levels of volatility in the capital markets the term comes from the latin spiritus animalis which means the breath that awakens the human mind in some ways keynes insights into human behavior predicted the rise of behavioral economics investopedia bailey marinerunderstanding animal spiritsthe technical concept of spiritus animalis can be traced as far back as 300 b c in the fields of human anatomy and medical physiology there animal spirits applied to the fluid or spirit present in sensory activities and nerve endings in the brain that resulting in mass psychological phenomena like manias or hysterias animal spirits also appeared in literary culture where they referred to states of physical courage gaiety and exuberance the literary meaning implies that animal spirits can be high or low depending on an individual s degree of health and energy animal spirits in finance and economicstoday in finance the term animal spirits arise in market psychology and behavioral economics animal spirits represent the emotions of confidence hope fear and pessimism that can affect financial decision making which in turn can fuel or hamper economic growth if spirits are low then confidence levels will be low which will drive down a promising market even if the market or economy fundamentals are strong likewise if spirits are high confidence among participants in the economy will be high and market prices will soar animal spirits can give rise to bubbles in asset prices and also can lead to panic selling according to the theory behind animal spirits the decisions of business leaders are based on intuition and the behavior of their competitors rather than on solid analysis keynes understood that in times of economic upheaval irrational thoughts might influence people as they pursue their financial self interests keynes further posited in the general theory that trying to estimate the future yield of various industries companies or activities using general knowledge and available insight amounts to little and sometimes to nothing he proposed that the only way people can make decisions in an uncertain environment is if animal spirits guide them in 2009 the term animal spirits returned to popularity when two economists george a akerlof nobel laureate and professor of economics at university of california and robert j shiller professor of economics at yale university published their book animal spirits how human psychology drives the economy and why it matters for global capitalism2 here the authors argue that although animal spirits are important it is equally important that the government actively intervene to control them via economic policymaking when necessary otherwise the authors postulate the spirits might follow their own devices that is capitalism could get out of hand and result in the kind of overindulgence that we saw in the 2008 financial crisis the five cognitive and psychological types of animal spirits identified by akerlof and shiller include following these phenomena help economists consider answers to tricky questions such as why do economies fall into depression and why are financial prices and corporate investments so volatile examples of animal spirits in actionanimal spirits often manifest as market psychology defined by either fear or greed for the latter the term irrational exuberance has been used to describe investor enthusiasm that drives asset prices far higher than those assets fundamentals justify simply tacking on dotcom to the name of a company increased its market value to extraordinary levels with startups showing zero earnings commanding ever higher share prices the crash that followed saw the nasdaq index which had risen five fold between 1995 and 2000 tumble from a peak of 5 048 62 on march 10 2000 to 1 139 90 on oct 4 2002 a 76 81 fall by the end of 2001 most dot com stocks had gone bust another example was the lead up to the 2008 09 financial crisis and the great recession when the markets were rife with financial innovations creative use of both new and existing financial products like collateralized debt obligations cdos abounded particularly in the housing market initially this trend was thought to be positive that is until the new financial instruments were found to be deceptive and fraudulent at this point investor confidence plummeted a sell off ensued and the markets plunged a clear case of animal spirits run amok critiques of animal spirits animal spirits refers to the tendency for investment prices to rise and fall based on human emotion rather than intrinsic value this theory however has been critiqued by some economists who argue that markets are nonetheless efficient and that individual irrationality washes out in the aggregate the animal spirits thesis like behavioral economics essentially throws a monkey wrench into the assumptions of efficiency and rationality other critics argue that bubbles are not the result of mass psychology but are due to the over involvement of central banks and too much regulation which stymie economic growth and throw markets out of equilibrium these arguments often stem from austrian economic theory or libertarianism that asserts that large increases in the money supply printed by governments are the cause of bubbles and their ultimate demise by encouraging malinvestment the bottom lineanimal spirits is a concept developed by economist john maynard keynes to describe the human emotions that affect consumer confidence these account for market psychology and in particular the role of emotion and herd mentality in investing this upends the assumptions of rationality and efficiency and primary drivers of economic behavior | |
what is the annual equivalent rate aer | the annual equivalent rate aer is the interest rate for a savings account or investment product that has more than one compounding period aer is calculated under the assumption that any interest paid is included in the principal payment s balance and the next interest payment will be based on the slightly higher account balance the aer method means that interest can be compounded several times in a year depending on the number of times that interest payments are made aer is also known as the effective annual interest rate or the annual percentage yield apy the aer is the actual interest rate that an investor will earn for an investment a loan or another product based on compounding the aer reveals to investors what they can expect to return from an investment the roi the actual return of the investment based on compounding which is more than the stated or nominal interest rate assuming that interest is calculated or compounded more than once a year the aer will be higher than the stated interest rate the more compounding periods the greater the difference between the two will be investors can compare the aer for different banking products to find the best savings accounts or other investment vehicles formula for the aer annual equivalent rate 1 r n n 1 where n the number of compounding periods times per year interest is paid r the stated interest rate begin aligned text annual equivalent rate left 1 frac r n right n 1 textbf where n text the number of compounding periods times per year interest is paid r text the stated interest rate end aligned annual equivalent rate 1 nr n 1where n the number of compounding periods times per year interest is paid r the stated interest rate | |
how to calculate the aer | to calculate aer the aer is displayed as a percentage example of aerlet s look at aer in both savings accounts and bonds assume an investor wishes to sell all the securities in their investment portfolio and place all the proceeds in a savings account the investor is deciding between placing the proceeds in bank a bank b or bank c depending on the highest rate offered bank a has a quoted interest rate of 3 7 that pays interest on an annual basis bank b has a quoted interest rate of 3 65 that pays interest quarterly and bank c has a quoted interest rate of 3 7 that pays interest semi annually the stated interest rate paid on an account offering monthly interest may be lower than the rate on an account offering only one interest payment per year however when interest is compounded the former account may offer higher returns than the latter account for example an account offering a rate of 6 25 paid annually may look more attractive than an account paying 6 12 with monthly interest payments however the aer on the monthly account is 6 30 as opposed to an aer of 6 25 on the account with annual interest payments therefore bank a would have an annual equivalent rate of 3 7 or 1 0 037 1 1 1 bank b has an aer of 3 65 1 0 0365 4 4 1 which is equivalent to that of bank a even though bank b is compounded quarterly it would thus make no difference to the investor if they placed their cash in bank a or bank b on the other hand bank c has the same interest rate as bank a but bank c pays interest semi annually consequently bank c has an aer of 3 73 which is more attractive than the other two banks aer the calculation is 1 0 037 2 2 1 3 73 let s now consider a bond issued by general electric in march 2019 general electric offered a noncallable semiannual coupon with a 4 coupon rate expiring dec 15 2023 the nominal or stated rate of the bond is 8 or the 4 coupon rate times two annual coupons however the annual equivalent rate is higher given the fact that interest is paid twice a year the aer of the bond is calculated as 1 0 08 2 2 1 8 16 annual equivalent rate vs stated interestwhile the stated interest rate doesn t account for compounding the aer does the stated rate will generally be lower than aer if there s more than one compounding period aer is used to determine which banks offer better rates and which investments might be attractive advantages and disadvantages of the aerthe primary advantage of aer is that it is the real rate of interest because it accounts for the effects of compounding in addition it is an important tool for investors because it helps them evaluate bonds loans or accounts to understand their real return on investment roi unfortunately when investors are evaluating different investment options the aer is usually not stated investors must do the work of calculating the figure themselves it s also important to keep in mind that aer doesn t include any fees that might be tied to purchasing or selling the investment also compounding itself has limitations with the maximum possible rate being continuous compounding unlike the apr aer reveals the actual interest rate crucial in finding the true roi from interest bearing assets investors must do the work of calculating aer themselves aer doesn t take into account fees that may be incurred from the investment compounding has limitations with the maximum possible rate being continuous compounding special considerationsaer is one of the various ways to calculate interest on interest which is called compounding compounding refers to earning or paying interest on previous interest which is added to the principal sum of a deposit or loan compounding allows investors to boost their returns because they can accrue additional profit based on the interest they ve already earned one of warren buffett s famous quotes is my wealth has come from a combination of living in america some lucky genes and compound interest 1 albert einstein reportedly referred to compound interest as mankind s greatest invention 2 | |
where can i find an aer calculator online | there are many websites that offer tools for calculating aer including the websites calculator soup get calc and omni calculator | |
what is a nominal interest rate | the nominal interest rate is the advertised or stated interest rate on a loan without taking into account any fees or compounding of interest the nominal interest rate is what is specified in the loan contract without adjusting for compounding once the compounding adjustment has been made this is the effective interest rate | |
what is a real interest rate | a real interest rate is an interest rate that has been adjusted to remove the effects of inflation real interest rates reflect the real cost of funds in the case of a loan and a borrower and the real yield or roi for an investor the real interest rate of an investment is calculated as the difference between the nominal interest rate and the inflation rate the bottom linethe annual equivalent rate or aer is the actual interest rate on a loan when you account for how interest is compounded this rate is higher than the nominal interest rate for a loan if interest is compounded more than once a year because this is a more accurate representation of the returns of a loan than the nominal rate the aer is also known as the effective annual interest rate | |
what is an annual general meeting agm | an annual general meeting agm is a yearly gathering of a company s interested shareholders at an agm the directors of the company present an annual report containing information for shareholders about the company s performance and strategy 1shareholders with voting rights vote on current issues such as appointments to the company s board of directors executive compensation dividend payments and the selection of auditors 2investopedia sydney saporito | |
how an annual general meeting agm works | an annual general meeting or annual shareholder meeting is primarily held to allow shareholders to vote on both company issues and the selection of the company s board of directors in large companies this meeting is typically the only time during the year when shareholders and executives interact 1the exact rules governing an agm vary according to jurisdiction as outlined by many states in their laws of incorporation both public and private companies must hold agms though the rules tend to be more stringent for publicly traded companies 3if a company needs to resolve a problem between annual general meetings it may call an extraordinary general meeting public companies must file annual proxy statements known as form def 14a with the securities and exchange commission sec the filing will specify the date time and location of the annual meeting as well as executive compensation and any material matters of the company concerning shareholder voting and nominated directors 4annual general meetings agms are important for the transparency they provide the ability to include shareholders as well as bringing management to accountability qualifications for an annual general meeting agm the corporate bylaws that govern a company along with its jurisdiction memorandum and articles of association contain the rules governing an agm for example there are provisions detailing how far in advance shareholders must be notified of where and when an agm will be held and how to vote by proxy in most jurisdictions the following items by law must be discussed at an agm additional topics covered at an annual general meeting agm if the company has not been performing well the agm is also when shareholders can question the board of directors and management as to why performance has been poor the shareholders can demand satisfactory answers as well as inquire about the strategies that management plans to implement to turn the company around the agm is also when shareholders can vote on company matters other than electing the board of directors for example if management is contemplating a merger or an acquisition the proposal can be presented to the shareholders and they can vote on whether or not the company should proceed 4several other elements may be added to an agm agenda often the company s directors and executives use an agm as their opportunity to share their vision of the company s future with the shareholders for example at the agm for berkshire hathaway warren buffett delivers long speeches on his views of the company and the economy as a whole 5berkshire hathaway s annual gathering has become so popular that it is attended by tens of thousands of people each year and it s been dubbed the woodstock for capitalists | |
what is annual percentage rate apr | annual percentage rate apr refers to the yearly interest generated by a sum that s charged to borrowers or paid to investors apr is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment this includes any fees or additional costs associated with the transaction but does not take compounding into account the apr provides consumers with a bottom line number they can compare among lenders credit cards or investment products peopleimages gettyimages | |
how the annual percentage rate apr works | an annual percentage rate is expressed as an interest rate it calculates what percentage of the principal you ll pay each year by taking things such as monthly payments and fees into account apr is also the annual rate of interest paid on investments without accounting for the compounding of interest within that year the truth in lending act tila of 1968 mandates that lenders disclose the apr they charge to borrowers 1 credit card companies are allowed to advertise interest rates on a monthly basis but they must clearly report the apr to customers before they sign an agreement 2credit card companies can increase your interest rate for new purchases but not existing balances if they provide you with 45 days notice first 3apr is calculated by multiplying the periodic interest rate by the number of periods in a year in which it was applied it does not indicate how many times the rate is actually applied to the balance apr fees interestprincipaln 365 100where interest total interest paid over life of the loanprincipal loan amountn number of days in loan term begin aligned text apr left left frac frac text fees text interest text principal n right times 365 right times 100 textbf where text interest text total interest paid over life of the loan text principal text loan amount n text number of days in loan term end aligned apr nprincipalfees interest 365 100where interest total interest paid over life of the loanprincipal loan amountn number of days in loan term types of aprscredit card aprs vary based on the type of charge the credit card issuer may charge one apr for purchases another for cash advances and yet another for balance transfers from another card issuers also charge high rate penalty aprs to customers for late payments or violating other terms of the cardholder agreement there s also the introductory apr a low or 0 rate with which many credit card companies try to entice new customers to sign up for a card bank loans generally come with either fixed or variable aprs a fixed apr loan has an interest rate that is guaranteed not to change during the life of the loan or credit facility a variable apr loan has an interest rate that may change at any time the apr borrowers are charged also depends on their credit the rates offered to those with excellent credit are significantly lower than those offered to those with bad credit apr does not take into account the compounding of interest within a specific year it is based only on simple interest apr vs annual percentage yield apy though an apr only accounts for simple interest the annual percentage yield apy takes compound interest into account as a result a loan s apy is higher than its apr the higher the interest rate and to a lesser extent the smaller the compounding periods the greater the difference between the apr and apy imagine that a loan s apr is 12 and the loan compounds once a month if an individual borrows 10 000 their interest for one month is 1 of the balance or 100 that effectively increases the balance to 10 100 the following month 1 interest is assessed on this amount and the interest payment is 101 slightly higher than it was the previous month if you carry that balance for the year your effective interest rate becomes 12 68 apy includes these small shifts in interest expenses due to compounding while apr does not here s another way to look at it say you compare an investment that pays 5 per year with one that pays 5 monthly for the first month the apy equals 5 the same as the apr but for the second the apy is 5 12 reflecting the monthly compounding given that an apr and a different apy can represent the same interest rate on a loan or financial product lenders often emphasize the more flattering number which is why the truth in savings act of 1991 mandated both apr and apy disclosure in ads contracts and agreements 4 a bank will advertise a savings account s apy in a large font and its corresponding apr in a smaller one given that the former features a superficially larger number the opposite happens when the bank acts as the lender and tries to convince its borrowers that it s charging a low rate a great resource for comparing both apr and apy rates on a mortgage is a mortgage calculator let s say that xyz corp offers a credit card that levies interest of 0 06273 daily multiply that by 365 and that s 22 9 per year which is the advertised apr now if you were to charge a different 1 000 item to your card every day and waited until the day after the due date when the issuer started levying interest to start making payments you d owe 1 000 6273 for each thing you bought to calculate the apy or effective annual interest rate the more typical term for credit cards add one that represents the principal and take that number to the power of the number of compounding periods in a year subtract one from the result to get the percentage apy 1 periodic rate n 1where n number of compounding periods per year begin aligned text apy 1 text periodic rate n 1 textbf where n text number of compounding periods per year end aligned apy 1 periodic rate n 1where n number of compounding periods per year in this case your apy or ear would be 25 7 1 0006273 365 1 257 begin aligned 1 0006273 365 1 257 end aligned 1 0006273 365 1 257 if you only carry a balance on your credit card for one month s period you will be charged the equivalent yearly rate of 22 9 however if you carry that balance for the year your effective interest rate becomes 25 7 as a result of compounding each day apr vs nominal interest rate vs daily periodic ratean apr tends to be higher than a loan s nominal interest rate that s because the nominal interest rate doesn t account for any other expense accrued by the borrower the nominal rate may be lower on your mortgage if you don t account for closing costs insurance and origination fees if you end up rolling these into your mortgage your mortgage balance increases as does your apr the daily periodic rate on the other hand is the interest charged on a loan s balance on a daily basis the apr divided by 365 lenders and credit card providers are allowed to represent apr on a monthly basis though as long as the full 12 month apr is listed somewhere before the agreement is signed disadvantages of annual percentage rate apr the apr isn t always an accurate reflection of the total cost of borrowing in fact it may understate the actual cost of a loan that s because the calculations assume long term repayment schedules the costs and fees are spread too thin with apr calculations for loans that are repaid faster or have shorter repayment periods for instance the average annual impact of mortgage closing costs is much smaller when those costs are assumed to have been spread over 30 years instead of seven to 10 years lenders have a fair amount of authority to determine how to calculate the apr including or excluding different fees and charges apr also runs into some trouble with adjustable rate mortgages arms estimates always assume a constant rate of interest and even though apr takes rate caps into consideration the final number is still based on fixed rates because the interest rate on an arm will change when the fixed rate period is over apr estimates can severely understate the actual borrowing costs if mortgage rates rise in the future mortgage aprs may or may not include other charges such as appraisals titles credit reports applications life insurance attorneys and notaries and document preparation there are other fees that are deliberately excluded including late fees and other one time fees all this may make it difficult to compare similar products because the fees included or excluded differ from institution to institution in order to accurately compare multiple offers a potential borrower must determine which of these fees are included and to be thorough calculate apr using the nominal interest rate and other cost information | |
why is the annual percentage rate apr disclosed | consumer protection laws require companies to disclose the aprs associated with their product offerings in order to prevent companies from misleading customers for instance if they were not required to disclose the apr a company might advertise a low monthly interest rate while implying to customers that it was an annual rate this could mislead a customer into comparing a seemingly low monthly rate against a seemingly high annual one by requiring all companies to disclose their aprs customers are presented with an apples to apples comparison | |
how do you calculate apr | the formula for calculating apr is straightforward it consists of multiplying the periodic interest rate by the number of periods in a year in which the rate is applied the exact formula is as follows apr fees interestprincipaln 365 100where interest total interest paid over life of the loanprincipal loan amountn number of days in loan term begin aligned text apr left left frac frac text fees text interest text principal n right times 365 right times 100 textbf where text interest text total interest paid over life of the loan text principal text loan amount n text number of days in loan term end aligned apr nprincipalfees interest 365 100where interest total interest paid over life of the loanprincipal loan amountn number of days in loan term the bottom linethe apr is the basic theoretical cost or benefit of money loaned or borrowed by calculating only the simple interest without periodic compounding the apr gives borrowers and lenders a snapshot of how much interest they are earning or paying within a certain period of time if someone is borrowing money such as by using a credit card or applying for a mortgage the apr can be misleading because it only presents the base number of what they are paying without taking time into the equation conversely if someone is looking at the apr on a savings account it doesn t illustrate the full impact of interest earned over time aprs are often a selling point for different financial instruments such as mortgages or credit cards when choosing a tool with an apr be careful to also take into account the apy because it will prove a more accurate number for what you will pay or earn over time though the formula for your apr may stay the same different financial institutions will include different fees in the principal balance be aware of what is included in your apr when signing any agreement | |
what is the annual percentage yield apy | the annual percentage yield apy is the interest rate earned on an investment in one year including compounding interest a higher apy is better as your return will be higher you can compare apys at different financial institutions to ensure you re opening an account with the highest possible return investopedia julie bangformula and calculation of annual percentage yield apy apy standardizes the rate of return it does this by stating the real percentage of growth that will be earned in compound interest assuming that the money is deposited for one year the formula for calculating apy is apy 1 r n n 1 where r nominal rate n number of compounding periods begin aligned text apy bigg 1 frac r n bigg n 1 textbf where r text nominal rate n text number of compounding periods end aligned apy 1 nr n 1where r nominal raten number of compounding periods | |
what apy can tell you | any investment is ultimately judged by its rate of return whether it s a certificate of deposit cd a share of stock or a government bond the rate of return is simply the percentage of growth in an investment over a specific period of time usually one year however rates of return can be difficult to compare across different investments if they have different compounding periods one may compound daily while another compounds quarterly or biannually comparing rates of return by simply stating the percentage value of each over one year gives an inaccurate result as it ignores the effects of compounding interest it is critical to know how often that compounding occurs since the more often a deposit compounds the faster the investment grows this is due to the fact that every time it compounds the interest earned over that period is added to the principal balance and future interest payments are calculated on that larger principal amount suppose you are considering whether to invest in a one year zero coupon bond that pays 6 upon maturity or a high yield money market account that also pays a 6 rate but with monthly compounding at first glance the yields appear equal because since they are both stated as 6 but when the effects of compounding are included the money market investment actually yields a higher apy 1 005 12 1 0 06168 6 17 apy comparing two investments by their simple interest rates doesn t work as it ignores the effects of compounding interest and how often that compounding occurs apy vs aprapy is similar to the annual percentage rate apr used for loans the apr reflects the effective percentage that the borrower will pay over a year in interest and fees for the loan apy and apr are both standardized measures of interest rates expressed as an annualized percentage rate however apy takes into account compound interest while apr does not furthermore the equation for apy does not incorporate account fees only compounding periods that s an important consideration for an investor who must consider any fees that will be subtracted from an investment s overall return example of apyif you deposited 100 for one year at 5 interest and your deposit was compounded quarterly at the end of the year you would have 105 09 if you had been paid simple interest you would have had 105 the apy would be 1 05 4 4 1 05095 5 095 begin aligned text the apy would be bigg 1 frac 05 4 bigg 4 1 05095 5 095 end aligned the apy would be 1 4 05 4 1 05095 5 095 it pays 5 a year interest compounded quarterly and that adds up to 5 095 that s not too dramatic however if you left that 100 for four years and it was being compounded quarterly your initial deposit would have grown to 121 99 without compounding it would have been 120 x d 1 r n n y 100 1 05 4 16 100 1 21989 121 99 where x final amount d initial deposit r nominal rate n number of compounding periods per year y number of years begin aligned x d bigg 1 frac r n bigg ny 100 bigg 1 frac 05 4 bigg 16 100 1 21989 121 99 textbf where x text final amount d text initial deposit r text nominal rate n text number of compounding periods per year y text number of years end aligned x d 1 nr ny 100 1 4 05 16 100 1 21989 121 99where x final amountd initial depositr nominal raten number of compounding periods per yeary number of years | |
how compound interest works | the premise of apy is rooted in the concept of compounding or compound interest compound interest is the financial mechanism that allows investment returns to earn returns of their own imagine investing 1 000 at 6 compounded monthly at the start of your investment you have 1 000 after one month your investment will have earned one month s worth of interest at 6 your investment will now be worth 1 005 1 000 1 06 12 at this point we have not yet seen compounding interest after the second month your investment will have earned a second month of interest at 6 however this interest is earned on both your initial investment as well as your 5 interest earned last month therefore your return this month will be greater than last month because your investment basis will be higher your investment will now be worth 1 010 03 1 005 1 06 12 notice that the interest earned this second month is 5 03 which is different from the 5 00 from last month after the third month your investment will earn interest on the 1 000 the 5 00 earned from the first month and the 5 03 earned from the second month this demonstrates the concept of compound interest the monthly amount earned will continually increase as long as the apy doesn t decrease and the investment principal is not reduced banks in the u s are required to include the apy when they advertise their interest bearing accounts that tells potential customers exactly how much money a deposit will earn if it is deposited for 12 months 1variable apy vs fixed apysavings or checking accounts may have either a variable apy or fixed apy a variable apy is one that fluctuates and changes with macroeconomic conditions while a fixed apy does not change or changes much less frequently one type of apy isn t necessarily better than the other while locking into a fixed apy sounds appealing it could also mean missing out when the federal reserve is raising rates and apys increase each month most checking savings and money market accounts have variable apys though some promotional bank accounts or bank account bonuses may have a higher fixed apy up to a specific level of deposits for example a bank may reward 5 apy on the first 500 deposited then pay 1 apy on all other deposits apy and riskin general investors are usually awarded higher yields when they take on greater risk or agree to make sacrifices the same can be said regarding the apy of checking saving and certificates of deposit | |
when a consumer holds money in a savings account the consumer may not have immediate need the consumer may need to transfer funds to their checking account before they can be used savings accounts usually have higher apys than checking accounts because consumers face greater limits with them | in addition when consumers hold a certificate of deposit they agree to sacrifice liquidity and access to funds in return for a higher apy the consumer can t use or spend the money in a cd without paying a penalty the apy on a cd is often the highest as the consumer is being rewarded for sacrificing immediate access to their funds | |
what is apy and how does it work | apy is the annual percent yield that reflects compounding on interest it reflects the actual interest rate you earn on an investment because it considers the interest you make on your interest consider the example above where the 100 investment yields 5 compounded quarterly during the first quarter you earn interest on the 100 however during the second quarter you earn interest on the 100 as well as the interest earned in the first quarter | |
what is a good apy rate | apy rates fluctuate often and a good rate at one time may no longer be a good rate due to shifts in macroeconomic conditions in general when the federal reserve raises interest rates the apy on savings accounts tends to increase therefore apy rates on savings accounts are usually better when monetary policy is tight or tightening in addition there are often low cost high yield savings accounts that consistently deliver competitive apys | |
how is apy calculated | apy standardizes the rate of return it does this by stating the real percentage of growth that will be earned in compound interest assuming that the money is deposited for one year the formula for calculating apy is 1 r n n 1 where r period rate and n number of compounding periods | |
how can apy assist an investor | any investment is ultimately judged by its rate of return whether it s a certificate of deposit a share of stock or a government bond apy allows an investor to compare different returns for different investments on an apples to apples basis allowing them to make a more informed decision | |
what is the difference between apy and apr | apy calculates the rate earned in one year if the interest is compounded and is a more accurate representation of the actual rate of return apr includes any fees or additional costs associated with the transaction but it does not take into account the compounding of interest within a specific year rather it is a simple interest rate the bottom lineapy is the actual rate of return you will earn on an investment or bank account as opposed to simple interest calculations apy considers the compounding effect of prior interest earned generating future returns for this reason apy will often be higher than simple interest especially if the account compounds often | |
what is an annual report | an annual report is a document that public corporations must provide annually to shareholders that describes their operations and financial conditions the report chronicles the company s activities over the past year may make forecasts about the future and contains detailed financial and operational information investopedia jake shi | |
what s included | annual reports became a regulatory requirement for public companies following the stock market crash in 1929 when lawmakers mandated standardized corporate financial reporting it includes public disclosure of a company s operating and fiscal activities for the previous year the report is typically issued to shareholders and other stakeholders who use it to evaluate the firm s financial performance and to make investment decisions 1 an annual report contains the following sections 23in the u s a detailed version of the annual report is referred to as form 10 k and is submitted to the u s securities and exchange commission sec companies may submit their annual reports electronically through the sec s edgar database reporting companies must send annual reports to their shareholders when they hold annual meetings to elect directors 2information for stakeholdersthe annual report defines whether the information conforms to the generally accepted accounting principles gaap this confirmation will be highlighted as an unqualified opinion in the auditor s report section 3fundamental analysts can understand a company s future direction by analyzing the details provided in its annual report the annual report contains key information on a company s financial position that can be used to measure mutual fund reportsa mutual fund annual report discloses certain aspects of the fund s operations and financial condition in contrast to corporate annual reports mutual fund reports are best described as plain vanilla in their presentation 45a mutual fund annual report along with a fund s prospectus and statement of additional information is a source of multi year fund data and performance made available to fund shareholders and prospective fund investors all mutual funds registered with the sec must send a full report to all shareholders annually the report shows how well the fund fared over the fiscal year information that can be found in the annual report includes 4 | |
how do companies write an annual report | an annual report has a few sections and steps that must convey a certain amount of information much of which is legally required for public companies most public companies hire auditing companies to write their annual reports an annual report begins with a letter to the shareholders then a brief description of the business and industry the report should include the audited financial statements balance sheet income statement and statement of cash flows the last part will typically be notes to the financial statements explaining certain facts and figures | |
is an annual report the same as a 10 k filing | an annual report is similar to the 10 k filing in that both report on the company s activity both are considered the last financial filing of the year and summarize how the company performed annual reports are much more visually friendly with images and graphics the 10 k filing only reports numbers and other qualitative information | |
what is a 10 q filing | a 10 q filing is a form filed with the securities and exchange commission sec that reports quarterly earnings most public companies have to file a 10 q with the sec to report their financial position for the quarter the bottom linepublic companies must produce annual reports to show their current financial conditions and operations annual reports can examine a company s financial position and possibly understand its plans these reports function differently for mutual funds that report performance to shareholders | |
what is an annual return | an annual return is the return that an investment provides over time it s expressed as a time weighted annual percentage sources of returns can include dividends returns of capital and capital appreciation the rate of annual return is measured against the initial amount of the investment and it represents a geometric mean rather than a simple arithmetic mean understanding annual returnan annual return can be calculated for various assets which include stocks bonds funds commodities and some types of derivatives it s the de facto method for comparing the performance of investments with liquidity this process is a preferred method considered to be more accurate than a simple return because it includes adjustments for compounding interest different asset classes tend to have different strata of annual returns 1annual returns on stocksalso known as an annualized return the annual return expresses a stock s increase in value over a designated period information regarding the current price of the stock and the price at which it was purchased is required to calculate it the purchase price must be adjusted accordingly if any splits have occurred the simple return percentage is calculated first when the prices are determined with that figure ultimately being annualized 2the simple return is the current price minus the purchase price divided by the purchase price example of the annual return calculationcagr ending value beginning value 1 years 1 where cagr compound annual growth rate years holding period in years begin aligned text cagr left left frac text ending value text beginning value right frac 1 text years right 1 textbf where text cagr text compound annual growth rate text years text holding period in years end aligned cagr beginning value ending value years1 1where cagr compound annual growth rateyears holding period in years consider an investor who purchases a stock for 20 on jan 1 2024 the investor then sells the stock on jan 1 2029 for 35 and realizes a 15 profit the investor also receives a total of 2 in dividends over the five year holding period the investor s total return over five years would be 17 or 17 20 85 of the initial investment the annual return required to achieve 85 over five years follows the formula for the compound annual growth rate cagr 37 20 1 5 1 13 1 annual return begin aligned left left frac 37 20 right frac 1 5 right 1 13 1 text annual return end aligned 2037 51 1 13 1 annual return the annualized return varies from the typical average and shows the real gain or loss on an investment as well as the difficulty in recouping losses losing 50 on an initial investment requires a 100 gain the next year to make up the difference annualized returns help even out investment results for better comparison because of the sizable difference in gains and losses that can occur annual return statistics are commonly quoted in promotional materials for mutual funds etfs and other individual securities annual returns on a 401 k the calculation differs when you re determining the annual return of a 401 k during a specific year the total return must first be calculated the starting value for the time period being examined is needed along with the final value any contributions to the account during the period in question must be subtracted from the final value before performing the calculations the adjusted final value is divided by the starting balance after the adjusted final value is determined subtract 1 from the result and multiply that amount by 100 to determine the percentage of total return | |
what is the modified dietz formula | the modified dietz formula is a method of annual return calculation that takes your cash flow into account it compounds returns over each period 3 | |
are there other ways to calculate annual return | you can calculate your rate of return by month and then multiply the result by 12 to get your annual rate of return numerous calculators are available online to do the math for you 4 | |
how can i calculate my overall return on an investment | calculate your return on investment ro by subtracting the initial cost of your investment from its final value divide the result by the overall cost of the investment adding in fees commissions and mark ups multiply this result by 100 to get a percentage the bottom linecalculating annual return tells you how much you re earning or losing on a particular investment from year to year it can be a critical component when you re placing your money somewhere to see it grow such as in stocks bonds or mutual funds it compares performance with liquidity speak with a professional if you re not sure you re calculating correctly so you can plan your next move | |
what is annual turnover | annual turnover is the percentage rate at which something changes ownership over the course of a year for a business this rate could be related to its yearly turnover in inventories receivables payables or assets in investments a mutual fund or exchange traded fund etf turnover rate replaces its investment holdings on a yearly basis portfolio turnover is the comparison of assets under management aum to the inflow or outflow of a fund s holdings the figure is useful to determine how actively the fund changes the underlying positions in its holdings high figure turnover rates indicate an actively managed fund other funds are more passive and have a lower percentage of holding turnovers an index fund is an example of a passive holding fund calculating annual turnoverto calculate the portfolio turnover ratio for a given fund first determine the total amount of assets purchased or sold whichever happens to be greater during the year then divide that amount by the average assets held by the fund over the same year portfolio turnover max applyfunction fund purchases fund sales average assets begin aligned text portfolio turnover frac operatorname max begin cases text fund purchases quad text fund sales end cases text average assets end aligned portfolio turnover average assetsmax fund purchasesfund sales for example if a mutual fund held 100 million in assets under management aum and 75 million of those assets were liquidated at some point during the measurement period the calculation is 7 5 m 1 0 0 m 0 7 5 where begin aligned frac 75 text m 100 text m 0 75 textbf where text m text million end aligned 100m 75m 0 75where it is important to note that a fund turning over at 100 annually has not necessarily liquidated all positions with which it began the year instead the complete turnover accounts for the frequent trading in and out of positions and the fact that sales of securities equal total aum for the year also using the same formula the turnover rate is also measured by the number of securities bought in the measurement period annualized turnover in investmentsannualized turnover is a future projection based on one month or another shorter period of time of investment turnover for example suppose that an etf has a 5 turnover rate for the month of february using that figure an investor may estimate annual turnover for the coming year by multiplying the one month turnover by 12 this calculation provides an annualized holdings turnover rate of 60 growth funds rely on trading strategies and stock selection from seasoned professional managers who set their sights on outperforming the index against which the portfolio benchmarks owning large equity positions is less about a commitment to corporate governance than it is a means to positive shareholder results managers who consistently beat the indices stay on the job and attract significant capital inflows while the passive versus active management argument persists high volume approaches can realize moderate success consider the american century small cap growth fund anoix a four star rated morningstar fund with a frantic 141 turnover rate as of february 2021 that outperformed the s p 500 index considently over the last 15 years through 2021 index funds such as the fidelity 500 index fund fxaix adopt a buy and hold strategy following this system the fund owns positions in equities as long as they remain components of the benchmark the funds maintain a perfect positive correlation to the index and thus the portfolio turnover rate is just 4 trading activity is limited to purchasing securities from inflows and infrequently selling issues removed from the index more than 60 of the time indices have historically outpaced managed funds also it is important to note a high turnover rate judged in isolation is never an indicator of fund quality or performance the fidelity spartan 500 index fund after expenses trailed the s p 500 by 2 57 in 2020 annual turnover in business inventory turnoverbusinesses use several annual turnover metrics for understanding how well the business is running on a yearly basis inventory turnover measures how fast a company sells inventory and how analysts compare it to industry averages a low turnover implies weak sales and possibly excess inventory also known as overstocking it may indicate a problem with the goods being offered for sale or be a result of too little marketing a high ratio implies either strong sales or insufficient inventory the former is desirable while the latter could lead to lost business sometimes a low inventory turnover rate is a good thing such as when prices are expected to rise inventory pre positioned to meet fast rising demand or when shortages are anticipated the speed at which a company can sell inventory is a critical measure of business performance retailers that move inventory out faster tend to outperform the longer an item is held the higher its holding cost will be and the fewer reasons consumers will have to return to the shop for new items | |
what is annualization | to annualize a number means to convert a short term calculation or rate into an annual rate typically an investment that yields a short term rate of return is annualized to determine an annual rate of return which may also include compounding or reinvestment of interest and dividends it helps to annualize a rate of return to better compare the performance of one security versus another annualization is a similar concept to reporting financial figures on an annual basis understanding annualization | |
when a number is annualized the short term performance or result is used to forecast the performance for the next twelve months or one year below are a few of the most common examples of when annualizing is utilized | an annualized return is similar to a run rate which refers to the financial performance of a company based on current financial information as a predictor of future performance the run rate functions as an extrapolation of current financial performance and assumes that current conditions will continue the annualized cost of loan products is often expressed as an annual percentage rate apr the apr considers every cost associated with the loan such as interest and origination fees and converts the total of these costs to an annual rate that is a percentage of the amount borrowed loan rates for short term borrowings can be annualized as well loan products including payday loans and title loans charge a flat finance fee such as 15 or 20 to borrow a nominal amount for a few weeks to a month on the surface the 20 fee for one month doesn t appear to be exorbitant however annualizing the number equates to 240 and could be extremely large relative to the loan amount to annualize a number multiply the shorter term rate of return by the number of periods that make up one year one month s return would be multiplied by 12 months while one quarter s return by four quarters taxpayers annualize by converting a tax period of less than one year into an annual period the conversion helps wage earners establish an effective tax plan and manage any tax implications for example taxpayers can multiply their monthly income by 12 months to determine their annualized income annualizing income can help taxpayers estimate their effective tax rate based on the calculation and can be helpful in budgeting their quarterly taxes example investmentsinvestments are annualized frequently let s say a stock returned 1 in one month in capital gains on a simple not compounding basis the annualized rate of return would be equal to 12 because there are 12 months in one year in other words you multiply the shorter term rate of return by the number of periods that make up one year a monthly return would be multiplied by 12 months however let s say an investment returned 1 in one week to annualize the return we d multiply the 1 by the number of weeks in one year or 52 weeks the annualized return would be 52 quarterly rates of return are often annualized for comparative purposes a stock or bond might return 5 in q1 we could annualize the return by multiplying 5 by the number of periods or quarters in a year the investment would have an annualized return of 20 because there are four quarters in one year or 5 4 20 limitations of annualizingthe annualized rate of return or forecast is not guaranteed and can change due to outside factors and market conditions consider an investment that returns 1 in one month the security would return 12 on an annualized basis however the annualized return of a stock cannot be forecasted with a high degree of certainty using the stock s short term performance there are many factors that could impact a stock s price throughout the year such as market volatility the company s financial performance and macroeconomic conditions as a result fluctuations in the stock price would make the original annualized forecast incorrect for example a stock might return 1 in month one and return 3 the following month | |
why might an investor annualize a stock s one month return | investors may annualize a stock s one month return to forecast its performance over the next 12 months understanding a stock s longer term returns can help investors better manage their risk and compare performance against other benchmarks | |
what periods do investors typically annualize | investors annualize returns of less than one year as mentioned a monthly rate of return is often annualized to project the returns on a stock over the next 12 months quarterly figures are also frequently annualized when analyzing a company s metrics such as its earnings and sales | |
why is understanding annualization important when determining loan costs | understanding annualization allows borrowers to better understand the annual costs associated with a loan most lenders display an apr which is the yearly rate of costs such as fees and interest expressed as a percentage of the amount borrowed | |
what is the main limitation of annualizing | the primary drawback of annualizing a return is that it can change over time due to outside factors and market conditions stock market volatility a company s financial performance and macroeconomic conditions can all significantly impact yearly returns the bottom lineannualize refers to converting a short term number such as an investment return or interest rate into an annual rate a number is annualized by multiplying the short term figure by the number of periods that make up one year investors and lenders typically annualize a return to forecast an investment s 12 month performance or a loan s annual costs helping to make comparisons and manage risk annualizing figures can also help investors to measure a company s performance metrics and assist taxpayers in establishing an effective tax plan investors should keep in mind that annualized figures can change due to shifting conditions over a 12 month period | |
what is annualized income | annualized income is an estimate of the amount of money that an individual a business or an investment generates over a year s time it is calculated based on less than one year s worth of data so it is only an approximation of total income for the year annualized income numbers are useful for creating a budget and for calculating estimated income tax payments understanding annualized incomeannualized income can be calculated by multiplying the earned income figure by the ratio of the number of months in a year divided by the number of months for which income data is available say for example a consultant earned 10 000 in january 12 000 in february 9 000 in march and 13 000 in april the earned income figure for those four months totals 44 000 to annualize the consultant s income multiply 44 000 by 12 4 to equal 132 000 | |
how estimated tax payments work | taxpayers who have jobs pay an estimate of their annual taxes through employer tax withholdings business owners make estimated tax payments each quarter there are many other sources of income that are not subject to tax withholding income from self employment interest and dividend income and capital gains income are not subject to tax withholdings nor are alimony and some other sources of income that may be reported to a taxpayer on form 1099 1to avoid a penalty for tax underpayment the total tax withholdings and estimated tax payments must equal the lesser of 90 of the tax owed for the current year or the full tax owed in the previous year 2examples of annualized income that fluctuatescomputing estimated tax payments is difficult if the taxpayer s income fluctuates during the year many self employed people generate income that varies greatly from one month to the next assume for example that a self employed salesperson earns 25 000 during the first quarter and 50 000 in the second quarter of the year the higher income in the second quarter indicates a higher total level of income for the year and the first quarter s estimated tax payment is based on a lower level of income as a result the salesperson may be assessed an underpayment penalty for the first quarter avoid underpayment penaltiesto avoid underpayment penalties due to fluctuating income irs form 2210 allows the taxpayer to annualize income for a particular quarter and compute the estimated tax payments based on that amount schedule ai of form 2210 provides a column for each quarterly period and the taxpayer annualizes the income for that period and computes an estimated tax payment based on that estimate 3using the salesperson example form 2210 allows the taxpayer to annualize the 25 000 first quarter income separately from the 50 000 second quarter income | |
what is the formula for annualized income | the formula is simple if you have 12 months of data add up the monthly income received during a period of 12 months divide by 12 there s your annualized income if you have less than 12 months of data multiply the earned income figure by the ratio of the number of months in a year divided by the number of months for which the data is available that should yield a reasonable estimate 4 | |
why would i want to annualize my income | if your income varies drastically throughout the year calculating your annualized income helps you budget sensibly if for example you grow christmas trees for a living most or all of your income will come at the end of the year but you have to cover your monthly expenses for the entire 12 months annualizing gives you a good estimate of how much you ll have to spend similiarly some people have side gigs or seasonal income sources that add substantially to their incomes calculating annualized income tells them how much extra income they ll have year round | |
should i annualize income for my business | if you re running your own business you re paying your estimated taxes due on a quarterly basis many businesses experience big swings in revenue seasonally calculating your business annualized revenue allows you to budget properly for the entire year it also helps you estimate the taxes you owe accurately the bottom lineannualized income is a useful calculation for anyone whose income varies greatly from month to month or whose income comes from a variety of sources that are paid on different schedules if you re one of those people annualization can help you budget your money from month to month it also can help you accurately estimate the amount of taxes you owe | |
what is the annualized income installment method | taxpayers who are self employed typically pay quarterly installments of their estimated tax in four even amounts as figured by the regular installment method additionally taxpayers should pay estimated taxes if they receive substantial dividends interest alimony or other forms of income that are not subject to income tax withholding | |
how the annualized income installment method works | the purpose of the regular installment method is to figure in quarterly tax installments it divides the annual estimated tax into four equal segments the resulting payments are appropriate for the quarterly estimated taxes of taxpayers with a steady income but this does not work as well for taxpayers whose income fluctuates some taxpayers may have a hard time finding the cash to pay estimated taxes in slower months consider for example taxpayers jane and john each of them owes 100 000 in annual estimated tax jane pays her estimated payments in four 25 000 installments per the regular installment method she evenly earned her income 25 each quarter so the quarterly portions paid her estimated tax in full and on time john s earnings were uneven with each tax quarter at 0 20 30 and 50 respectively john may have a difficult time coming up with the cash necessary to make his first and second quarter estimated tax payments when his earnings are low using the regular installment method if john were to pay less estimated tax in the first two quarters and more in the second two quarters he would owe an underpayment penalty for the first two quarters the annualized income installment method allows john to refigure his installments so they correlate to his income as he earns it it does so by annualizing john s installments over four overlapping periods each period begins on jan 1 the first period ends on march 31 the second ends on may 31 the third on aug 31 and the fourth period ends on dec 31 each period includes all the previous periods with the final period encompassing the entire year it allows john to estimate his tax payments based on his income to that point in the year in this example we know the exact percentage of john s annual earnings from each tax quarter john pays 0 in march 20 000 in may 30 000 in august and 50 000 in december john now has four installments of different amounts that when added together equal his full annual estimated tax of 100 000 john s refigured installments are now paid on time his underpayment penalties abated irs publication 505 has forms schedules and worksheets that guide taxpayers desiring to refigure their installments using the annualized income installment method 1 however figuring installments this way is complicated and best done on an irs worksheet by your favorite tax professional | |
how do i annualize my income for the annualized income installment method | unlike our scenario above in real life you will not already know your full annual tax payment when your quarterly estimated tax payment is due instead you will have to estimate your annual tax payment by annualizing your income from the beginning of the year until the end of the period in which you are paying taxes because the quarters do not always fall on actual calendar quarters year to date ytd income through may 31 is annualized by multiplying by 2 4 through aug 31 ytd by 1 5 and through dec 31 ytd by 1 3 | |
what is the tax form for the annualized income installment method | the annualized method can be calculated using irs form 2210 3i owed 500 when i filed my tax return do i need to file form 2210 no there is no underpayment penalty if the difference between your total tax on your return and the amount of tax you paid through withholding is less than 1 000 | |
what is an annualized rate of return | an annualized rate of return is calculated as the equivalent annual return an investor receives over a given period the global investment performance standards dictate that returns of portfolios or composites for periods of less than one year may not be annualized 1 this prevents projected performance in the remainder of the year from occurring understanding annualized rateannualized returns are scaled down to a 12 month period this scaling process allows investors to objectively compare the returns of any assets over any period 2keep in mind that transaction fees will affect the amount in your investment portfolio your investment portfolio might have a 5 annualized return for example but it could also have ongoing annual fees that reduce the portfolio value 3calculation using annual datacalculating the annualized performance of an investment or index using yearly data uses the following data points p principal or initial investmentg gains or lossesn number of yearsap annualized performance ratethe generalized formula which is exponential to take into account compound interest over time is ap p g p 1 n 12annualized rate of return examplesfor example assume an investor invested 50 000 into a mutual fund and four years later the investment is worth 75 000 this is a 25 000 gain in four years thus the annualized performance is ap 50 000 25 000 50 000 1 4 1in this example the annualized performance is 10 67 percent a 25 000 gain on a 50 000 investment over four years is a 50 percent return it is inaccurate to say the annualized return is 12 5 percent or 50 percent divided by four because this does not take into effect compound interest if reversing the 10 67 percent result to compound over four years the result is exactly what is expected 75 000 50 000 x 1 10 67 4it is important not to confuse annualized performance with annual performance the annualized performance is the rate at which an investment grows each year over the period to arrive at the final valuation in this example a 10 67 percent return each year for four years grows 50 000 to 75 000 but this says nothing about the actual annual returns over the four year period returns of 4 5 percent 13 1 percent 18 95 percent and 6 7 percent grow 50 000 into approximately 75 000 also returns of 15 percent 7 5 percent 28 percent and 10 2 percent provide the same result using days in the calculationindustry standards for most investments dictate the most precise form of annualized return calculation which uses days instead of years the formula is the same except for the exponent ap p g p 365 n 1assume from the previous example that the fund returned 25 000 over a 1 275 day period the annualized return is then ap 50 000 25 000 50 000 365 1275 1the annualized performance in this example is 12 31 percent | |
what is the difference between annualized rate of return and annual performance | the annualized rate of return of an investment is expressed as a percentage consistent over the years that an investment provides returns annualized return also takes compound interest into account annual performance is a snapshot of an investment s gains and losses in a single year which can change substantially depending on the year | |
how can the annualized rate of return help you understand your investments | investors hold different types of investments for varying periods of time annualized rate of return can help investors compare the performance of diverse investments | |
what are the limitations of an annualized rate of return | annualized rate of return can be a useful tool to understand your investment outlook but it is not a guarantee market volatility and other outside forces can change an investment s annualized rate of return the bottom lineannualized rate of return calculates return on investment as an annual average over a given period of time investors can use the annualized rate of return to compare diverse investments over the same set period annualized rate of return can change over time influenced by market conditions | |
what is annualized total return | an annualized total return is the geometric average amount of money an investment earns each year over a given period the annualized return formula is calculated as a geometric average to show what an investor would earn over some time if the annual return were compounded an annualized total return provides only a snapshot of an investment s performance and does not give investors any indication of its volatility or price fluctuations investopedia jiaqi zhouunderstanding annualized total returnto understand what annualized total return is it helps to compare the hypothetical performances of two mutual funds below is the annualized rate of return over a five year period for two funds both mutual funds have an annualized rate of return of 5 5 but mutual fund a is much more volatile its standard deviation is 4 2 while mutual fund b s standard deviation is only 1 even when analyzing an investment s annualized return it is important to review risk statistics annualized return formula and calculationthe formula to calculate the annualized rate of return needs only two variables the returns for a given period of time and the time the investment was held the formula is annualized return 1 r1 1 r2 1 r3 1 rn 1n 1 begin aligned text annualized return big 1 r 1 times 1 r 2 times 1 r 3 times dots times 1 r n big frac 1 n 1 end aligned annualized return 1 r1 1 r2 1 r3 1 rn n1 1 for example take the annual rates of returns of mutual fund a above an analyst substitutes each r variable with the appropriate return and n with the number of years the investment was held in this case five years the annualized return of mutual fund a is calculated as annualized return 1 03 1 07 1 05 1 12 1 01 15 1 1 3090 20 1 1 0553 1 0553 or 5 53 begin aligned text annualized return big 1 03 times 1 07 times 1 05 times quad quad 1 12 times 1 01 big frac 1 5 1 1 309 0 20 1 1 0553 1 0553 text or 5 53 end aligned annualized return 1 03 1 07 1 05 1 12 1 01 51 1 1 3090 20 1 1 0553 1 0553 or 5 53 an annualized return does not have to be limited to yearly returns if an investor has a cumulative return for a given period even if it is a specific number of days an annualized performance figure can be calculated however the annual return formula must be slightly adjusted to annualized return 1 cumulative return 365days held 1 begin aligned text annualized return 1 text cumulative return frac 365 text days held 1 end aligned annualized return 1 cumulative return days held365 1 for example assume a mutual fund was held by an investor for 575 days and earned a cumulative return of 23 74 the annualized rate of return would be annualized return 1 2374 365575 1 1 145 1 145 or 14 5 begin aligned text annualized return 1 2374 frac 365 575 1 1 145 1 145 text or 14 5 end aligned annualized return 1 2374 575365 1 1 145 1 145 or 14 5 difference between annualized return and average returncalculations of simple averages only work when numbers are independent of each other the annualized return is used because the amount of investment lost or gained in a given year is interdependent with the amount from the other years under consideration because of compounding for example if a mutual fund manager loses half of her client s money she has to make a 100 return to break even using the more accurate annualized return also gives a clearer picture when comparing mutual funds or the return of stocks that have traded over different periods reporting annualized returnaccording to the global investment performance standards gips a set of standardized industry wide principles that guide the ethics of performance reporting any investment that does not have a track record of at least 365 days cannot ratchet up its performance to be annualized thus if a fund has been operating for only six months and earned 5 it is not allowed to say its annualized performance is approximately 10 since that is predicting future performance instead of stating facts from the past in other words calculating an annualized rate of return must be based on historical numbers | |
how is annualized total return calculated | the annualized total return is a metric that captures the average annual performance of an investment or portfolio of investments it is calculated as a geometric average meaning that it captures the effects of compounding over time the annualized total return is sometimes called the compound annual growth rate cagr | |
what is the difference between an annualized total return and an average return | the key difference between the annualized total return and the average return is that the annualized total return captures the effects of compounding whereas the average return does not | |
what is the difference between the annualized total return and the compound annual growth rate cagr | the annualized total return is conceptually the same as the cagr in that both formulas seek to capture the geometric return of an investment over time the main difference is that the cagr is often presented using only the beginning and ending values whereas the annualized total return is typically calculated using the returns from several years this however is more a matter of convention in substance the two measures are the same the bottom lineannualized total return represents the geometric average amount that an investment has earned each year over a specific period by calculating a geometric average the annualized total return formula accounts for compounding when depicting the yearly earnings the investment would generate over the holding period while the metric provides a useful snapshot of an investment s performance it does not reveal volatility and price fluctuations | |
what is an annuitant | an annuitant is an individual who is entitled to collect the regular payments of a pension or an annuity investment the annuitant may be the contract holder or another person such as a surviving spouse annuities are generally seen as retirement income supplements they may be tied to an employee pension plan or a life insurance product the size of the payments is usually determined by the life expectancy of the annuitant as well as the amount invested understanding annuitantsan annuity is a regular payment of a guaranteed income for life or for some specified number of years an annuitant may be a retired civil servant who receives a pension plan or an investor who has paid a sum of money to an insurance company in return for a regular income supplement depending on the specifics of the contract the owner of an annuity may name one or more annuitants such as a spouse and an elderly parent or may arrange a joint annuity the annuitant can also arrange for the payments to be transferred to a surviving spouse if the need arises in any case the annuitant must be a person not a company or a trust the amount of the payments to an annuitant is based on the individual s age and life expectancy and the age and life expectancy of any beneficiaries for example if the annuitant is 65 years old but the annuity is transferrable to his 60 year old wife if she survives him the insurance company will calculate that it will make monthly payments for about 24 years which is the life expectancy of a 60 year old woman most annuities are taxed as ordinary income in yet another variation an annuity can be for a term of life plus that is the payments will continue for the annuitant s lifetime and then be transferred to a surviving spouse for a specified period of time types of annuitiesthere are many variations of annuity but they can be boiled down to two basic types taxes on annuitantsannuities are generally taxed as ordinary income the portion of the annuity payments that represents the contract holder s basis is not taxed only the gain portion in the case of an employer pension the entire payment is generally taxed as ordinary income | |
what is annuitization | annuitization is the process of converting an annuity investment into a series of periodic income payments annuities may be annuitized for a specific period or for the life of the annuitant annuity payments may only be made to the annuitant or to the annuitant and a surviving spouse in a joint life arrangement annuitants can arrange for beneficiaries to receive a portion of the annuity balance upon their death understanding annuitizationthe concept of annuitization dates back centuries but life insurance companies formalized it into a contract offered to the public in the 1800s individuals can enter into a contract with a life insurance company that involves the exchange of a lump sum of capital for a promise to make periodic payments for a specified period or for the lifetime of the individual who is the annuitant | |
how annuitization works | upon receiving the lump sum of capital the life insurer makes calculations to determine the annuity payout amount the key factors used in the calculation are the annuitant s current age life expectancy and the projected interest rate the insurer will credit to the annuity balance the resulting payout rate establishes the amount of income that the insurer will pay whereby the insurer will have returned the entire annuity balance plus interest to the annuitant by the end of the payment period the payment period may be a specified period or the life expectancy of the investor if the insurer determines that the investor s life expectancy is 25 years then that becomes the payment period the significant difference between using a specified period versus a lifetime period is that if the annuitant lives beyond their life expectancy the life insurer must continue the payments until the annuitant s death this is the insurance aspect of an annuity in which the life insurer assumes the risk of extended longevity annuity payments based on a single lifeannuity payments based on a single life cease when the annuitant dies and the insurer retains the remaining annuity balance when payments are based on joint lives the payments continue until the death of the second annuitant when an insurer covers joint lives the amount of the annuity payment is reduced to cover the longevity risk of the additional life annuitants may designate a beneficiary to receive the annuity balance through a refund option annuitants can select refund options for varying periods of time during which if death occurs the beneficiary will receive the proceeds for instance if an annuitant selects a refund option for a period certain of 10 years death must occur within that 10 year period for the insurer to pay the refund to the beneficiary an annuitant may select a lifetime refund option but the length of the refund period will affect the payout rate the longer the refund period is the lower the payout rate changes to annuities in retirement accountsin 2019 the u s congress passed the secure act which made changes to retirement plans including those containing annuities 1 the good news is that the new ruling makes annuities more portable for example if you change jobs your 401 k annuity from your old job can be rolled over into the 401 k plan at your new job however the secure act removed some of the legal risks for retirement plans the ruling limits the ability for account holders to sue the retirement plan if it doesn t pay the annuity payments as in the case of bankruptcy note that a safe harbor provision of the secure act prevents retirement plans and not annuity providers from being sued 2the secure act also eliminated the stretch provision for those beneficiaries who inherit an ira in years past a beneficiary of an ira could stretch out the required minimum distributions from the ira over their lifetime which helped to stretch out the tax burden 1with the new ruling non spousal beneficiaries must distribute all of the funds from the inherited ira within 10 years of the death of the owner 1 however there are exceptions to the new law by no means is this article a comprehensive review of the secure act as a result it s important for investors to consult a financial professional to review the new changes to retirement accounts annuities and their designated beneficiaries | |
what is an annuity | an annuity is an insurance contract issued and distributed by financial institutions and bought by individuals an annuity requires the issuer to pay out a fixed or variable income stream to the purchaser beginning either at once or at some time in the future people invest in or purchase annuities by making monthly premium payments or lump sum payments the holding institution issues a stream of payments for a specified period of time or for the remainder of the annuitant s life annuities are mainly used for retirement income purposes they can help individuals address the risk of outliving their savings | |
how an annuity works | annuities are designed to provide a steady cash flow for people during their retirement years to alleviate the fear of outliving their assets since these assets may not be enough to sustain their standard of living some investors may turn to an insurance company or other financial institution to purchase an annuity contract as such these financial products are appropriate for investors known as annuitants who want stable guaranteed retirement income because invested cash is illiquid and subject to withdrawal penalties it is not recommended that younger individuals or those with liquidity needs use this financial product an annuity has different phases these are called annuities can be immediate or deferred immediate annuities are often purchased by people of any age who have received a large lump sum of money such as a settlement or lottery win and who prefer to exchange it for cash flows into the future deferred annuities are structured to grow on a tax deferred basis and provide annuitants with guaranteed income that begins on a date they specify 1variable annuities are regulated by the securities and exchange commission sec and state insurance commissioners fixed annuities are not securities and therefore are regulated by state insurance commissioners rather than the sec indexed annuities are normally regulated by a state insurance commissioner if they are registered as securities they are regulated by the sec as well the financial industry regulatory authority finra also regulates variable and registered indexed annuities 2agents or brokers selling annuities need to hold a state issued life insurance license and a securities license in the case of variable annuities these agents or brokers typically earn a commission based on the notional value of the annuity contract annuities often come with complicated tax considerations so it s important to understand how they work as with any other financial product be sure to consult with a professional before you purchase an annuity contract other considerationsannuities usually have a surrender period annuitants cannot make withdrawals during this time which may span several years without paying a surrender charge or fee 3investors must consider their financial requirements during this time period for example if a major event requires significant amounts of cash such as a wedding then it might be a good idea to evaluate whether the investor can afford to make requisite annuity payments many insurance companies will allow recipients to withdraw up to 10 of their account value without paying a surrender fee however if you withdraw more than that you may end up paying a penalty even if the surrender period has already lapsed there are also tax implications for withdrawals before age 59 4because of the potentially high cost of withdrawals some hard up annuitants may opt to sell their annuity payments this is similar to borrowing against any other income stream the annuitant receives a lump sum and in exchange gives up their right to some or all of their future annuity payments 5contracts also have an income rider that ensures a fixed income after the annuity kicks in there are two questions that investors should ask when they consider income riders individuals who invest in annuities cannot outlive their income stream which hedges longevity risk so long as the purchaser understands that they are trading a liquid lump sum for a guaranteed series of cash flows the product is appropriate some purchasers hope to cash out an annuity in the future at a profit however this is not the intended use of the product defined benefit pensions and social security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass annuities in workplace retirement plansannuities can be a beneficial part of a retirement plan but annuities are complex financial vehicles because of that complexity many employers don t offer them as part of an employee s retirement portfolio however the passage of the setting every community up for retirement enhancement secure act signed into law by president donald trump in 2019 loosened the rules on how employers can select annuity providers and includes annuity options within 401 k or 403 b investment plans 6the easement of these rules may result in more investments by qualified employees in annuities types of annuitiesannuities can be structured according to an array of details and factors such as the duration of time that payments from the annuity can be guaranteed to continue as mentioned above annuities can be created so that payments continue as long as either the annuitant or their spouse if survivorship benefit is elected is alive alternatively annuities can be structured to pay out funds for a fixed amount of time such as 20 years regardless of how long the annuitant lives annuities can begin to payout immediately upon deposit of a lump sum or they can be structured for deferred benefits the immediate payment annuity begins paying once the annuitant deposits a lump sum deferred income annuities on the other hand don t begin paying out after the initial investment instead the client specifies an age at which they would like to begin receiving payments from the insurance company depending on the type of annuity you choose the annuity may or may not be able to recover some of the principal invested in the account in the case of a straight lifetime payout there is no refund of the principal payments simply continue until the beneficiary dies if the annuity is set for a fixed period of time the recipient may be entitled to a refund of any remaining principal or their heirs if the annuitant has deceased 7annuities can be structured generally as fixed variable or indexed while variable annuities carry some market risk and the potential to lose principal riders and features can be added to them usually for an extra cost this allows them to function as hybrid fixed variable annuities contract owners can benefit from upside portfolio potential while enjoying the protection of a guaranteed lifetime minimum withdrawal benefit if the portfolio drops in value 8other riders may be purchased to add a death benefit to the agreement or to accelerate payouts if the annuity holder is diagnosed with a terminal illness the cost of living rider is another common rider that will adjust the annual base cash flows for inflation based on changes in the consumer price index cpi criticism of annuitiesone criticism of annuities is that they are illiquid deposits into annuity contracts are typically locked up for an extended period of time known as the surrender period the annuitant incurs a penalty if all or part of that money is withdrawn these periods can last anywhere from two to more than 10 years depending on the particular product surrender fees can start out at 10 or more and the penalty typically declines annually over the surrender period 93another criticism is that annuities are complex and costly at times individuals may buy an annuity without clearly knowing how they work or the costs involved be sure to do your research to understand all fees charges expenses and potential penalties 8annuities vs life insurancelife insurance companies and investment companies are primarily the two types of financial institutions offering annuity products for life insurance companies annuities are a natural hedge for their insurance products life insurance is bought to deal with mortality risk which is the risk of dying prematurely policyholders pay an annual premium to the insurance company that will pay out a lump sum upon their death if the policyholder dies prematurely the insurer pays out the death benefit at a net loss to the company actuarial science and claims experience allow these insurance companies to price their policies so that on average insurance purchasers will live long enough so that the insurer earns a profit in many cases the cash value inside of permanent life insurance policies can be exchanged via a 1035 exchange for an annuity product without any tax implications 109annuities on the other hand deal with longevity risk or the risk of outliving one s assets the risk to the issuer of the annuity is that annuity holders will survive to outlive their initial investment annuity issuers may hedge longevity risk by selling annuities to customers with a higher risk of premature death examples of an annuitywho buys annuities annuities are appropriate financial products for individuals seeking stable guaranteed retirement income because money put into an annuity is illiquid and subject to withdrawal penalties it is not recommended for younger individuals or for those with liquidity needs annuity holders cannot outlive their income stream which hedges longevity risk | |
what is a non qualified annuity | annuities can be purchased with either pre tax or after tax dollars a non qualified annuity is one that has been purchased with after tax dollars a qualified annuity is one that has been purchased with pre tax dollars qualified plans include 401 k plans and 403 b plans only the earnings and not the contributions of a non qualified annuity are taxed at the time of withdrawal as they are after tax money | |
what is an annuity fund | an annuity fund is an investment portfolio in which an annuity holder s payments are invested it can contain stocks bonds and other securities the annuity fund earns returns which correlate to the payout that an annuity holder receives | |
what is the surrender period | the surrender period is the amount of time an investor must wait before they can withdraw funds from an annuity without facing a penalty withdrawals made before the end of the surrender period can result in a surrender charge which is essentially a deferred sales fee this period generally spans several years the bottom linean annuity is a financial contract between an annuity purchaser and an insurance company the purchaser pays either a lump sum or regular payments over a period of time in return the insurance company makes regular payments to the annuity owner either immediately or beginning at some point in the future an annuity can be fixed variable or indexed to an equity index such as the s p 500 index | |
what is an annuity | an annuity is an insurance contract issued and distributed by financial institutions and bought by individuals an annuity requires the issuer to pay out a fixed or variable income stream to the purchaser beginning either at once or at some time in the future people invest in or purchase annuities by making monthly premium payments or lump sum payments the holding institution issues a stream of payments for a specified period of time or for the remainder of the annuitant s life annuities are mainly used for retirement income purposes they can help individuals address the risk of outliving their savings | |
how an annuity works | annuities are designed to provide a steady cash flow for people during their retirement years to alleviate the fear of outliving their assets since these assets may not be enough to sustain their standard of living some investors may turn to an insurance company or other financial institution to purchase an annuity contract as such these financial products are appropriate for investors known as annuitants who want stable guaranteed retirement income because invested cash is illiquid and subject to withdrawal penalties it is not recommended that younger individuals or those with liquidity needs use this financial product an annuity has different phases these are called annuities can be immediate or deferred immediate annuities are often purchased by people of any age who have received a large lump sum of money such as a settlement or lottery win and who prefer to exchange it for cash flows into the future deferred annuities are structured to grow on a tax deferred basis and provide annuitants with guaranteed income that begins on a date they specify 1variable annuities are regulated by the securities and exchange commission sec and state insurance commissioners fixed annuities are not securities and therefore are regulated by state insurance commissioners rather than the sec indexed annuities are normally regulated by a state insurance commissioner if they are registered as securities they are regulated by the sec as well the financial industry regulatory authority finra also regulates variable and registered indexed annuities 2agents or brokers selling annuities need to hold a state issued life insurance license and a securities license in the case of variable annuities these agents or brokers typically earn a commission based on the notional value of the annuity contract annuities often come with complicated tax considerations so it s important to understand how they work as with any other financial product be sure to consult with a professional before you purchase an annuity contract other considerationsannuities usually have a surrender period annuitants cannot make withdrawals during this time which may span several years without paying a surrender charge or fee 3investors must consider their financial requirements during this time period for example if a major event requires significant amounts of cash such as a wedding then it might be a good idea to evaluate whether the investor can afford to make requisite annuity payments many insurance companies will allow recipients to withdraw up to 10 of their account value without paying a surrender fee however if you withdraw more than that you may end up paying a penalty even if the surrender period has already lapsed there are also tax implications for withdrawals before age 59 4because of the potentially high cost of withdrawals some hard up annuitants may opt to sell their annuity payments this is similar to borrowing against any other income stream the annuitant receives a lump sum and in exchange gives up their right to some or all of their future annuity payments 5contracts also have an income rider that ensures a fixed income after the annuity kicks in there are two questions that investors should ask when they consider income riders individuals who invest in annuities cannot outlive their income stream which hedges longevity risk so long as the purchaser understands that they are trading a liquid lump sum for a guaranteed series of cash flows the product is appropriate some purchasers hope to cash out an annuity in the future at a profit however this is not the intended use of the product defined benefit pensions and social security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass annuities in workplace retirement plansannuities can be a beneficial part of a retirement plan but annuities are complex financial vehicles because of that complexity many employers don t offer them as part of an employee s retirement portfolio however the passage of the setting every community up for retirement enhancement secure act signed into law by president donald trump in 2019 loosened the rules on how employers can select annuity providers and includes annuity options within 401 k or 403 b investment plans 6the easement of these rules may result in more investments by qualified employees in annuities types of annuitiesannuities can be structured according to an array of details and factors such as the duration of time that payments from the annuity can be guaranteed to continue as mentioned above annuities can be created so that payments continue as long as either the annuitant or their spouse if survivorship benefit is elected is alive alternatively annuities can be structured to pay out funds for a fixed amount of time such as 20 years regardless of how long the annuitant lives annuities can begin to payout immediately upon deposit of a lump sum or they can be structured for deferred benefits the immediate payment annuity begins paying once the annuitant deposits a lump sum deferred income annuities on the other hand don t begin paying out after the initial investment instead the client specifies an age at which they would like to begin receiving payments from the insurance company depending on the type of annuity you choose the annuity may or may not be able to recover some of the principal invested in the account in the case of a straight lifetime payout there is no refund of the principal payments simply continue until the beneficiary dies if the annuity is set for a fixed period of time the recipient may be entitled to a refund of any remaining principal or their heirs if the annuitant has deceased 7annuities can be structured generally as fixed variable or indexed while variable annuities carry some market risk and the potential to lose principal riders and features can be added to them usually for an extra cost this allows them to function as hybrid fixed variable annuities contract owners can benefit from upside portfolio potential while enjoying the protection of a guaranteed lifetime minimum withdrawal benefit if the portfolio drops in value 8other riders may be purchased to add a death benefit to the agreement or to accelerate payouts if the annuity holder is diagnosed with a terminal illness the cost of living rider is another common rider that will adjust the annual base cash flows for inflation based on changes in the consumer price index cpi criticism of annuitiesone criticism of annuities is that they are illiquid deposits into annuity contracts are typically locked up for an extended period of time known as the surrender period the annuitant incurs a penalty if all or part of that money is withdrawn these periods can last anywhere from two to more than 10 years depending on the particular product surrender fees can start out at 10 or more and the penalty typically declines annually over the surrender period 93another criticism is that annuities are complex and costly at times individuals may buy an annuity without clearly knowing how they work or the costs involved be sure to do your research to understand all fees charges expenses and potential penalties 8annuities vs life insurancelife insurance companies and investment companies are primarily the two types of financial institutions offering annuity products for life insurance companies annuities are a natural hedge for their insurance products life insurance is bought to deal with mortality risk which is the risk of dying prematurely policyholders pay an annual premium to the insurance company that will pay out a lump sum upon their death if the policyholder dies prematurely the insurer pays out the death benefit at a net loss to the company actuarial science and claims experience allow these insurance companies to price their policies so that on average insurance purchasers will live long enough so that the insurer earns a profit in many cases the cash value inside of permanent life insurance policies can be exchanged via a 1035 exchange for an annuity product without any tax implications 109annuities on the other hand deal with longevity risk or the risk of outliving one s assets the risk to the issuer of the annuity is that annuity holders will survive to outlive their initial investment annuity issuers may hedge longevity risk by selling annuities to customers with a higher risk of premature death examples of an annuitywho buys annuities annuities are appropriate financial products for individuals seeking stable guaranteed retirement income because money put into an annuity is illiquid and subject to withdrawal penalties it is not recommended for younger individuals or for those with liquidity needs annuity holders cannot outlive their income stream which hedges longevity risk | |
what is a non qualified annuity | annuities can be purchased with either pre tax or after tax dollars a non qualified annuity is one that has been purchased with after tax dollars a qualified annuity is one that has been purchased with pre tax dollars qualified plans include 401 k plans and 403 b plans only the earnings and not the contributions of a non qualified annuity are taxed at the time of withdrawal as they are after tax money | |
what is an annuity fund | an annuity fund is an investment portfolio in which an annuity holder s payments are invested it can contain stocks bonds and other securities the annuity fund earns returns which correlate to the payout that an annuity holder receives | |
what is the surrender period | the surrender period is the amount of time an investor must wait before they can withdraw funds from an annuity without facing a penalty withdrawals made before the end of the surrender period can result in a surrender charge which is essentially a deferred sales fee this period generally spans several years the bottom linean annuity is a financial contract between an annuity purchaser and an insurance company the purchaser pays either a lump sum or regular payments over a period of time in return the insurance company makes regular payments to the annuity owner either immediately or beginning at some point in the future an annuity can be fixed variable or indexed to an equity index such as the s p 500 index | |
what is an annuity table | an annuity table is a tool for determining the present value of an annuity or other structured series of payments such a tool used by accountants actuaries and other insurance personnel takes into account how much money has been placed into an annuity and how long it has been there to determine how much money would be due to an annuity buyer or annuitant figuring out the present value of any future amount of an annuity may also be performed using a financial calculator or software built for such a purpose | |
how an annuity table works | an annuity table provides a factor based on time and a discount rate interest rate by which an annuity payment can be multiplied to determine its present value for example an annuity table could be used to calculate the present value of an annuity that paid 10 000 a year for 15 years if the interest rate is expected to be 3 according to the concept of the time value of money receiving a lump sum payment in the present is worth more than receiving the same sum in the future having 10 000 today is better than being given 1 000 per year for the next 10 years because the sum could be invested and earn interest over that decade at the end of the 10 year period the 10 000 lump sum would be worth more than the sum of the annual payments even if invested at the same interest rate annuity table and the present value of an annuitythe formula for the present value of an ordinary annuity as opposed to an annuity due is as follows p pmt 1 1 r n r where p present value of an annuity stream pmt dollar amount of each annuity payment r interest rate also known as the discount rate n number of periods in which payments will be made begin aligned text p text pmt times frac 1 1 r n r textbf where text p text present value of an annuity stream text pmt text dollar amount of each annuity payment r text interest rate also known as the discount rate n text number of periods in which payments will be made end aligned p pmt r1 1 r n where p present value of an annuity streampmt dollar amount of each annuity paymentr interest rate also known as the discount rate n number of periods in which payments will be made assume an individual has an opportunity to receive an annuity that pays 50 000 per year for the next 25 years with a discount rate of 6 or a lump sum payment of 650 000 he needs to determine the more rational option using the above formula the present value of this annuity is pva 50 000 1 1 0 06 25 0 06 639 168 where pva present value of annuity begin aligned text pva 50 000 times frac 1 1 0 06 25 0 06 639 168 textbf where text pva text present value of annuity end aligned pva 50 000 0 061 1 0 06 25 639 168where pva present value of annuity given this information the annuity is worth 10 832 less on a time adjusted basis and the individual should choose the lump sum payment over the annuity note this formula is for an ordinary annuity where payments are made at the end of the period in the above example each 50 000 payment would occur at the end of the year each year for 25 years with an annuity due the payments are made at the beginning of the period in question to find the value of an annuity due multiply the above formula by a factor of 1 r p pmt 1 1 r n r 1 r begin aligned text p text pmt times left frac 1 1 r n r right times 1 r end aligned p pmt r1 1 r n 1 r if the above example were of an annuity due its value would be p 50 000 1 1 0 06 25 0 06 1 0 06 677 518 begin aligned text p 50 000 quad times left frac 1 1 0 06 25 0 06 right times 1 0 06 677 518 end aligned p 50 000 0 061 1 0 06 25 1 0 06 677 518 in this case the individual should choose the annuity due because it is worth 27 518 more than the lump sum payment rather than working through the formulas above you could alternatively use an annuity table an annuity table simplifies the math by automatically giving you a factor for the second half of the formula above for example the present value of an ordinary annuity table would give you one number referred to as a factor that is pre calculated for the 1 1 r n r portion of the formula the factor is determined by the interest rate r in the formula and the number of periods in which payments will be made n in the formula in an annuity table the number of periods is commonly depicted down the left column the interest rate is commonly depicted across the top row simply select the correct interest rate and number of periods to find your factor in the intersecting cell that factor is then multiplied by the dollar amount of the annuity payment to arrive at the present value of the ordinary annuity below is an example of the present value of an ordinary annuity table if we take the example above with a 6 interest rate and a 25 year period you will find the factor 12 7834 if you multiply this 12 7834 factor from the annuity table by the 50 000 payment amount you will get 639 170 almost the same as the 639 168 result in the formula highlighted in the previous section the slight difference in the figures reflects the fact that the 12 7834 number in the annuity table is rounded there is a separate table for the present value of an annuity due and it will give you the correct factor based on the second formula | |
what is an annuity | an annuity is an insurance contract that provides an income stream typically during retirement an annuity may be fixed variable or indexed there are two phases first the accumulation savings phase then the payout income phase the payout may be immediate or deferred | |
what is the difference between an ordinary annuity and an annuity due | an ordinary annuity generates payments at the end of the annuity period while an annuity due is an annuity with the payment expected or paid at the start of the payment period can a lottery winner use an annuity table a lottery winner could use an annuity table to determine whether it makes more financial sense to take their lottery winnings as a lump sum payment today or as a series of payments over many years however lottery winnings are a rare form of an annuity more commonly annuities are a type of investment used to provide individuals with a steady income in retirement the bottom linean annuity table is a tool used mostly by accounting insurance or other financial professionals to determine the present value of an annuity it takes into account the amount of money that has been placed in the annuity and how long it s been sitting there so as to decide the amount of money that should be paid out to an annuity buyer or annuitant | |
what is an anomaly | in economics and finance an anomaly is when the actual result under a given set of assumptions is different from the expected result predicted by a model an anomaly provides evidence that a given assumption or model does not hold up in practice the model can either be a relatively new or older model understanding anomaliesin finance two common types of anomalies are market anomalies and pricing anomalies market anomalies are distortions in returns that contradict the efficient market hypothesis emh pricing anomalies are when something for example a stock is priced differently than how a model predicts it will be priced 1common market anomalies include the small cap effect and the january effect the small cap effect refers to the small company effect where smaller companies tend to outperform larger ones over time 2 the january effect refers to the tendency of stocks to return much more in the month of january than in others 3anomalies also often occur with respect to asset pricing models in particular the capital asset pricing model capm although the capm was derived by using innovative assumptions and theories it often does a poor job of predicting stock returns the numerous market anomalies that were observed after the formation of the capm helped form the basis for those wishing to disprove the model although the model may not hold up in empirical and practical tests it still does hold some utility 4anomalies tend to be few and far between in fact once anomalies become publicly known they tend to quickly disappear as arbitragers seek out and eliminate any such opportunity from occurring again 1types of market anomaliesin financial markets any opportunity to earn excess profits undermines the assumptions of market efficiency which states that prices already reflect all relevant information and so cannot be arbitraged the january effect is a rather well known anomaly according to the january effect stocks that underperformed in the fourth quarter of the prior year tend to outperform the markets in january the reason for the january effect is so logical that it is almost hard to call it an anomaly investors will often look to jettison underperforming stocks late in the year so that they can use their losses to offset capital gains taxes or to take the small deduction that the irs allows if there is a net capital loss for the year many people call this event tax loss harvesting as selling pressure is sometimes independent of the company s actual fundamentals or valuation this tax selling can push these stocks to levels where they become attractive to buyers in january likewise investors will often avoid buying underperforming stocks in the fourth quarter and wait until january to avoid getting caught up in the tax loss selling as a result there is excess selling pressure before january and excess buying pressure after jan 1 leading to this effect 3the september effect refers to historically weak stock market returns for the month of september there is a statistical case for the september effect depending on the period analyzed but much of the theory is anecdotal it is generally believed that investors return from summer vacation in september ready to lock in gains as well as tax losses before the end of the year 5there is also a belief that individual investors liquidate stocks going into september to offset schooling costs for children as with many other calendar effects the september effect is considered a historical quirk in the data rather than an effect with any causal relationship efficient market supporters hate the days of the week anomaly because it not only appears to be true but it also makes no sense research has shown that stocks tend to move more on fridays than mondays and that there is a bias toward positive market performance on fridays it is not a huge discrepancy but it is a persistent one the monday effect is a theory which states that returns on the stock market on mondays will follow the prevailing trend from the previous friday therefore if the market was up on friday it should continue through the weekend and come monday resume its rise the monday effect is also known as the weekend effect 6on a fundamental level there is no particular reason that this should be true some psychological factors could be at work perhaps an end of week optimism permeates the market as traders and investors look forward to the weekend alternatively perhaps the weekend gives investors a chance to catch up on their reading stew and fret about the market and develop pessimism going into monday aside from calendar anomalies there are some non market signals that some people believe will accurately indicate the direction of the market here is a short list of superstitious market indicators | |
what is an anti dilution provision | anti dilution provisions are clauses built into convertible preferred stocks and some options to help shield investors from their investment potentially losing value when new issues of a stock hit the market at a cheaper price than that paid by earlier investors in the same stock then equity dilution can occur anti dilution provisions are also referred to as anti dilution clauses subscription rights subscription privileges or preemptive rights understanding anti dilution provisionsanti dilution provisions act as a buffer to protect investors against their equity ownership positions becoming diluted or less valuable this can happen when the percentage of an owner s stake in a company decreases because of an increase in the total number of shares outstanding total shares outstanding may increase because of new share issuance based on a round of equity financing dilution can also occur when holders of stock options such as company employees or holders of other optionable securities exercise their options | |
when the number of shares outstanding increases each existing stockholder owns a smaller or diluted percentage of the company making each share less valuable | sometimes the company receives enough cash in exchange for the shares that the increase in the value of the shares offsets the effects of dilution but often this is not the case anti dilution provisions at workdilution can be particularly vexing to preferred shareholders of venture capital deals whose stock ownership may become diluted when later issues of the same stock hit the market at a cheaper price anti dilution provisions can discourage this from happening by tweaking the conversion price between convertible securities such as corporate bonds or preferred shares and common stocks in this way anti dilution clauses can keep an investor s original ownership percentage intact the two common types of anti dilution clauses are known as full ratchet and weighted average with a full ratchet provision the conversion price of the existing preferred shares is adjusted downward to the price at which new shares are issued in later rounds very simply if the original conversion price was 5 and in a later round the conversion price is 2 50 the investor s original conversion price would adjust to 2 50 the weighted average provision uses the following formula to determine new conversion prices | |
what is an anti dumping duty | an anti dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value dumping is a process wherein a company exports a product at a price that is significantly lower than the price it normally charges in its home or its domestic market in order to protect their respective economy many countries impose duties on products they believe are being dumped in their national market because these products have the potential to undercut local businesses and the local economy investopedia mira norianunderstanding anti dumping dutiesin the u s the international trade commission itc an independent government agency is tasked with imposing anti dumping duties their actions are based on recommendations they receive from the u s department of commerce and investigations by the itc and or the department of commerce 1 in many cases the duties imposed on these goods exceeds the value of the goods anti dumping duties are typically levied when a foreign company is selling an item significantly below the price at which it is being produced while the intention of anti dumping duties is to save domestic jobs these tariffs can also lead to higher prices for domestic consumers and in the long term anti dumping duties can reduce the international competition of domestic companies producing similar goods the world trade organization wto is an international organization that deals with the rules of trade between nations the wto also operates a set of international trade rules including the international regulation of anti dumping measures the wto does not intervene in the activities of companies engaged in dumping instead it focuses on how governments can or cannot react to the practice of dumping 2 in general the wto agreement permits governments to act against dumping if it causes or threatens material injury to an established industry in the territory of a contracting party or materially retards the establishment of a domestic industry 3 this intervention must be justified in order to uphold the wto s commitment to free market principles 2 anti dumping duties have the potential to distort the market in a free market governments cannot normally determine what constitutes a fair market price for any good or service example of an anti dumping dutyin june 2015 american steel companies united states steel corp nucor corp steel dynamics inc arcelormittal usa ak steel corp and california steel industries inc filed a complaint with the u s department of commerce and the itc their complaint alleged that several countries including china were dumping steel into the u s market and keeping prices unfairly low 4after conducting a review one year later the u s announced that it would be imposing a total of 522 combined anti dumping and countervailing import duties on certain steel imported from china 5 in 2018 china filed a complaint with the wto challenging the tariffs imposed by the trump administration 6 since then the trump administration has continued to use the wto to challenge what it claims are unfair trading practices by the chinese government and other trading partners 7 | |
what is anti money laundering aml | anti money laundering is an international web of laws regulations and procedures aimed at uncovering money that has been disguised as legitimate income for centuries governments and law enforcement agencies have tried to fight crime by following the money in modern times that comes down to anti money laundering aml laws and activities money laundering is the concealment of the origins of money gained from crimes including tax evasion human trafficking drug trafficking and public corruption it also includes money being illegally routed to terrorist organizations anti money laundering regulations have had an impact on governments financial institutions and even individuals around the world julie bang investopediaknow your customer kyc regulatory compliance at financial institutions starts with a process often called know your customer kyc kyc determines the identity of new customers and whether their funds originated from a legitimate source 1money laundering can be divided into three steps 2the kyc process aims to stop money laundering at the first step when a customer attempts to deposit money a study from verafin a financial crime risk management company estimates that 3 1 trillion in illicit money flowed through the global financial system in 2023 3financial institutions screen new customers against lists of parties that pose a higher than average risk of money laundering criminal suspects and convicts individuals and companies under economic sanctions and politically exposed people encompassing foreign public officials their family members and close associates 45customer due diligence cdd throughout the account s lifetime financial institutions must conduct customer due diligence cdd the practice of maintaining accurate and up to date records of transactions and customer information for regulatory compliance and potential investigations certain customers may be added over time to sanctions and other aml watchlists warranting checks for regulatory risks and compliance issues on an ongoing basis 6according to the u s treasury s financial crimes enforcement network fincen the four core requirements of cdd in the united states are 7cdd may try to uncover and counter money laundering patterns such as layering and structuring also known as smurfing breaking up large transactions into smaller ones to dodge reporting limits for example financial institutions have instituted aml holding periods that force deposits to remain in an account for a minimum of days before they can be transferred elsewhere 8if patterns and anomalies indicate money laundering activities suspicious transactions in u s jurisdictions must be reported in suspicious activity reports sars to relevant financial agencies for further investigation anti money laundering in the u s aml regulations in the u s expanded after the bank secrecy act bsa was passed in 1970 for the first time financial institutions were required to report cash deposits of more than 10 000 collect identifiable information of financial account owners and maintain records of transactions additional legislation was passed in the 1980s amid increased efforts to fight drug trafficking in the 1990s to enhance financial surveillance and in the 2000s to cut off funding for terrorist organizations banks brokers and dealers now follow a complex regulatory framework of conducting due diligence on customers and tracking and reporting suspicious transactions 91011 a written aml compliance policy must be implemented and approved in writing by a member of senior management and overseen by an aml compliance officer the anti money laundering act of 2020 the most sweeping overhaul of u s aml regulations since the patriot act passed after the 9 11 terrorist attacks in 2001 subjected cryptocurrency exchanges arts and antiquities dealers and private companies to the same cdd requirements as financial institutions 1213the corporate transparency act a clause of the anti money laundering act eliminated loopholes for shell companies to evade anti money laundering measures and economic sanctions fincen a u s department of the treasury bureau issues guidance and regulations that interpret and implement the bsa and other aml laws fincen s guidance and regulations provide detailed instructions for financial institutions on how to comply with aml requirements in addition to these federal laws many states have their own aml statutes and regulations these state laws often mirror the federal requirements but may include additional provisions international anti money launderingthe european union eu and other jurisdictions adopted similar anti money laundering measures to the u s anti money laundering legislation enforcement assumed greater global prominence in 1989 when a group of countries and nongovernmental organizations ngos formed the financial action task force fatf the fatf is an intergovernmental body that devises and promotes the adoption of international standards to prevent money laundering in october 2001 following the 9 11 terrorist attacks fatf s mandate grew to combat terrorist financing those standards the fatf s 40 recommendations provide a framework for aml and combating the financing of terrorism cft regulations and policies in more than 190 jurisdictions worldwide covering cdd transaction monitoring reporting of suspicious activity and international cooperation other important international organizations in the fight against money laundering include the international monetary fund imf and the united nations u n and programs include the council of the european union s anti money laundering directive amld and the basel committee on banking supervision s customer due diligence cdd for banks the imf has pressed member countries to comply with international norms thwarting terrorist financing 14 the u n added aml provisions to address money laundering associated with drug trafficking in the 1998 vienna convention with international organized crime in the 2001 palermo convention and with political corruption in the 2005 meridian convention 14the council of the european union s amld a directive that sets out aml cft requirements for all eu member states has been amended several times to reflect the changing risks of money laundering and terrorist financing the basel committee on banking supervision s cdd for banks provides detailed recommendations for banks on how to identify and verify the identity of their customers anti money laundering and cryptocurrencycryptocurrency has drawn increasing attention among aml professionals and regulatory bodies virtual coins provide anonymity to users presenting criminals with a convenient way to store and move money according to cryptocurrency and blockchain analytics firm chainalysis addresses connected to illicit activity sent nearly 39 6 billion worth of cryptocurrency in 2022 up 141 from 2021 this figure dropped to 24 2 billion in 2023 but it was still a significant amount of money it was only about 0 78 of all illicit funds 31516the decentralized nature of cryptocurrency markets makes it challenging to implement and enforce aml regulations traditional aml frameworks designed for centralized financial institutions were not adequate in the past for the decentralized cryptocurrency ecosystem but regulators have made significant progress in addressing the weaknesses that were present blockchain analysis and monitoring tools enable financial institutions and law enforcement to identify and investigate suspicious cryptocurrency transactions crypto forensic services like chainalysis elliptic and trm labs have the technology to flag crypto wallets exchanges and transactions tied to designated terrorist organizations sanctions lists political groups government actors and organized crime such as hacking ransomware scams and contraband trafficking on darknet markets in the u s cryptocurrencies are largely an unregulated market and few regulations explicitly target the asset class by name instead aml enforcement actions such as those against crypto exchanges binance and ftx have been prosecuted under existing laws and statutes such as the bank secrecy act and the foreign corrupt practices act fcpa only under the anti money laundering act of 2020 did u s companies become legally required to comply with financial screening regulations that apply to fiat currencies and tangible assets businesses that exchange or transmit virtual currencies now qualify as regulated entities and must register with fincen adhere to aml and cft laws and report suspicious customer information to financial regulators 17more formal rules on intervening in virtual currency money laundering are expected to be introduced in the u s and abroad recent steps include an internal revenue service irs proposal and several european bills for financial platforms to report digital asset payments and transactions to national and transnational regulatory bodies law enforcement agencies and industry stakeholders 181920on the global stage the financial action task force fatf travel rule an international aml framework that would require collecting and sharing beneficiary information for cross border cryptocurrency flows is being closely watched and gaining traction among regulatory bodies worldwide several countries have implemented or are implementing the fatf travel rule in their civil and criminal codes to increase the transparency and accountability of cryptocurrency transactions 21some aml requirements apply to individuals by law u s residents must report receipts of multiple related payments totaling more than 10 000 to the internal revenue service irs on irs form 8300 2223 | |
what is considered anti money laundering | anti money laundering aml refers to legally recognized rules national and international that are designed to thwart hiding criminal profits inside the financial system customer due diligence cdd refers to practices that financial institutions implement to detect and report aml violations know your customer kyc also known as know your client is a component of cdd that involves screening and verifying prospective banking clients | |
what is an example of anti money laundering | financial institutions are required by law to gather information on customers track deposits and outflows and report any suspicious activity | |
what are the 3 stages of money laundering | the three stages are placement depositing layering obscuring through many transactions and integration or extraction using for large purchases or withdrawing the bottom linegovernments have evolved their approach to money laundering deterrence by establishing and revising regulatory controls that elicit proactive participation from financial institutions anti money laundering is crucial for safeguarding the financial system from crimes | |
what is an anticipatory breach | an anticipatory breach of contract is an action that shows one party s intention to fail to fulfill its contractual obligations to another party an anticipatory breach can end the counterparty s responsibility to perform its duties demonstrating the other party s intention to breach the contract gives the counterparty grounds for beginning legal action an anticipatory breach is also referred to as an anticipatory repudiation understanding anticipatory breachesan anticipatory breach occurs when a party demonstrates its intention to break a contract however vocal or written confirmation is not required and failure to perform any obligation in a timely matter can result in a breach by declaring an anticipatory breach the counterparty may begin legal action immediately rather than waiting until the terms of a contract are actually broken parties claiming an anticipatory breach are obliged to make every effort to mitigate their own damages if they wish to seek compensation in court that could include halting payments to the party that committed the breach and immediately looking for ways to minimize the effects of the breach it also might mean seeking a third party who could perform the duties outlined in the original contract requirements for an anticipatory breachthe intent to break the contract must be an absolute refusal to fulfill the terms for it to qualify as an anticipatory breach the expected breach cannot be based solely on the assumption that the other party will not meet its obligations if the anticipatory breach involves the sale of goods then section 2 609 of the uniform commercial code ucc also lays down several requirements the party anticipating a breach has the right to ask the other party to provide reassurance that the contract will be fulfilled while awaiting assurance payments and other duties can and should be stopped if the other party does not offer the proper assurance within 30 days the contract is officially breached 1the requirements for an anticipatory breach can vary it is a good idea to consult an attorney before taking any action example of an anticipatory breachlet s say a real estate developer contracts an architecture firm to create plans for a new building by a specific deadline if the developer requests regular updates on the project and is not pleased with the latest results this is not grounds to claim an anticipatory breach the architects may be behind schedule while continuing to work on the project such a circumstance still leaves the possibility that the architects might meet their deadline if corrective steps are taken if the architects took actions that made it impossible to meet the deadline it would constitute an anticipatory breach for example the architects might halt all work on the first project and commit all their resources to a new project with a different developer that would preclude them from fulfilling the initial contract | |
what is antitrust | antitrust laws are regulations that encourage competition by limiting the market power of any particular firm this often involves ensuring that mergers and acquisitions don t overly concentrate market power or form monopolies as well as breaking up firms that have become monopolies antitrust laws also prevent multiple firms from colluding or forming a cartel to limit competition through practices such as price fixing due to the complexity of deciding what practices will limit competition antitrust law has become a distinct legal specialization understanding antitrustantitrust laws are the broad group of state and federal laws that are designed to make sure businesses are competing fairly the trust in antitrust refers to a group of businesses that team up or form a monopoly to dictate pricing in a particular market supporters say antitrust laws are necessary and that competition among sellers gives consumers lower prices higher quality products and services more choices and greater innovation most people agree with this concept and the benefits of an open marketplace although there are some who claim that allowing businesses to compete as they see fit would ultimately give consumers the best prices the antitrust lawsthe sherman act the federal trade commission act and the clayton act are the key laws that set the groundwork for antitrust regulation 1 predating the sherman act the interstate commerce act was also beneficial in establishing antitrust regulations although it was less influential than some of the others 2congress passed the interstate commerce act in 1887 in response to growing public demand that railroads be regulated among other requirements the law ordered railroads to charge a fair fee to travelers and post those fees publicly it was the first example of antitrust law but was less influential than the sherman act passed in 1890 2the sherman act outlawed contracts and conspiracies restraining trade and or monopolizing industries in an attempt to stop competing individuals or businesses fixing prices dividing markets or attempting to rig bids the sherman act laid out specific penalties and fines for violating the terms 1in 1914 congress passed the federal trade commission act banning unfair competition methods and deceptive acts or practices the clayton act was also passed in 1914 addressing specific practices that the sherman act does not ban for example the clayton act prohibits appointing the same person to make business decisions for competing corporations 1the antitrust laws describe unlawful mergers and business practices in general terms leaving courts to decide which ones are illegal based on the specifics of each case 1special considerationsthe federal trade commission ftc and the u s department of justice doj are tasked with enforcing federal antitrust laws in some cases these two authorities may also work with other regulatory agencies to ensure that certain mergers fit the public interest 3the ftc mainly focuses on segments of the economy where consumer spending is high including healthcare drugs food energy technology and anything related to digital communications factors that could spark an ftc investigation include premerger notification filings certain consumer or business correspondence congressional inquiries or articles on consumer or economic subjects 3if the ftc thinks that a law has been violated the agency will try to stop the questionable practices or find a resolution to the anticompetitive portion of say a proposed merger between two competitors if no resolution is found the ftc may put out an administrative complaint and or pursue injunctive relief in federal court 3the ftc might also refer evidence of criminal antitrust violations to the doj the doj has the power to impose criminal sanctions and holds sole antitrust jurisdiction in certain sectors such as telecommunications banks railroads and airlines 3major example of antitrust lawin january 2023 the doj and eight states filed an antitrust lawsuit against alphabet s google alleging that the search giant has illegal monopolization of the digital advertising business today s complaint alleges that google has used anticompetitive exclusionary and unlawful conduct to eliminate or severely diminish any threat to its dominance over digital advertising technologies the government agency said 4the filing which seeks to make google divest parts of its advertising business alleges that the company has used acquisitions as a strategy for neutralizing or eliminating rivals and forces advertisers to use its products by making competitors products difficult to use the complaint claims that the company s monopolistic practices curtail innovation raise advertising fees and prevent small businesses and publishers from growing 4google s advertising business has come under fire from critics who argue that the search giant controls both the supply and demand sides of the digital advertising market the company provides tools that help websites offer ad space and that assist advertisers in placing online ads the suit alleges that google s dominance in the market allows it to pocket 30 cents of each dollar that advertisers spend using its suite of advertising tools 4the lawsuit marks the second federal antitrust complaint against google in three years under the former trump administration the doj filed a lawsuit in october 2020 accusing the tech giant of using its monopoly to reduce competition through exclusionary agreements 5 that case is expected to go to trial this fall google responded to the suit saying the doj was attempting to intervene in the free market today s lawsuit from the department of justice attempts to pick winners and losers in the highly competitive advertising technology sector google global ads vice president dan taylor said in a statement 6on oct 20 2020 the u s department of justice filed an antitrust lawsuit against google for anticompetitive practices related to its alleged dominance in search advertising 5 | |
what are antitrust laws and are they necessary | antitrust laws were implemented to prevent companies from getting greedy and abusing their power without these regulations in place many politicians fear that big businesses would gobble up the smaller ones this would result in less competition and fewer choices for consumers potentially leading to higher prices lower quality and less innovation among other things | |
how many antitrust laws are there | there are three federal antitrust laws in effect today the sherman act the federal trade commission act and the clayton act 1who enforces antitrust laws the federal trade commission ftc and the u s department of justice doj are responsible for making sure that antitrust laws are abided by the ftc mainly focuses on segments of the economy where consumer spending is high while the doj holds sole antitrust jurisdiction in sectors such as telecommunications banks railroads and airlines and has the power to impose criminal sanctions 3the bottom lineantitrust laws regulate the concentration of economic power to prevent companies from price colluding or creating monopolies proponents of antitrust laws argue that they keep consumer prices lower and foster innovation through increased competition critics say antitrust regulations intervene in the free market and reduce efficiency antitrust laws are enforced by the ftc and doj with the agencies focusing on areas of the economy that receive significant consumer spending such as technology healthcare pharmaceuticals and communications typically antitrust investigations arise from premerger notification filings congressional inquiries or consumer and business correspondence | |
what are appellate courts | appellate courts also known as the court of appeals are the part of the american judicial system that is responsible for hearing and reviewing appeals from legal cases that have already been heard in a trial level or other lower court persons or entities such as corporations that experience an unsuccessful outcome in a trial level or other lower courts may file an appeal with an appellate court to have the decision reviewed if the appeal has merit the lower ruling may be reversed appellate courts are present at both the state and federal levels and do not include a jury | |
how appellate courts work | appellate courts review the decisions of lower courts to determine if the court applied the law correctly they exist as part of the judicial system to provide those who have judgments made against them an opportunity to have their case reviewed a publicly traded company with an unfavorable judgment against it will likely experience a drop in share price but an appeal could overturn this previous ruling if an appeal is successful the stock price usually jumps unsuccessful appeals may further be appealed to the supreme court courts at the appellate level review the findings and evidence from the lower court and determine if there is sufficient evidence to support the determination made by the lower court in addition the appellate court will determine if the trial or lower court correctly applied the law the highest form of an appellate court in the u s is the u s supreme court which hears only appeals of major importance and consequence appellate courts vs supreme courtssupreme courts typically have more authority and breadth than appellate courts the u s supreme court is the highest legal authority there is in america and many states have their own supreme courts or court of last resort supreme courts review decisions made by appeals courts overall there are 13 appellate courts on the federal level 12 district appellate courts and an appeals court for the federal circuit many states have intermediate appellate courts which serve as appeals courts meant to cut down on the workload for the state supreme court forty one of the 50 states have at least one intermediate appellate court example of an appellate court rulingshares of ride sharing companies uber technologies inc and lyft inc rose in the summer of 2020 after an appellate court granted a delay in the implementation of a new california law that requires many so called gig workers including drivers for ride share companies to be reclassified as employees 1in this instance the appellate court decided that a previous ruling from a lower california court affirming the constitutionality or legality of the state employment law would be put on hold until it could evaluate the appeal and rule on its merits not long after investor hopes that uber and lyft could potentially get away with offering drivers no access to benefit plans or workers compensation coverage were dashed in october of 2020 the california first district court of appeals ruled that the law was in fact legal and enforceable meaning uber and lyft must treat their california drivers as employees rather than independent contractors and provide them with the benefits and wages they are entitled to under state labor law 2in february of 2021 the u s supreme court refused to hear uber and lyft s appeal affirming the lower court s decision 3 the u k supreme court has also done the same | |
what is the applicable federal rate afr | the applicable federal rate afr is the minimum interest rate that the internal revenue service irs allows for private loans each month the irs publishes a set of interest rates that the agency considers the minimum market rate for loans 1 any interest rate that is less than the afr would have tax implications the irs publishes these rates in accordance with section 1274 d of the internal revenue code 2understanding the applicable federal rate afr the afr is used by the irs as a point of comparison versus the interest on loans between related parties such as family members 3 if you were giving a loan to a family member you would need to be sure that the interest rate charged is equal to or higher than the minimum applicable federal rate the irs publishes three afrs short term mid term and long term short term afr rates are determined from the one month average of the market yields from marketable obligations such as u s government treasury securities with maturities of three years or less mid term afr rates are from obligations of maturities of more than three and up to nine years long term afr rates are from bonds with maturities of more than nine years 4in addition to the three basic rates the rulings in which the afrs are published contain several other rates that vary according to compounding period annually semi annually quarterly monthly and various other criteria and situations example of how to use the afras of may 2023 the irs stated that the annual short term afr was 4 30 the mid term afr was 3 57 and the long term afr was 3 72 please bear in mind that these afr rates are subject to change by the irs 5 | |
which afr rate to use for a family loan would depend on the length of time designated for payback 6 let s say you were giving a loan to a family member for 10 000 to be paid back in one year you would need to charge the borrower a minimum interest rate of 4 30 for the loan in other words you should receive 430 in interest from the loan | in our example above any rate below 4 30 could trigger a taxable event for example let s say you gave the same loan but you didn t charge any interest by not charging any interest you would have foregone 430 in interest income and according to the irs it would be considered a taxable gift any interest rate charged below the stated afr for the particular term of the loan would be considered foregone interest and as a result be taxable special considerations | |
when preparing to make a loan between related parties taxpayers should consider two factors to select the correct afr the length of the loan should correspond to the afrs short term three years or less mid term up to nine years and long term more than nine years 4 | if the lender charges interest at a lower rate than the proper afr the irs may reassess the lender and add imputed interest to the income to reflect the afr rather than the actual amount paid by the borrower also if the loan is more than the annual gift tax exclusion it may trigger a taxable event and income taxes may be owed depending on the circumstances the irs may also assess penalties 7am i required to charge interest when loaning money to family no you re not required to charge interest however by not doing so the irs may consider your loan a gift and levy taxes accordingly | |
how often is the afr determined | the afr is released monthly with updated interest rates based on the market interest rates | |
does my loan agreement with a family member have to be notarized | no while notarization may take it the next step your written and signed agreement is legally binding on its own 8the bottom linethe applicable federal rate exists to set a standard for what differentiates a gift from a loan check this rate before loaning money to anyone if you charge an interest rate less than this benchmark you may be subject to gift taxes correction april 9 2024 this article has been edited from a previous version that incorrectly referenced t bills with maturity terms of up to three years t bills have maturities of one year or less | |
what is an application programming interface api | an application programming interface api is a set of programming codes that queries data parse responses and sends instructions between one software platform and another apis are used extensively in providing data services across a range of fields and contexts apis have become increasingly popular tools with the likes of meta formerly facebook amazon salesforce and many more establishing their own apis that allow companies to access some of their services without having to fully migrate into their ecosystem this new paradigm has led to the rise of what some experts call the api economy a model that enhances a company s bottom line by improving interoperability and thus creating new systems from existing ones in the domain of financial markets and trading one may use an api to establish a connection between a set of automated trading algorithms and the trader s preferred trading broker platform for the purpose of obtaining real time quotes and pricing data or to place electronic trades understanding application programming interfaces apis apis have become increasingly popular with the rise of automated trading systems in the past retail traders were forced to screen for opportunities in one application and separately place trades with their broker many retail brokers now provide apis that enable traders to directly connect their screening software with the brokerage account to share real time prices and place orders traders can even develop their own applications using programming languages like python and execute trades using a broker s api two types of traders use broker apis despite the apparent benefits of apis there are many risks to consider most apis are provided to a broker s customers free of charge but there are some cases where traders may incur an extra fee it s important to understand these fees before using the api traders should also be aware of any api limitations including the potential for downtime which could significantly affect trading results | |
where to find apis for traders | the most popular brokers supporting api access in the traditional stock and futures markets include tradestation tdameritrade and interactivebrokers but many smaller brokers have expanded access over time apis are more common among forex brokers where third party applications and trading systems such as metatrader have been commonly used for many years many brokers provide online documentation for their apis developers can find out exactly how to authenticate with the api what data is available for consumption how to place orders through the api and other technical details it s essential to be familiar with these details before choosing a broker when looking for specific functionality some brokers also provide libraries in various languages to make interaction with their api easier for example a broker may offer a python library that provides a set of functions or methods for placing a trade rather than having to write your own functions to do so this can help accelerate the development of trading systems and make them less costly to develop | |
what is an application specific integrated circuit asic miner | an application specific integrated circuit asic is an integrated circuit chip designed for a specific purpose an asic miner is a device that uses asics for the sole purpose of mining digital currency generally each asic miner is constructed to mine a specific digital currency based on their hashing algorithms one way to think about asics is as specialized computers optimized to solve a cryptographic proof of work puzzle because asics are built especially for mining cryptocurrency they do it much faster than personal computers which might otherwise be considered powerful history of asic minerscryptocurrency mining is required by a proof of work pow blockchain like bitcoin to carry out its operations the mining process involves solving cryptographic puzzle by generating a hash until finding one with a value equal to or below the target difficulty number s value the first miner to find the solution to the puzzle has their block added to the blockchain each winner in the bitcoin mining competition receives a reward a specific amount of bitcoin along with the transaction fees for the transactions in that block in bitcoin s early days any computer with adequate processing power could mine bitcoin however those days are long gone in 2012 the first asic miner was introduced attracting hordes of crypto miners as the network of mining machines grew the mining difficulty increased because the network is designed to increase the difficulty when there is more computational power this led to a race to harness the most hashing power the term used to describe how many hashes per second a miner can generate or the combined hashes per second of a networked mining rig or pool the most powerful bitcoin asics can hash at more than 400 terahashes per second 12 zeros the latest gpus on the other hand hash at about 120 megahashes per second one million | |
how an application specific integrated circuit asic miner works | instead of being general purpose integrated circuits like ram chips pc processors or mobile device microprocessors asics employed in cryptocurrency mining are custom designed to mine cryptocurrencies by only generating hashes the chips are designed to compute one or a few hashing algorithms they are placed on an integrated circuit board or many and programmed to generate hashes a hash is a long hexadecimal number the result output of a hashing algorithm s input blocks have a dedicated space called a block header that includes certain information one of these fields is the nonce or number used once in another field there is information about the transaction that will transfer the block reward to the miner which is called the coinbase the coinbase field also acts as an extra nonce field because it can hold more data these two fields can be altered to generate different hashes to mine a block the mining program changes the nonce and the extra nonce usually both to generate a new hash until a number less than the target hash is reached this is called hashing the more hashes that can be performed in a set period the more likely a miner is to earn the reward bitcoin is programmed to allow a miner to hash at 8 x 1028 hashes per second much more than the entire network of asics and other computers can currently do hashing uses all of the computational resources in the asic miner which generates a lot of heat heat generation inhibits efficiency heat slows down conductivity and can cause damage so the machines use active cooling such as heat sinks large fans or liquid cooling to combat the heat one asic mining farm cleanspark submerges thousands of asics in non conductive oil which is cycled through a cooling process to maintain a specific temperature many miners join a mining pool to increase their chances of earning bitcoin mining pools usually pay shares of rewards based on a miner s hashrate and work contributed asic miner considerationsbefore investing thousands of dollars in an asic mining rig here are some factors to be considered | |
what is the meaning of asic | asic stands for application specific integrated circuit these special circuits can be designed for any purpose but in cryptocurrency they are built for mining |
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