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how do you trade the ascending triangle chart pattern | traders generally enter a position on a security when its price breaks above or below the boundaries of an ascending triangle if the price jumps above the horizontal resistance level it may be a good time to buy while a move below the lower trendline suggests that selling or shorting the asset could be a profitable move traders often protect their positions by placing a stop loss outside the opposite side of the pattern to determine a profit target it can be useful to start at the breakout point and then add or subtract the height of the triangle at its thickest point the bottom linean ascending triangle is a technical analysis chart pattern that occurs when the price of an asset fluctuates between a horizontal upper trendline and an upward sloping lower trendline since the price has a tendency to break out in the same direction as the trend in place before the formation of the triangle ascending triangles are often called continuation patterns traders often wait for the price to break above or below the pattern before entering a position the ascending triangle pattern is particularly useful for traders because it suggests a clear entry point profit target and stop loss level | |
what is the asia pacific economic cooperation apec | the asia pacific economic cooperation apec is an economic group of 21 members formed in 1989 with the primary goal of promoting free trade and sustainable development in the pacific rim economies 1 | |
what is the asian development bank | the asian development bank s primary mission is to foster economic growth and cooperation among countries in the asia pacific region 1 founded in 1966 and based in manila philippines the adb assists members and partners by providing loans technical assistance grants and equity investments to promote social and economic development the adb has been responsible for major projects in the region and raises capital regularly through the international bond markets the adb also relies on member contributions retained earnings from lending and the repayment of loans for the funding of the organization | |
how the asian development bank works | the asian development bank provides assistance to its developing member countries the private sector and public private partnerships through grants loans technical assistance and equity investments to promote development the adb regularly facilitates policy dialogues and provides advisory services they also use co financing operations that tap official commercial and export credit sources while providing assistance membership in the adb is open to members and associate members of the united nations economic commission for asia and the far east it s also open to other regional countries and non regional developed countries that are members of the u n or of any of its specialized agencies the adb is one of two asian regional development banks the other being the chinese led asian infrastructure investment bank aiib financing provided by the asian development bankthe adb provides both private financing and sovereign public financing private sector efforts focus on projects that help promote private investments in the region that will have significant development impact and will lead to accelerated sustainable and inclusive growth public sector financing provides funding for member countries with flexibility in determining how they can achieve development goals in 2021 the adb committed nearly us 13 5 billion to help its developing member countries address the impacts of the covid 19 crisis and address vaccination needs and has mobilized a further 12 9 billion in co financing from partners through a 9 billion asia pacific vaccine access facility or apvax announced in december 2020 the adb provided funding for vaccine procurement logistics and distribution 23the total private financing portfolio consisted of 14 2 billion at the end of 2021 in terms of sovereign financing adb s portfolio stood at 104 billion by the end of 2021 consisting of 713 loans 392 grants 915 ta projects one guarantee and 1 equity investment 4structure of the asian development bankaccording to adb s website the agreement establishing the asian development bank known as the adb charter vests all the powers of the institution in the board of governors which in turn delegates some of these powers to the board of directors the board of governors meets formally once a year during adb s annual meeting 5 the adb s highest policy making body is its board of governors which comprises one representative from each member the two largest shareholders of the asian development bank are the united states and japan although the majority of the bank s members are from the asia pacific region the industrialized nations are also well represented regional development banks usually work in harmony with both the international monetary fund imf and the world bank in their activities asian development bank country relationships | |
when adb was founded in 1966 it consisted of 31 members since then membership has grown to 68 members which is made up of 48 regional and 19 non regional members membership as of 2022 includes 6 | the two largest shareholders of the asian development bank are the united states and japan both countries have a majority ownership of the bank with 15 6 each 7who controls the asian development bank the adb is run by a board of governors which represent the member countries of the adb as of 2022 adb s five largest shareholders are japan and the united states each with 15 6 of total shares the people s republic of china 6 4 india 6 3 and australia 5 8 75 | |
where is the asian development bank headquartered | the asian development bank has its headquarters in manila philippines | |
is india a member of the asian development bank | yes india is a regional member country of the adb | |
what was the asian financial crisis | the asian financial crisis also called the asian contagion was a sequence of currency devaluations and other events that began in july 1997 and spread across asia the crisis started in thailand when the government ended the local currency s de facto peg to the u s dollar after depleting much of the country s foreign exchange reserves trying to defend it against months of speculative pressure 1just weeks after thailand stopped defending its currency malaysia the philippines and indonesia were also compelled to let their currencies fall as speculative market pressure built by october the crisis spread to south korea where a balance of payments crisis brought the government to the brink of default 1other economies also came under pressure but those with solid economic fundamentals and hefty foreign exchange reserves fared much better hong kong fended off several major but unsuccessful speculative attacks on its currency which is pegged to the u s dollar via a currency board system and backed by massive u s dollar reserves 12impact of the asian financial crisisas the thai baht fell other asian currencies fell some precipitously across asia inflows of capital slowed or reversed the thai baht had been trading at about 26 to the u s dollar before the crisis but lost half its value by the end of 1997 falling to 53 to the dollar by january 1998 the south korean won fell from about 900 to the dollar to 1 695 by the end of 1997 the indonesian rupiah which had been trading at around 2 400 to the dollar in june 1997 plummeted to 14 900 by june 1998 less than one sixth its precrisis level some of the more heavily affected countries fell into severe recession indonesia s gross domestic product gdp growth fell from 4 7 in 1997 to 13 1 in 1998 3 in the philippines it slid from 5 2 to 0 5 over the same period 4 malaysia s gdp growth similarly slid from 7 3 in 1997 to 7 4 in 1998 while south korea s contracted from 6 2 to 5 1 56in indonesia the ensuing economic crisis led to the collapse of the three decade old dictatorship of president suharto 7the crisis was alleviated by intervention from the international monetary fund imf and the world bank among others which poured some 118 billion into thailand indonesia and south korea to bail out their economies 1as a result of the the crisis affected countries restructured their economies generally because the imf required reform as a condition of help the specific policy changes were different in each country but generally involved strengthening weak financial systems lowering debt levels raising interest rates to stabilize currencies and cutting government spending 1the crisis also serves as a valuable case study for economists to understand how interwoven markets affect one another especially as it relates to currency trading and national accounts management causes of the asian financial crisisthe crisis was rooted in several threads of industrial financial and monetary government policies and the investment trends that they created once the crisis began markets reacted strongly and one currency after another came under pressure some of the macroeconomic problems included current account deficits high levels of foreign debt climbing budget deficits excessive bank lending poor debt service ratios and imbalanced capital inflows and outflows many of these problems were the result of policies to promote export led economic growth in the years leading up to the crisis governments worked closely with manufacturers to support exports including providing subsidies to favored businesses more favorable financing and a currency peg to the u s dollar to ensure an exchange rate favorable to exporters while this did support exports it also created risk explicit and implicit government guarantees to bail out domestic industries and banks meant investors often did not assess the profitability of an investment but instead looked to its political support investment policies also created cozy relationships among local conglomerates financial institutions and the regulators who oversaw their industries large volumes of foreign money flowed in often with little attention to potential risks these factors all contributed to a massive moral hazard in asian economies encouraging major investment in marginal and potentially unsound projects as the crisis spread it became clear that the impressive economic growth rates in these countries were concealing serious vulnerabilities in particular domestic credit had expanded rapidly for years often poorly supervised creating significant leverage along with loans extended to dubious projects rapidly rising real estate values often fueled by easy access to credit contributed to the problem along with rising current account deficits and a buildup in external debt heavy foreign borrowing often at short maturities also exposed corporations and banks to significant exchange rate and funding risks risks that had been masked by long standing currency pegs when the pegs fell apart companies that owed money in foreign currencies suddenly owed a lot more in local currency terms forcing many into insolvency 1many asian economies had also slid into current account deficits if a country has a current account surplus that means it is essentially a net lender to the rest of the world if the current account balance is negative then the country is a net borrower from the rest of the world current account deficits had grown on the back of heavy government spending much of it directed to supporting continued export growth response to the asian financial crisisthe imf intervened to stem the crisis with loans to stabilize the affected economies the imf and others lent roughly 118 billion in short term loans to thailand indonesia and south korea 1 the bailouts came with conditions though governments had to raise taxes cut spending and eliminate many subsidies by 1999 many of the affected countries began to show signs of recovery other financial institutions also intervened for example in december 1997 the u s federal reserve bank brokered a deal under which u s banks owed money by south korean companies on short term loans voluntarily agreed to roll them over into medium term loans 1lessons from the asian financial crisismany of the lessons of the asian financial crisis remain relevant today first beware of asset bubbles as they have a habit of bursting another is that governments need to control spending and pursue prudent economic development policies | |
when governments spend implement policies that keep taxes low subsidize the price of staple goods or use other methods that effectively put more money in people s pockets consumers have more money to spend as most economies rely at least partly on imports for many goods and services this increased spending creates demand for foreign currency usually u s dollars as importers have to sell local currency and buy foreign currency to pay for imports | demand for foreign currency and selling of local currency to buy it increases exponentially when those policies also promote heavy investment in infrastructure new businesses and other economic projects as more local currency is offered for sale on foreign exchange markets its value goes down unless there is a corresponding demand to buy it say by exporters selling foreign currency that they earn from exports | |
why do governments keep exchange rates high | governments especially in developing economies seek to manage exchange rates to balance their ability to pay debts denominated in foreign currencies because investors generally prefer instruments denominated in more stable currencies governments in developing economies often raise funds by issuing bonds denominated in u s dollars japanese yen or euros however if the value of the domestic currency falls vs the currency in which its debt is denominated that effectively increases the debt as more local currency is needed to pay it so when the thai baht lost half of its value in 1997 that meant local borrowers needed twice as many baht to pay debts denominated in u s dollars as many developing countries also rely on imports a higher valued local currency also makes those imports cheaper in local currency terms | |
why do governments keep exchange rates low | conversely governments may seek to keep their exchange rates low to increase the competitiveness of exports in the 1980s following years of complaints from u s companies about competition from cheap japanese imports the u s government convinced japan to allow its currency to appreciate as part of the plaza accord 8 the currency s value climbed from 250 yen to one u s dollar in early 1985 to less than 130 yen by 1990 the u s trade deficit with japan fell from 55 billion in 1986 to 41 billion in 1990 9the bottom linein 1997 decades of economic policy planning that featured close relationships among government policy planners regulators the industries they regulated and financial institutions came to a head when markets began putting downward pressure on asian currencies the most vulnerable were those countries with high levels of debt and insufficient financing to pay it the imf stepped in to bail out the most affected economies but it imposed strict conditions in exchange for the help some measures included requiring governments to cut spending raise taxes eliminate subsidies and restructure their financial systems the crisis also serves as a case study in asset bubbles and how quickly panic selling can trigger contagion that central bankers cannot control | |
what is the asian infrastructure investment bank aiib | the asian infrastructure investment bank aiib is a multilateral development bank that provides financing for infrastructure projects in asia like other development banks its mission is to improve social and economic outcomes in its region asia and beyond it has 106 member countries and 100 billion of capitalization as of 2023 the aiib was proposed by chinese leader xi jinping to provide developing countries with an alternative to western lending institutions like the world bank and the international monetary fund it began operations in january 2016 | |
what is ask | the ask is the price a seller is willing to accept for a security which is often referred to as the offer price along with the price the ask quote might also stipulate the amount of the security available to be sold at the stated price the bid is the price a buyer is willing to pay for a security and the ask will always be higher than the bid understanding askthe terms bid and ask are used in nearly every financial market in the world including stocks bonds foreign exchange and derivatives an example of an ask in the stock market is 5 24 x 1 000 which means that someone is offering to sell 1 000 shares for 5 24 per share the ask is always higher than the bid the difference between the two numbers is called the spread a wider spread makes it harder to make a profit because the security is always being bought at the high end of the spread and sold at the low end spreads can widen sharply with unusually volatile trading or when there is a great deal of uncertainty over the direction of the price stock market spreadsin 2001 stock prices changed from being quoted in sixteenths to decimals 1 that brought the smallest possible spread from 1 16 of a dollar or 0625 to one penny the width of a spread in nominal terms will depend in part on the price of the stock a spread of two cents on a price of 10 is 0 02 while a spread of two cents on a price of 100 is 0 002 foreign exchange spreadsspreads in the wholesale market in which financial institutions deal are tight the spreads vary by currency because the value of a point varies a typical spread when trading the euro versus the dollar is between 1 and 2 points this means that the bid might be 1 3300 which is the number of dollars needed to buy one euro with an offer of 1 3301 a single point on a transaction of 10 000 000 and a eur usd rate of 1 3300 is worth 751 at 110 japanese yen to the dollar the value of one point on a 10 000 000 transaction is 909 the bid ask spread for cross currency transactions such as the euro versus the japanese yen or the british pound is usually two to three times as wide as spreads versus the dollar this reflects both lower trading volume and higher volatility spreads in the retail market have tightened considerably with the increased popularity of electronic dealing systems these allow small traders to view competitive prices in ways that only large financial institutions could do in the past this has pushed spreads down as low as 3 to 10 points at times bank note spreadsbuying and selling banknotes in foreign currencies is a separate market from either wholesale or retail foreign exchange spreads are likely to be 75 pips or more | |
what is assemble to order ato | assemble to order ato is a business production strategy where products that are ordered by customers are produced quickly and are customizable to a certain extent it typically requires that the basic parts of the product are already manufactured but not yet assembled once an order is received the parts are assembled quickly and the final product is sent to the customer understanding assemble to order ato the assemble to order strategy is a hybrid between the make to stock strategy mts and the make to order strategy mto a make to stock strategy is one where products are fully produced in advance the idea is to build an inventory that matches expected or anticipated consumer demand this method would consist of setting a production level building up inventory and then attempting to sell as much assembled product as possible it s used mostly for high volume goods consumables and items that can be bought in bulk or as a single unit a make to order strategy is one where products are manufactured once the order has been received production is driven by demand and items are only produced when orders are confirmed in other words the supply chain operation does not begin until there is evidence of sufficient customer demand this strategy is often employed for high end goods or items made individually or in small batches the ato strategy attempts to combine the benefits of both make to order and make to stock getting products into customers hands quickly while allowing for the product to be adapted or altered in certain ways as per customer request in most cases the time and costs associated with building the product from its components are minimal however the time and costs to build the components which are usually ordered from a supplier can be considerable enabled by technology advancements in production processes and inventory management systems have played a big part in making assemble to order strategies a reality add cheaper methods of shipping products and the strategy has been a boon for product customization opportunities pros and cons assemble to order ato like many methods that chart a middle course assemble to order has both advantages and disadvantages no need to invest in materials and supplies and storage for themorders made to customer specificsless risk of having unsold units on handrisk of lost sales due to low supplypotentially longer lead times to produce goodsexample of assemble to order ato consider a manufacturer of personal computers it might have all of the essential parts of a computer motherboards graphic cards processors monitors keyboards in stock and already manufactured the company depends on various suppliers for these components | |
what is assessed value | assessed value is the dollar value assigned to a home or other piece of real estate for property tax purposes it takes into account the value of comparable properties in the area among other factors in many cases the assessed value is calculated as a percentage of the fair market value of the property understanding assessed valuethe assessed value of a home or other property is used only to determine the applicable property tax also known as an ad valorem tax assessed value takes into account the overall quality and condition of the property local property values square footage home features and market conditions many of these factors are derived from real estate data for the property s neighborhood and the surrounding area a government assessor is responsible for assigning a property s assessed value and for updating it periodically government assessors are usually designated by specified tax districts each district may have a different procedure for calculating assessed value however the basic process is largely the same depending on the state and locality assessors may be required to personally visit properties periodically for assessment purposes owners who want to dispute the assessed value placed on their property can request a reassessment which is a second evaluation of the property the assessed value may be lower for a property if you are an owner occupant as opposed to a landlord this is sometimes called a homestead exemption that doesn t affect the market value of the property but can reduce your property tax bill the assessed value is considered an accepted dollar value for your home and a reliable indicator of the home s worth | |
how assessed value is calculated | in most states and municipalities assessed value is calculated as a percentage of the property s fair market value the percentage rate used can vary considerably from one place to another for example at 10 mississippi uses one of the lowest percentage rates in the nation for owner occupied single family homes to establish assessed value 1 by contrast massachusetts uses a very high percentage rate of 100 2once the assessed value is known property taxes can then be determined assessed value and property taxesthe assessed value of your home is only one factor used to calculate your property taxes many tax authorities use an equation such as the following which typically includes a millage rate or tax rate fair market value assessment rate millage rate effective property taxthe millage rate is the tax rate applied to the assessed value of the property millage rates are typically expressed per 1 000 with one mill representing 1 in tax for every 1 000 of assessed value so for calculation purposes if the mill rate in your jurisdiction is 20 divide that by 1000 to get 02 then apply that figure to the calculation say that a house in your area has a fair market value of 300 000 the area s assessment rate is 50 and the mill rate is 20 using the formula shown above the property tax would be 3 000 300 000 0 50 0 02 3 000personal property taxesin addition to a real estate tax many states impose a tax on certain personal property similarly this tax usually is based on the personal property s assessed value types of personal property that are taxed can include mobile homes cars motorcycles and boats rates can vary widely as well depending on where you live | |
what s the difference between the assessed value and the appraised value | to begin with they re both values associated with your home however the assessed value is determined by your local tax authority and used to determine your property tax the appraised value is determined by an industry professional and normally used in the mortgage application process to verify that the home is worth the amount sought by the borrower in addition homebuyers or sellers may seek an appraisal of a property that they wish to buy or sell | |
why is assessed value important | it s important to know because it plays a role in how your property tax bill is determined plus if you re looking for a home knowing the assessed value may give you a bargaining chip if the sale price of a home is set much higher | |
how often does assessed value change | that depends on the state or jurisdiction where the property is located some areas update assessments annually others may do so every few years check with the tax department of your town for details the bottom lineassessed value refers to the value assigned to a property such as a home by the local government it is used by the tax authority to determine the property taxes that a homeowner owes often it s calculated as a percentage of the fair market value of the property | |
what is an asset | an asset is a resource with economic value that an individual a company or a country owns or controls with the expectation that it will provide a future benefit investopedia nez riazunderstanding assetsindividuals usually think of assets as items of value that they could convert into cash at some future point and that might also be producing income or appreciating in value in the meantime those can be financial assets like stocks bonds and mutual funds or physical assets like a home or an art collection in the case of businesses an asset may be something that has the potential to generate cash flow reduce expenses or improve sales regardless of whether it s a tangible asset like manufacturing equipment or a fleet of trucks or an intangible asset like a patent or a trademark for something to be counted as one of its assets a company must possess a right to it as of the date of the company s financial statements types of assetsin corporate accounting assets are reported on a company s balance sheet and can be broadly categorized into current or short term assets fixed assets financial assets and intangible assets current assets are short term economic resources that are expected to be converted into cash or consumed within one year current assets can include cash and cash equivalents accounts receivable physical inventory and various prepaid expenses while cash is easy to value accountants must periodically reassess the recoverability of inventory and accounts receivable if there is evidence that a receivable might be uncollectible it will be classified as impaired or if inventory becomes obsolete companies may have to write off those assets some assets are recorded on companies balance sheets using the concept of historical cost it represents the original cost of the asset when purchased by the company and can also include expenses such as delivery and set up incurred to incorporate an asset into the company s operations fixed assets are resources with an expected life of greater than a year such as plants equipment and buildings an accounting adjustment called depreciation is made for fixed assets as they age it allocates the cost of the asset over time depreciation may or may not reflect the fixed asset s loss of earning power generally accepted accounting principles gaap allow depreciation under several methods the straight line method assumes that a fixed asset loses its value in proportion to its useful life while the accelerated method assumes that the asset loses its value faster in its first years of use 1 | |
what s considered useful life varies according to the type of asset for example under the general depreciation system gds the internal revenue service irs assigns office furniture and fixtures a useful life of seven years while cars and trucks get a useful life of five years 1 | financial assets can include stocks corporate and government bonds and other types of securities unlike fixed assets they tend to be liquid and they are valued according to their current price on the relevant market intangible assets are economic resources that have no physical presence they include patents trademarks copyrights and goodwill similar to the depreciation process for fixed assets intangible assets can be amortized over their useful life for accounting and tax purposes assets vs liabilitieswhile an asset is something of economic value that s owned or controlled by a person company or government a liability is basically the opposite something that is owed to another person company or government examples of liabilities include loans tax obligations and accounts payable | |
what is considered an asset | an asset can be anything that provides a current or potential future economic benefit to whoever possesses or controls that asset simply put an asset is something of value that you own or that is owed to you if you lend money to someone that loan is also an asset because you are due that amount for the person who owes the money the loan is a liability | |
what are examples of assets | personal assets can include a home land financial securities jewelry artwork gold and silver or your checking account business assets can include such things as motor vehicles buildings machinery equipment cash and accounts receivable as well as intangibles like patents and copyrights | |
what are non physical assets | non physical or intangible assets provide an economic benefit even though you cannot physically touch them they are an important class of assets that include things like intellectual property e g patents or trademarks contractual obligations royalties and goodwill brand equity and reputation are also examples of non physical or intangible assets that can be quite valuable | |
is labor an asset | no labor is the work carried out by human beings for which they are paid in wages or a salary labor is distinct from assets which are considered to be capital | |
how are current assets different from fixed noncurrent assets | in accounting assets are categorized by their time horizon of use current assets are expected to be sold or used within one year fixed assets also known as noncurrent assets are expected to be in use for longer than one year fixed assets are not easily liquidated as a result unlike current assets fixed assets can undergo depreciation over time the bottom lineassets are basically anything of value that an individual a business enterprise or another entity owns different types of assets are treated differently for tax and accounting purposes generally speaking assets are a good thing to have and liabilities less so | |
why is asset allocation important | there s no formula for the right asset allocation for everyone but the consensus among most financial professionals is that asset allocation is one of the most important decisions investors make 1 selecting individual securities within an asset class is done only after you decide how to divide your investments among stocks bonds and cash and cash equivalents this will largely determine your investment results investors use different asset allocations for distinct goals someone saving to buy a new car in the next year might invest those savings in a conservative mix of cash certificates of deposit and short term bonds however individuals saving for retirement decades away typically invest most of their retirement accounts in stocks because they have a lot of time to ride out the market s short term fluctuations risk tolerance plays a key factor as well those uncomfortable investing in stocks may put their money in a more conservative asset class despite having a long term investment horizon age based asset allocationfinancial advisors generally recommend holding stocks for five years or longer cash and money market accounts are appropriate for goals less than a year away bonds fall somewhere in between financial advisors once recommended subtracting an investor s age from 100 to determine what percentage should be invested in stocks a 40 year old would therefore be 60 invested in stocks variations of this rule recommend subtracting age from 110 or 120 given that average life expectancy continues to grow 2 portfolios should generally move to a more conservative asset allocation to help lower risk as individuals approach retirement 2asset allocation through life cycle fundssome asset allocation mutual funds are known as life cycle or target date funds they set out to provide investors with portfolios that address their age risk appetite and investment goals with the correlated parts of different asset classes critics of this approach point out that a standardized solution for allocating portfolio assets is wrongheaded because individual investors require individual solutions 3these funds gradually reduce the risk in their portfolios as they near the target date cutting riskier stocks and adding safer bonds to preserve the nest egg the vanguard target retirement 2030 is an example of a target date fund the vanguard 2030 fund is for people expecting to retire just before or after 2030 as of aug 31 2023 its portfolio comprises 63 stocks 36 bonds and 1 short term reserves this asset allocation was achieved by investing in the following four funds | |
how do economic changes affect asset allocation strategies | economic cycles of growth and contraction greatly affect how you should allocate your assets during bull markets investors ordinarily prefer growth oriented assets like stocks to profit from better market conditions alternatively during downturns or recessions investors tend to shift toward more conservative investments like bonds or cash equivalents which can help preserve capital | |
what is an asset allocation fund | an asset allocation fund provides investors with a diversified portfolio of investments across various asset classes the asset allocation of the fund can be fixed or variable among a mix of asset classes it may be held to fixed percentages of asset classes or allowed to lean further on some depending on market conditions | |
what is the best asset allocation strategy for my age | generally the younger and further you are from needing to access the capital invested the more you should invest in stocks one common guideline that s ordinarily quoted is that you should hold a percentage of stocks that is equal to 100 minus your age so if you are 30 70 of your portfolio should supposedly consist of stocks the rest would then be allocated to safer assets such as bonds but a lot of these rules don t work for everyone for advice that reflects your personal circumstances reach out to a financial advisor | |
how does behavioral finance view asset allocation | behavioral finance explores how common cognitive errors might influence our financial choices for our asset allocation we might be swayed too much by recent market trends overconfidence sunk cost reasoning or loss aversion which can lead to less beneficial allocation choices awareness of these cognitive biases can help you keep a disciplined long term approach aligned with your goals the bottom linemost financial professionals will tell you that asset allocation is one of the most important decisions investors can make the selection of individual securities is secondary to how assets are allocated in stocks bonds and cash and cash equivalents which will play more of a role in your investment results | |
what is an asset backed commercial paper abcp | an asset backed commercial paper abcp is a short term investment vehicle with a maturity date that is typically between 90 and 270 days a bank or other financial institution typically issues the security itself the notes are backed by the company s physical assets such as trade receivables companies will use an asset backed commercial paper to fund short term financing needs understanding asset backed commercial paper abcp asset backed commercial paper abcp is a short term money market security that is issued by a special purpose vehicle spv or conduit which is set up by a sponsoring financial institution the maturity date of an abcp is set at no more than 270 days and issued either on an interest bearing or discount basis the note is backed by the corporation s collateral which might include future payments to be made on credit cards auto loans student loans and collateralized debt obligations cdos these expected payments are collectively known as accounts receivables the proceeds of an abcp issue is used primarily to obtain interests in various types of assets either through asset purchase or secured lending transactions a company can create an abcp from any type of asset backed security including subprime mortgages which are high risk mortgages that were one of the main catalysts of the 2008 financial crisis commercial paper cp vs asset backed commercial paper abcp the primary difference between commercial paper cp and asset backed commercial paper abcp is that commercial paper is not backed by assets commercial paper cp is a money market security issued by large corporations to raise money to meet short term obligations with a fixed maturity of less than one year the commercial paper acts as a promissory note that is backed only by the high credit rating of the issuing company investors purchase the commercial paper at a discount to face value and are repaid the full face value of the security at maturity since standard commercial papers are not backed by collateral only firms with excellent credit ratings from a recognized credit rating agency will be able to sell commercial papers at a reasonable price a type of commercial paper that is backed by other financial assets is called an asset backed commercial paper a company or bank looking to enhance liquidity may sell receivables to an spv or other conduits which in turn will issue them to its investors as asset backed commercial paper the abcp is backed by the expected cash inflows from the receivables as the receivables are collected the originators are expected to pass the funds to the conduit which is responsible for disbursing the funds generated by the receivables to the abcp noteholders abcp interest paymentsduring the life of the investment the sponsoring financial institution that set up the conduit is responsible for monitoring developments that could affect the performance and credit quality of the assets in the spv the sponsor ensures that abcp investors receive their interest payments and principal repayments when the security matures the interest payments made to abcp investors originate from the pool of assets backing the security e g monthly car loan payments when the collateralized paper matures the investor receives a principal payment that is funded either from the collection of the credit s assets from the issuance of new abcp or by accessing the credit s liquidity facility special considerationswhile most abcp programs issue commercial paper as their primary liability funding sources have been extensively diversified lately to include other types of debt this includes medium term notes mtns extendible commercial paper and subordinated debt to provide credit enhancement one significant concern about abcps and related investments stems from the possibility of liquidity risk if the market value of the underlying assets decreases then the safety and value of the abcp might also suffer it s important for abcp investors to understand the composition of the underlying assets and how the value of those assets might be impacted by market stresses such as a downturn in the economy the inability in some circumstances for investors to sell their investments quickly to minimize losses is just one of the risks associated with asset backed commercial paper | |
what is an asset backed security abs | asset backed securities abs is a type of financial investment that is collateralized by an underlying pool of assets usually ones that generate a cash flow from debt such as loans leases credit card balances or receivables it takes the form of a bond or note paying income at a fixed rate for a set amount of time until maturity for income oriented investors asset backed securities can be an alternative to other debt instruments like corporate bonds or bond funds joules garcia investopediaunderstanding asset backed securities abss asset backed securities allow their issuers to raise cash which can be used for lending or other investment purposes the underlying assets of an abs are often illiquid and can t be sold on their own so pooling assets together and creating a financial instrument out of them a process called securitization allows the issuer to make illiquid assets marketable to investors it also allows them to get shakier assets off their books thus alleviating their credit risk 1the underlying assets of these pools may be home equity loans automobile loans credit card receivables student loans or other expected cash flows 12 abs issuers can be as creative as they desire for example asset backed securities have been built based on cash flows from movie revenues royalty payments aircraft landing slots toll roads and solar photovoltaics just about any cash producing vehicle or situation can be securitized into an abs for investors buying an abs affords the opportunity of a revenue stream the abs allows them to participate in a wide variety of income generating assets sometimes as noted above exotic ones that aren t available in any other investment | |
how an asset backed security works | assume that company x is in the business of making automobile loans if a person wants to borrow money to buy a car company x gives that person the cash and the person is obligated to repay the loan with a certain amount of interest perhaps company x makes so many loans that it starts to run out of cash company x can then package its current loans and sell them to investment firm x thus receiving the cash which it can then use to make more loans investment firm x will then sort the purchased loans into different groups called tranches these tranches contain loans with similar characteristics such as maturity interest rate and expected delinquency rate next investment firm x will issue securities based on each tranche it creates similar to bonds each abs has a rating indicating its degree of riskiness that is the likelihood that the underlying loans will go into default 3individual investors then purchase these securities and receive the cash flows from the underlying pool of auto loans minus an administrative fee that investment firm x keeps for itself an abs will usually have three tranch classes a b and c the senior tranche a is almost always the largest tranche and is structured to have an investment grade rating to make it attractive to investors the b tranche has lower credit quality and thus has a higher yield than the senior tranche 3 the c tranche has a lower credit rating than the b tranche and might have such poor credit quality that it can t be sold to investors in this case the issuer would keep the c tranche and absorb the losses types of asset backed securitiestheoretically an asset based security can be created out of almost anything that generates an income stream from mobile home loans to utility bills but certain types are more common among the most typical abs types are a cdo is an abs issued by a special purpose vehicle spv the spv is a business entity or trust formed specifically to issue that abs there are a variety of subsets of cdos including 45though a cdo is essentially structured the same as an abs some consider it a separate type of investment vehicle in general cdos own a wider and more diverse range of assets including other asset based securities or cdos 6home equity loans are one of the largest abs categories though similar to mortgages home equity loans are often taken out by borrowers who have less than stellar credit scores or few assets the reason why they didn t qualify for a mortgage these are amortizing loans that is payment goes toward satisfying a specific sum and consists of three categories interest principal and prepayments a mortgage backed security mbs is sometimes considered a type of abs but is more often classified as a separate variety of investment especially in the united states both operate in essentially the same way the difference lies in the underlying assets in the portfolio mortgage backed securities are formed by pooling together mortgages exclusively while asset backed securities consist of any other type of loan or debt instrument including rather confusingly home equity loans 2 mbss actually predate abss 7car financing is another large category of abs the cash flows of an auto loan abs include monthly interest payments principal payments and prepayments though the last is rarer for an auto loan abs is much lower than a home equity loan abs this is another amortizing loan 8credit card receivables the amount due on credit card balances are a type of non amortizing abs they go to a revolving line of credit rather than toward the same set sum thus they don t have fixed payment amounts while new loans and changes can be added to the composition of the pool the cash flows of credit card receivables include interest principal payments and annual fees there is usually a lockup period for credit card receivables where no principal will be paid if the principal is paid within the lockup period then new loans will be added to the abs with the principal payment that makes the pool of credit card receivables staying unchanged after the lockup period the principal payment is passed on to abs investors 9abss can be collateralized by either government student loans guaranteed by the u s department of education or private student loans 1011 the former have had a better repayment record and a lower risk of default benefits of investing in asset backed securitiesasset backed securities can offer several compelling reasons to invest in them abs can provide diversification opportunities beyond traditional asset classes like stocks and bonds you can get exposure to a diverse pool of underlying assets such as mortgages auto loans and credit card receivables that you shouldn t otherwise have traditional investment access in this also can give you access to different industries entirely abs can also have somewhat predictable cash flows the underlying assets typically generate steady income streams such as monthly mortgage payments or loan repayments passed through to abs holders this predictability can appeal to income oriented investors seeking stable returns remember that if the debtor defaults on their loan this cash flow could unexpectedly stop abs can offer enhanced yield potential compared to other fixed income securities with similar credit ratings this is because abs transactions may be structured where different tranches or slices of securities are created to appeal to investors with varying risk appetites if you want to take on more risk in exchange for potentially higher yields you can opt into that more conservative investors can opt for lower risk tranches with correspondingly lower yields last asset backed securities are frequently backed by collateral that can provide a degree of credit enhancement this collateralization helps mitigate credit risk to some extent as the collateral can be sold to make the missed payments on the asset because of this abs can be a popular choice that may have greater liquidity compared to other securities depending on the market conditions or structure of the abs risks associated with asset backed securitiesthere are also some risks to think about when investing in asset backed securities one primary risk is credit risk which refers to the possibility that borrowers underlying the abs may default on their payments this risk can vary depending on the credit quality of the underlying assets and the structure of the abs transaction another significant risk is prepayment risk particularly relevant in mortgage backed securities mbs prepayment risk arises when borrowers repay their loans earlier than expected such as during periods of falling interest rates this can disrupt the expected cash flows to abs holders it can also dramatically reduce the return on investment as an investor may have been hoping to general additional cash flow from interest payments that would have occurred had the debt not been prepaid market risk is another factor to consider as changes in market conditions interest rates or economic factors can affect the value and performance of abs as we ll look at later in the 2008 global financial crisis section poor valuations for the assets being backed could lead to upside loans when certain market conditions like this exist liquidity risk may arise if there is difficulty in selling abs positions quickly or at fair prices key players in the abs market industrythe asset backed securities abs market involves several key participants who each play a small part in the issuance trading and management of abs transactions here are the key players legal considerations in asset backed securitiesasset backed securities transactions involve several important legal considerations there are three main legal aspects of abs to keep in mind example of abs 2008 global financial crisis the 2007 2008 financial crisis was a culmination of factors rooted in the housing market bubble and financial market practices it began with years of low interest rates and loose lending standards which encouraged excessive borrowing and speculative investments in subprime mortgages mortgage backed securities bundled these loans and were sold to investors however as the housing bubble burst and homeowners defaulted on their mortgages the underlying value of mbs declined sharply investors including major financial institutions and global banks suddenly found themselves holding securities backed by increasingly risky loans this triggered a crisis of confidence in the financial markets as the true extent of losses became apparent leading to widespread panic and freezing of credit markets 12the crisis escalated in 2007 with the collapse of two bear stearns hedge funds heavily invested in subprime loans signaling broader market instability by 2008 the failures of major financial institutions like lehman brothers and the near collapse of others like bear stearns and merrill lynch highlighted the systemic risks posed by interconnected global financial markets 13 | |
what is an example of an asset backed security | a collateralized debt obligation is an example of an asset based security abs it is like a loan or bond one backed by a portfolio of debt instruments bank loans mortgages credit card receivables aircraft leases smaller bonds and sometimes even other abss or cdos this portfolio acts as collateral for the interest generated by the cdo which is reaped by the institutional investors who purchase it 1415 | |
what is asset backing | asset backing refers to the total value of a company s shares in relation to its assets specifically it refers to the total value of all the assets that a company has divided by the number of outstanding shares that the company has issued in terms of investments asset backing refers to a security with value deriving from a single asset or a pool of assets these holdings act as collateral for the security backing it in effect | |
what does abs stand for in accounting | in the business world abs stands for accounting and billing system it s the software used to process invoice and potentially apply remittances to against those payments | |
what is the difference between mbs and abs | an asset based security abs is similar to a mortgage backed security mbs both are securities that like bonds pay a fixed rate of interest derived from an underlying pool of income generating assets usually debts or loans the main difference is that an mbs as its name implies consists of a package of mortgages real estate loans in contrast an abs is usually backed by other sorts of financing student loans auto loans or credit card debt 2some financial sources use abs as a generic term encompassing any sort of securitized investment based on underlying asset pools in which case an mbs is a kind of abs others consider abss and mbss to be separate investment vehicles | |
how does asset securitization work | asset securitization begins when a lender or any company with loans or a firm with income producing assets earmarks a bunch of these assets and then arranges to sell the lot to an investment bank or other financial institution this institution often pools these assets with comparable ones from other sellers then establishes a special purpose vehicle spv an entity set up specifically to acquire the assets package them and issue them as a single security the issuer then sells these securities to investors usually institutional investors hedge funds mutual funds pension plans etc the investors receive fixed or floating rate payments from a trustee account funded by the cash flows generated by the portfolio of assets sometimes the issuer divides the original asset portfolio into slices called tranches each tranche is sold separately and bears a different degree of risk indicated by a different credit rating 16the bottom lineasset backed securities are pools of loans that are packaged together into an investable security which can in turn be bought by investors predominantly large institutions like hedge funds insurance companies and pension funds abss provide a method of diversification from typical bond mutual funds or individual bonds themselves most importantly they are income generating assets typically with a higher return than a normal corporate bond all depending on the credit rating assigned to the abs | |
what is an asset based approach | an asset based approach is a type of business valuation that focuses on a company s net asset value the net asset value is identified by subtracting total liabilities from total assets there is some room for interpretation in terms of deciding which of the company s assets and liabilities to include in the valuation and how to measure the worth of each understanding an asset based approachidentifying and maintaining awareness of the value of a company is an important responsibility for financial executives overall stakeholder and investor returns increase when a company s value increases and vice versa there are a few different ways to identify a company s value two of the most common are the equity value and enterprise value the asset based approach can also be used in conjunction with these two methods or as a standalone valuation both equity value and enterprise value require the use of equity in the calculation if a company does not have equity analysts may use the asset based valuation as an alternative many stakeholders will also calculate the asset based value and use it comprehensively in valuation comparisons the asset based value may also be required for private companies in certain types of analysis as added due diligence furthermore the asset based value can also be an important consideration when a company is planning a sale or liquidation the asset based approach uses the value of assets to calculate a business entity s valuation calculating asset based valuein its most basic form the asset based value is equivalent to the company s book value or shareholders equity the calculation is generated by subtracting liabilities from assets often the value of assets minus liabilities differs from the value reported on the balance sheet for example asset based valuations can provide latitude for using market values rather than balance sheet values analysts may also include certain intangible assets in asset based valuations that may or may not be on the balance sheet adjusting net assetsone of the biggest challenges in arriving at an asset based valuation is adjusting net assets an adjusted asset based valuation seeks to identify the market value of assets in the current environment balance sheet valuations use depreciation to decrease the value of assets over time thus the book value of an asset is not necessarily equivalent to the fair market value other considerations for net asset adjustments may include certain intangibles that are not fully valued on the balance sheet or included on the balance sheet at all companies are often not allowed to include the value of their brand on their balance sheet because of difficulties calculating a reliable cost or value of the brand name however since an adjusted asset based approach looks at what a company could potentially sell for in the current market these intangibles are important to consider in an adjusted net asset calculation adjustments can also be made for liabilities market value adjustments can potentially increase or decrease the value of liabilities which directly affects the calculation of adjusted net assets | |
what is asset based lending | asset based lending is the business of loaning money in an agreement that is secured by collateral an asset based loan or line of credit may be secured by inventory accounts receivable equipment or other property owned by the borrower the asset based lending industry serves business not consumers it is also known as asset based financing | |
how asset based lending works | many businesses need to take out loans or obtain lines of credit to meet routine cash flow demands for example a business might obtain a line of credit to make sure it can cover its payroll expenses even if there s a brief delay in payments it expects to receive if the company seeking the loan cannot show enough cash flow or cash assets to cover a loan the lender may offer to approve the loan with its physical assets as collateral for example a new restaurant might be able to obtain a loan only by using its equipment as collateral lenders might require a negative pledge clause or covenant as part of the loan this clause will limit the borrower from reusing the pledged asset for another loan the terms and conditions of an asset based loan depend on the type and value of the assets offered as security lenders prefer highly liquid collateral such as securities that can readily be converted to cash if the borrower defaults on the payments loans using physical assets are considered riskier so the maximum loan will be considerably less than the book value of the assets interest rates charged vary widely depending on the applicant s credit history cash flow and length of time doing business interest rates on asset based lending are lower than rates on unsecured loans since the lender can recoup most or all of its losses in the event that the borrower defaults examplefor example say a company seeks a 200 000 loan to expand its operations if the company pledges the highly liquid marketable securities on its balance sheet as collateral the lender may grant a loan equalling 85 of the face value of the securities if the firm s securities are valued at 200 000 the lender will be willing to loan 170 000 if the company chooses to pledge less liquid assets such as real estate or equipment it may only be offered 50 of its required financing or 100 000 in both cases the discount represents the costs of converting the collateral to cash and its potential loss in market value special considerationssmall and mid sized companies that are stable and that have physical assets of value are the most common asset based borrowers however even large corporations may occasionally seek asset based loans to cover short term needs the cost and long lead time of issuing additional shares or bonds in the capital markets may be too high the cash demand may be extremely time sensitive such as in the case of a major acquisition or an unexpected equipment purchase | |
what is an asset class | an asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations asset classes are thus made up of instruments that often behave similarly to one another in the marketplace examples of common asset classes include equities fixed income commodities and real estate nono flores investopediaunderstanding asset classessimply put an asset class is a grouping of comparable financial securities for example ibm msft and aapl are a grouping of stocks asset classes and asset class categories are often mixed together there is usually very little correlation and sometimes a negative correlation among different asset classes this characteristic is important in the field of investing historically the three main asset classes have been equities stocks fixed income bonds and cash equivalent or money market instruments currently most investment professionals include real estate commodities futures other financial derivatives and even cryptocurrencies in the asset class mix investment assets include both tangible and intangible instruments that investors buy and sell for the purposes of generating additional income on either a short or long term basis financial advisors view investment vehicles as asset class categories that are used for diversification purposes each asset class is expected to reflect different risk and return investment characteristics and perform differently in any given market environment investors interested in maximizing return often do so by reducing portfolio risk through asset class diversification financial advisors will help investors diversify their portfolios by combining assets from different asset classes that have different cash flow streams and varying degrees of risk investing in several different asset classes ensures a certain amount of diversity in investment selections diversification reduces risk and increases your probability of making a positive return the main asset classes are equities fixed income cash or marketable securities and commodities types of asset classesthe most common asset classes are cash and cash equivalents represent actual cash on hand and securities that are similar to cash this type of investment is considered very low risk since there is little to no chance of losing your money that peace of mind means the returns are also lower than other asset classes examples of cash and cash equivalents include cash parked in a savings account as well as u s government treasury bills t bills guaranteed investment certificates gics and money market funds generally the greater the risk of losing money the greater the prospective return fixed income is an investment that pays a fixed income basically you lend money to an entity and in return they pay you a fixed amount until the maturity date which is the date when the money you initially invested the loan is paid back to you government and corporate bonds are the most common types of fixed income products the government or company will pay you interest for the life of the loan with rates varying depending on inflation and the perceived risk that they won t make good on the loan the risk of certain governments defaulting on their bonds is very unlikely so they pay out less conversely some companies risk going bust and need to pay investors more to convince them to part with their money | |
when people talk about equities they are usually speaking about owning shares in a company for companies to expand and meet their objectives they often resort to selling slices of ownership in exchange for cash to the general public buying these shares represents a great way to profit from the success of a company | there are two ways to make money from investing in companies the market can be volatile though share prices are known to fluctuate and some companies may even go bust commodities are basic goods that can be transformed into other goods and services examples include metals energy resources and agricultural goods commodities are crucial to the economy and in some cases are viewed as a good hedge against inflation their return is based on supply and demand dynamics rather than profitability many investors invest indirectly in commodities by buying shares in companies that produce them however there is also a huge market for investing directly whether that is actually buying a physical commodity with the view of eventually selling it for a profit or investing in futures each asset class carries a different level of risk and return and tends to perform differently in a given environment alternative asset classesequities stocks bonds fixed income securities cash or marketable securities and commodities are the most liquid asset classes and therefore the most quoted asset classes there are also alternative asset classes such as real estate and valuable inventory such as artwork stamps and other tradable collectibles some analysts also refer to an investment in hedge funds venture capital crowdsourcing or cryptocurrencies as examples of alternative investments that said an asset s illiquidity does not speak to its return potential it only means that it may take more time to find a buyer to convert the asset to cash asset class and investing strategyinvestors looking for alpha employ investment strategies focused on achieving alpha returns investment strategies can be tied to growth value income or a variety of other factors that help to identify and categorize investment options according to a specific set of criteria some analysts link criteria to performance and or valuation metrics such as earnings per share eps growth or the price to earnings p e ratio other analysts are less concerned with performance and more concerned with the asset type or class investors are often advised not to put all their eggs into one basket and invest in different asset classes to spread their bets and reduce risk | |
what are the most popular asset classes | historically the three main asset classes have been equities stocks fixed income bonds and cash equivalent or money market instruments currently most investment professionals include real estate commodities futures other financial derivatives and even cryptocurrencies in the asset class mix | |
which asset class has the best historical returns | the stock market has proven to produce the highest returns over extended periods of time since the late 1920s the compound annual growth rate cagr for the s p 500 is about 6 7 assuming that all dividends were reinvested and adjusted for inflation in other words 100 invested in the s p 500 on jan 1 1928 would have been worth about 50 337 30 in 1928 dollars by dec 31 2023 without adjusting for inflation the total would have grown to 898 634 26 in 2023 dollars by comparison the same 100 invested in five year treasuries would have been worth only about 7 278 in today s dollars 12 | |
why are asset classes useful | financial advisors focus on asset class as a way to help investors diversify their portfolios to maximize returns investing in several different asset classes ensures a certain amount of diversity in investment selections each asset class is expected to reflect different risk and return investment characteristics and perform differently in any given market environment the bottom linean asset class is a grouping of investments that exhibit similar characteristics and that may be subject to the same rules and regulations equities fixed income commodities and real estate are common examples of asset classes asset classes can be used to diversify portfolios and reduce risk as they are expected to reflect different risk and return characteristics for instance if stocks are falling bond prices may be rising and vice versa building a portfolio with asset classes that are not highly correlated with one another is an important concept for diversification | |
what is the asset coverage ratio | the asset coverage ratio is a financial metric that measures how well a company can repay its debts by selling or liquidating its assets the asset coverage ratio is important because it helps lenders investors and analysts measure the financial solvency of a company banks and creditors often look for a minimum asset coverage ratio before lending money understanding the asset coverage ratiothe asset coverage ratio provides creditors and investors with the ability to gauge the level of risk associated with investing in a company once the coverage ratio is calculated it can be compared to the ratios of companies within the same industry or sector it s important to note that the ratio is less reliable when comparing it to companies of different industries companies within certain industries may typically carry more debt on their balance sheet than others for example a software company might not have much debt while an oil producer is usually more capital intensive meaning it carries more debt to finance the expensive equipment such as oil rigs but then again has assets on its balance sheet to back the loans asset coverage ratio calculationthe asset coverage ratio is calculated with the following equation assets intangible assets current liabilities short term debt total debtin this equation assets refers to total assets and intangible assets are assets that can t be physically touched such as goodwill or patents current liabilities are liabilities due within one year and short term debt is debt that is also due within one year total debt includes both short term and long term debt all of these line items can be found in the annual report | |
how the asset coverage ratio is used | companies that issue shares of stock or equity to raise funds don t have a financial obligation to pay those funds back to investors however companies that issue debt via a bond offering or borrow capital from banks or other financial companies have an obligation to make timely payments and ultimately pay back the principal amount borrowed as a result banks and investors holding a company s debt want to know that a company s earnings or profits are sufficient to cover future debt obligations but they also want to know what happens if earnings falter in other words the asset coverage ratio is a solvency ratio it measures how well a company can cover its short term debt obligations with its assets a company that has more assets than it does short term debt and liability obligations indicates to the lender that the company has a better chance of paying back the funds it lends in the event company earnings can not cover the debt the higher the asset coverage ratio the more times a company can cover its debt therefore a company with a high asset coverage ratio is considered to be less risky than a company with a low asset coverage ratio if earnings are not enough to cover the company s financial obligations the company might be required to sell assets to generate cash the asset coverage ratio tells creditors and investors how many times the company s assets can cover its debts in the event earnings are not enough to cover debt payments compared to debt service ratio asset coverage ratio is an extreme or last recourse ratio because the assets coverage is an extreme use of the assets value under a liquidation scenario which is not an extraordinary event special considerationsthere is one caveat to consider when interpreting the asset coverage ratio assets found on the balance sheet are held at their book value which is often higher than the liquidation or selling value in the event a company would need to sell assets to repay debts the coverage ratio may be slightly inflated this concern can be partially eliminated by comparing the ratio against other companies in the same industry example of the asset coverage ratiofor example let s say exxon mobil corporation xom has an asset coverage ratio of 1 5 meaning that there are 1 5x s more assets than debts let s say chevron corporation cvx which is within the same industry as exxon has a comparable ratio of 1 4 and even though the ratios are similar they don t tell the whole story if chevron s ratio for the prior two periods was 8 and 1 1 the 1 4 ratio in the current period shows the company has improved its balance sheet by increasing assets or deleveraging paying down debt conversely let s say exxon s asset coverage ratio was 2 2 and 1 8 for the prior two periods the 1 5 ratio in the current period could be the start of a worrisome trend of decreasing assets or increasing debt in other words it s not enough to merely analyze one period s asset coverage ratio instead it s important to determine what the trend has been over multiple periods and compare that trend with like companies | |
what is asset financing | asset financing refers to the use of a company s balance sheet assets including short term investments inventory and accounts receivable to borrow money or get a loan the company borrowing the funds must provide the lender with a security interest in the assets understanding asset financingasset financing differs considerably from traditional financing as the borrowing company offers some of its assets to quickly get a cash loan a traditional financing arrangement such as a project based loan would involve a longer process including business planning projections and so on asset financing is most often used when a borrower needs a short term cash loan or working capital in most cases the borrowing company using asset financing pledges its accounts receivable however the use of inventory assets in the borrowing process known as warehouse financing is not uncommon the difference between asset financing and asset based lendingat a basic level asset financing and asset based lending are terms that essentially refer to the same thing with a slight difference with asset based lending when an individual borrows money to buy a home or a car the house or the vehicle serves as collateral for the loan if the loan is not then repaid in the specified time period it falls into default and the lender may then seize the car or the house and sell it in order to pay off the amount of the loan the same concept applies to businesses buying assets with asset financing if other assets are used to help the individual qualify for the loan they are generally not considered direct collateral on the amount of the loan the lender may include a covenant as part of the loan contract that bans the borrower from using pledged assets to secure other loans asset financing is typically used by businesses which tend to borrow against assets they currently own accounts receivable inventory machinery and even buildings and warehouses may be offered as collateral on a loan these loans are almost always used for short term funding needs such as cash to pay employee wages or to purchase the raw materials that are needed to produce the goods that are sold so the company is not purchasing a new asset but using its owned assets to make up a working cash flow shortfall if however the company goes on to default the lender can still seize assets and attempt to sell them to recoup the loan amount secured and unsecured loans in asset financingasset financing in the past was generally considered a last resort type of financing however the stigma around this source of funding has lessened over time this is primarily true for small companies startups and other companies that lack the track record or credit rating to qualify for alternative funding sources there are two basic types of loans that may be given the most traditional type is a secured loan wherein a company borrows pledging an asset against the debt the lender considers the value of the asset pledged instead of looking at the creditworthiness of the company overall if the loan is not repaid the lender may seize the asset that was pledged against the debt unsecured loans do not involve collateral specifically however the lender may have a general claim on the company s assets if repayment is not made if the company goes bankrupt secured creditors typically receive a greater proportion of their claims as a result secured loans usually have a lower interest rate making them more attractive to companies in need of asset financing | |
what is an asset liability committee | an asset liability committee alco also known as surplus management is a supervisory group that coordinates the management of assets and liabilities with a goal of earning adequate returns by managing a company s assets and liabilities executives are able to influence net earnings which may translate into increased stock prices understanding asset liability committees alco an alco at the board or management level provides important management information systems mis and oversight for effectively evaluating on and off balance sheet risk for an institution members incorporate interest rate risk and liquidity consideration into a bank s operating model one of the alco s goals is to ensure adequate liquidity while managing the bank s spread between the interest income and interest expense members also consider investments and operational risk alco meetings should be conducted at least quarterly member responsibilities typically include managing market risk tolerances establishing appropriate mis and reviewing and approving the bank s liquidity and funds management policy at least annually members also develop and maintain a contingency funding plan review immediate funding needs and sources and determine liquidity risk exposures to adverse scenarios with varying probability and severity special considerationsan alco s strategies policies and procedures should relate to the board s goals objectives and risk tolerances for operating standards strategies should articulate liquidity risk tolerances and address the extent to which central elements of funds management are centralized or delegated in the institution strategies should also communicate how much emphasis is placed on using asset liquidity liabilities and operating cash flows for meeting daily and contingent funding needs example of an asset liability committeealfa bank s alco is appointed by a resolution of the bank s executive board and includes seven or more members with the right to vote for a one year period the alco is headed by the alco chair appointed by the bank s executive board alco members without the right to vote are appointed upon presentation to the alco chair by order of the bank executive board from among bank specialists and managers for a one year period the bank s alco meetings are typically held every two weeks additional meetings may be scheduled as needed the alco has the authority to resolve matters submitted for consideration if more than half of the members with the right to vote are present at the committee meeting a resolution is passed when more than half the members with the right to vote are present and vote in favor of the resolution alco s resolutions are binding on all bank employees | |
what is asset liability management | asset liability management is the process of managing the use of assets and cash flows to reduce the firm s risk of loss from not paying a liability on time well managed assets and liabilities increase business profits the asset liability management process is typically applied to bank loan portfolios and pension plans it also involves the economic value of equity understanding asset liability managementthe concept of asset liability management focuses on the timing of cash flows because company managers must plan for the payment of liabilities the process must ensure that assets are available to pay debts as they come due and that earnings or assets can be converted into cash the asset liability management process applies to different categories of assets on the balance sheet important a company can face a mismatch between assets and liabilities because of illiquidity or changes in interest rates asset liability management reduces the likelihood of a mismatch a defined benefit pension plan provides a fixed pre established pension benefit for employees upon retirement and the employer carries the risk that assets invested in the pension plan may not be sufficient to pay all benefits companies must forecast the dollar amount of assets available to pay benefits required by a defined benefit plan assume for example that a group of employees must receive a total of 1 5 million in pension payments starting in 10 years the company must estimate a rate of return on the dollars invested in the pension plan and determine how much the firm must contribute each year before the first payments begin in 10 years examples of interest rate riskasset liability management is also used in banking a bank must pay interest on deposits and also charge a rate of interest on loans to manage these two variables bankers track the net interest margin or the difference between the interest paid on deposits and interest earned on loans assume for example that a bank earns an average rate of 6 on three year loans and pays a 4 rate on three year certificates of deposit the interest rate margin the bank generates is 6 4 2 since banks are subject to interest rate risk or the risk that interest rates increase clients demand higher interest rates on their deposits to keep assets at the bank an important ratio used in managing assets and liabilities is the asset coverage ratio which computes the value of assets available to pay a firm s debts the ratio is calculated as follows asset coverage ratio bvta ia cl stdo total debt outstanding where bvta book value of total assets ia intangible assets cl current liabilities stdo short term debt obligations begin aligned text asset coverage ratio frac text bvta text ia text cl text stdo text total debt outstanding textbf where text bvta text book value of total assets text ia text intangible assets text cl text current liabilities text stdo text short term debt obligations end aligned asset coverage ratio total debt outstanding bvta ia cl stdo where bvta book value of total assetsia intangible assetscl current liabilitiesstdo short term debt obligations tangible assets such as equipment and machinery are stated at their book value which is the cost of the asset less accumulated depreciation intangible assets such as patents are subtracted from the formula because these assets are more difficult to value and sell debts payable in less than 12 months are considered short term debt and those liabilities are also subtracted from the formula the coverage ratio computes the assets available to pay debt obligations although the liquidation value of some assets such as real estate may be difficult to calculate there is no rule of thumb as to what constitutes a good or poor ratio since calculations vary by industry key takeaways fast fact asset liability management is a long term strategy to manage risks for example a home owner must ensure that they have enough money to pay their mortgage each month by managing their income and expenses for the duration of the loan | |
what is asset management | asset management is the practice of buying selling and managing investments commensurate with specific risk tolerances to increase wealth over time asset management professionals perform this service for clients they may also be called portfolio managers or financial advisors many work independently while others work for an asset management company investment bank or other type of financial institution investopedia sydney saporitounderstanding asset managementasset management has a double barreled goal increasing value while mitigating risk tolerance for risk is one of the first topics that an asset manager might raise with a client a retiree living on the income from a portfolio or a pension fund administrator overseeing retirement funds is or should be risk averse on the other hand a young person or an aggressive investor of any age might want to dabble in high risk investments most people fall in between these two extremes and asset managers try to identify where a client s risk tolerance lies thus an asset manager s role is to determine what investments to make or avoid and to realize the client s financial goals within the client s risk tolerance limits the investments they select may include stocks bonds real estate commodities alternative investments and mutual funds among the better known choices asset management can involve rigorous research using both macro and micro analytical tools this research includes statistical analysis of prevailing market trends reviews of corporate financial documents and anything else that would aid in achieving the client s stated goal of asset appreciation types of asset managersthere are several different types of asset managers distinguished by the kinds of assets they specialize in and the level of service they provide each type of asset manager has a different level of responsibility to the client so it is important to understand a manager s obligations to their clients before deciding to invest a registered investment adviser ria is a firm that advises clients on security trades and manages their portfolios rias are closely regulated and are required to register with the sec if they manage more than 100 million in assets a broker is an individual or firm that acts as an intermediary for their clients buying stocks and other securities and serving as custodian of customer assets brokers generally do not have a fiduciary duty to their clients so it is always important to research them thoroughly before becoming a client and buying anything a financial advisor is a professional who can recommend investments to their clients and buy and sell securities on their behalf financial advisors may or may not be fiduciaries some financial advisors specialize in a specific area such as tax or estate planning the most affordable type of investment manager isn t a person at all a robo advisor is a computer algorithm that automatically builds monitors and rebalances an investor s portfolio to suit their needs they sell and buy investments aligned with programmed goals and risk tolerances because there is no person involved services provided by robo advisors cost much less than personalized asset management handled by human beings the robo advisor market is expected to grow from 9 5 billion in 2024 to 72 billion in 2032 1cost of asset managementasset managers have a variety of fee structures the most common model charges a percentage of the assets under management with the industry average at about 1 for up to 1 million larger portfolios are usually charged fewer and lower fees due to their size other asset managers may charge a fee for each trade they execute some may even receive a commission to upsell securities to their clients because such incentives and transactions might not be in a client s best interest it is important to know if your asset management firm is a fiduciary if it is not it may recommend investments or trades that are inappropriate for a client s investment experience and financial goals | |
how asset management companies work | asset management companies compete to serve the investment needs of individuals and institutions account holders at financial institutions such as banks often receive check writing privileges credit cards debit cards margin loans and brokerage services | |
when individuals deposit money into their accounts it is typically placed into a money market fund that offers a greater return than a regular savings account the deposits of investors with accounts at banks insured by the federal deposit insurance company fdic are protected up to at least 250 000 per depositor however fdic insurance does not cover investment products that are not deposits such as mutual funds annuities and stocks and bonds 2 | these types of accounts at banks have only been possible since the passage of the gramm leach bliley act in 1999 which replaced the glass steagall act the glass steagall act of 1933 passed during the great depression forced a separation between banking and investing services now they have only to maintain a chinese wall between divisions the added benefit to account holders whose assets are managed at banks is that the same institution can meet all of their banking and investing needs example of an asset management companyinvestment management and wealth management firm merrill previously known as merrill lynch offers a cash management account cma to fulfill the needs of clients who wish to pursue banking and investment options under one roof 3the account gives investors access to a personal financial advisor this advisor offers advice and a range of investment options that include initial public offerings ipo in which merrill may participate as well as foreign currency transactions interest rates for cash deposits are tiered deposit accounts can be linked so that all eligible funds are aggregated to receive the best possible rate securities held in the account fall under the protective umbrella of the securities investor protection corporation sipc sipc does not shield investor assets from inherent risk but instead protects them from the financial failure of the brokerage firm along with typical check writing services the account offers worldwide access to bank of america automated teller machines atm without transaction fees bill payment services fund transfers and wire transfers are available the mymerrill app allows users to access their accounts and perform several basic functions via a mobile device accounts with more than 250 000 in eligible assets sidestep the annual 125 fee and the 25 assessment applied to each sub account held 4 | |
how does an asset management company differ from a brokerage | asset management companies are fiduciary firms and are generally used by people with significant assets they usually have discretionary trading authority over accounts and are legally bound to act in good faith on the client s behalf brokerages execute and facilitate trades but do not necessarily manage clients portfolios although some do brokerages are not usually fiduciaries | |
what does an asset manager do | an asset manager is responsible for creating a client s portfolio overseeing it from day to day making changes to it as needed and communicating regularly with the client about those changes and how well their investment goals are being achieved | |
what are the top asset management institutions | as of february 2024 the five largest asset management institutions based on global assets under management aum were blackrock 9 46 trillion vanguard group 7 25 trillion fidelity management and research 3 88 trillion the capital group 2 5 trillion and amundi 2 1 trillion 5 | |
what is digital asset management | digital asset management or dam refers to the storage of media assets in a central repository where they can be accessed as necessary by all members of an organization dam is usually used for large audio or video files that need to be worked on by many teams of employees at once the bottom lineasset management firms provide asset management services which broadly involves the buying selling and management of assets on behalf of their clients there are many types of asset managers some work for family offices and wealthy individuals and others are employed by major banks and institutional investors | |
what is an asset management company amc | an asset management company amc is a firm that invests pooled funds from clients putting the capital to work through different investments including stocks bonds real estate master limited partnerships and more along with high net worth individual hnwi portfolios amcs manage hedge funds and pension plans and to better serve smaller investors create pooled structures such as mutual funds index funds or exchange traded funds etfs which they can manage in a single centralized portfolio amcs are colloquially referred to as money managers or money management firms those that offer public mutual funds or etfs are also known as investment companies or mutual fund companies such businesses include vanguard group fidelity investments t rowe price and many others amcs are generally distinguished by their assets under management aum the amount of assets that they manage investopedia julie bangunderstanding asset management companies amcs because they have a larger pool of resources than the individual investor could access on their own amcs provide investors with more diversification and investing options buying for so many clients allows amcs to practice economies of scale often getting a price discount on their purchases pooling assets and paying out proportional returns also allows investors to avoid the minimum investment requirements often required when purchasing securities on their own as well as the ability to invest in a larger assortment of securities with a smaller amount of investment funds in most cases amcs charge a fee that is calculated as a percentage of the client s total aum this asset management fee is a defined annual percentage that is calculated and paid monthly for example if an amc charges a 1 annual fee it would charge 100 000 in annual fees to manage a portfolio worth 10 million however since portfolio values fluctuate on a daily and monthly basis the management fee calculated and paid every month will fluctuate monthly as well continuing with the above example if the 10 million portfolio increases to 12 million in the next year the amc will stand to make an additional 20 000 in management fees conversely if the 10 million portfolio declines to 8 million due to a market correction the amc s fee would be reduced by 20 000 thus charging fees as a percentage of aum serves to align the amc s interests with that of the client if the amc s clients prosper so does the amc but if the clients portfolios make losses the amc s revenues will decline as well most amcs set a minimum annual fee such as 5 000 or 10 000 in order to focus on clients that have a portfolio size of at least 500 000 or 1 million in addition some specialized amcs such as hedge funds may charge performance fees for generating returns above a set level or that beat a benchmark the two and twenty fee model is standard in the hedge fund industry typically amcs are considered buy side firms this status means they help their clients make investment decisions based on proprietary in house research and data analytics while also using security recommendations from sell side firms sell side firms such as investment banks and stockbrokers in contrast sell investment services to amcs and other investors they perform a great deal of market analysis looking at trends and creating projections their objective is to generate trade orders on which they can charge transaction fees or commissions asset management companies amcs vs brokerage housesbrokerage houses and amcs overlap in many ways along with trading securities and doing analysis many brokers advise and manage client portfolios often through a special private investment or wealth management division or subsidiary many also offer proprietary mutual funds their brokers may also act as advisors to clients discussing financial goals recommending products and assisting clients in other ways in general though brokerage houses accept nearly any client regardless of the amount they have to invest and these companies have a legal standard to provide suitable services suitable essentially means that as long as they make their best effort to manage the funds wisely and in line with their clients stated goals they are not responsible if their clients lose money in contrast most asset management firms are fiduciary firms held to a higher legal standard essentially fiduciaries must act in the best interest of their clients avoiding conflicts of interest at all times if they fail to do so they face criminal liability they re held to this higher standard in large part because money managers usually have discretionary trading powers over accounts that is they can buy sell and make investment decisions on their authority without consulting the client first in contrast brokers must ask permission before executing trades amcs usually execute their trades through a designated broker that brokerage also acts as the designated custodian that holds or houses an investor s account amcs also tend to have higher minimum investment thresholds than brokerages do and they charge fees rather than commissions professional legally liable managementportfolio diversificationgreater investment optionseconomies of scalesizeable management feeshigh account minimumsrisk of underperforming the marketexample of an asset management company amc as mentioned earlier purveyors of popular mutual fund families are technically amcs also many high profile banks and brokerages have asset management divisions usually for hnwi or institutions there are also private amcs that are not household names but are quite established in the investment field one such example is rmb capital an independent investment and advisory firm with approximately 10 billion in aum 1 headquartered in chicago with 10 other offices around the u s and roughly 142 employees rmb has different divisions including 2the firm also has a subsidiary rmb funds that manages six mutual funds | |
what is asset protection | asset protection is the adoption of strategies to guard one s wealth asset protection is a component of financial planning intended to protect one s assets from creditor claims individuals and business entities use asset protection techniques to limit creditors access to certain valuable assets while operating within the bounds of debtor creditor law understanding asset protectionasset protection helps insulate assets in a legal manner without engaging in the illegal practices of concealment hiding of the assets contempt fraudulent transfer as defined in the 1984 uniform fraudulent transfer act tax evasion or bankruptcy fraud experts advise that effective asset protection begins before a claim or liability occurs since it is usually too late to initiate any worthwhile protection after the fact some common methods for asset protection include asset protection trusts accounts receivable financing and family limited partnerships flp if a debtor has few assets bankruptcy may be considered the more favorable route compared to establishing a plan for asset protection if significant assets are involved however proactive asset protection is typically advised certain assets such as retirement plans are exempt from creditors under united states federal bankruptcy and erisa the employee retirement income security act of 1974 laws in addition many states allow exemptions for a specified amount of home equity in a primary residence homestead and other personal property such as clothing each state in the united states has laws to protect owners of corporations limited partnerships lps and limited liability corporations llcs from the entity s liabilities asset protection and real estatejointly held property under the coverage of tenants by entirety can work as a form of asset protection married couples who hold mutual interest in property under tenants by entirety share a claim to a whole piece of property and not subdivisions of it the combined ownership of the property means that creditors who have liens and other claims against one spouse cannot attach the property for their debt reclamation efforts if a creditor has claims against both spouses the tenants by entirety stipulations would not protect the asset from being pursued by that creditor some attempts at asset protection include putting the property or financial resource in the name of a family member or other trusted associate for example an heir might be gifted ownership of real estate or other property while the actual owner continues to reside in the property or make use of it this could complicate efforts to seize property as actual ownership must be determined financial accounts may also be domiciled in offshore banks in order to legally avoid paying taxes against those funds | |
in accounting an asset retirement obligation aro describes a legal obligation associated with the retirement of a tangible long lived asset where a company will be responsible for removing equipment or cleaning up hazardous materials at some future date aros should be included in a company s financial statement to present a more accurate and holistic snapshot of the enterprise s overall value | understanding asset retirement obligationsasset retirement obligation accounting often applies to companies that create physical infrastructure which must be dismantled before a land lease expires such as underground fuel storage tanks at gas stations aros also apply to the removal of hazardous elements and or waste materials from the land such as nuclear power plant decontamination the asset is considered to be retired once the clean up removal activity is complete and the property is restored back to its original condition an example of an asset retirement obligationconsider an oil drilling company that acquires a 40 year lease on a parcel of land five years into the lease the company finishes constructing a drilling rig this item must be removed and the land must be cleaned up once the lease expires in 35 years although the current cost for doing so is 15 000 an estimate for inflation for the removal and remediation work over the next 35 years is 2 5 per year consequently for this aro the assumed future cost after inflation would be calculated as follows 15 000 1 0 025 35 35 598 08 asset retirement obligations oversightbecause calculating asset retirement obligations can be complex businesses should seek guidance from certified public accountants to ensure compliance with the financial accounting standards board s rule no 143 accounting for asset retirement obligations under this mandate public companies must recognize the fair value of their aros on their balance sheets in an effort to render them more accurate this represents somewhat of a departure from the income statement approach many businesses previously used asset retirement obligation calculating expected present valueto calculate the expected present value of an aro companies should observe the following iterative steps asset retirement obligations do not apply to unplanned cleanup costs resulting from unplanned events such as chemical spills and other accidents | |
what is an asset swap | an asset swap is similar in structure to a plain vanilla swap with the key difference being the underlying of the swap contract rather than regular fixed and floating loan interest rates being swapped fixed and floating assets are being exchanged all swaps are derivative contracts through which two parties exchange financial instruments these instruments can be almost anything but most swaps involve cash flows based on a notional principal amount agreed upon by both parties as the name suggests asset swaps involve an actual asset exchange instead of just cash flows swaps do not trade on exchanges and retail investors do not generally engage in swaps rather swaps are over the counter otc contracts between businesses or financial institutions understanding an asset swapasset swaps can be used to overlay the fixed interest rates of bond coupons with floating rates in that sense they are used to transform cash flow characteristics of underlying assets and transforming them to hedge the asset s risks whether related to currency credit and or interest rates typically an asset swap involves transactions in which the investor acquires a bond position and then enters into an interest rate swap with the bank that sold them the bond the investor pays fixed and receives floating this transforms the fixed coupon of the bond into a libor based floating coupon it is widely used by banks to convert their long term fixed rate assets to a floating rate in order to match their short term liabilities depositor accounts another use is to insure against loss due to credit risk such as default or bankruptcy of the bond s issuer here the swap buyer is also buying protection some asset swaps can be quite involved such as asset swapped convertible option transactions ascot used to separate fixed income and equity components of a bond offering the process of an asset swapwhether the swap is to hedge interest rate risk or default risk there are two separate trades that occur first the swap buyer purchases a bond from the swap seller in return for a full price of par plus accrued interest called the dirty price next the two parties create a contract where the buyer agrees to pay fixed coupons to the swap seller equal to the fixed rate coupons received from the bond in return the swap buyer receives variable rate payments of libor plus or minus an agreed upon fixed spread the maturity of this swap is the same as the maturity of the asset the mechanics are the same for the swap buyer wishing to hedge default or some other event risk here the swap buyer is essentially buying protection and the swap seller is also selling that protection as before the swap seller protection seller will agree to pay the swap buyer protection buyer libor plus or minus a spread in return for the cash flows of the risky bond the bond itself does not change hands in the event of default the swap buyer will continue to receive libor plus or minus the spread from the swap seller in this way the swap buyer has transformed its original risk profile by changing both its interest rate and credit risk exposure due to recent scandals and questions around its validity as a benchmark rate libor is being phased out according to the federal reserve and regulators in the u k libor will be phased out by june 30 2023 and will be replaced by the secured overnight financing rate sofr as part of this phase out libor one week and two month usd libor rates will no longer be published after dec 31 2021 1 | |
how is the spread of an asset swap calculated | there are two components used in calculating the spread for an asset swap the first one is the value of coupons of underlying assets minus par swap rates the second component is a comparison between bond prices and par values to determine the price that the investor has to pay over the lifetime of the swap the difference between these two components is the asset swap spread paid by the protection seller to the swap buyer example of an asset swapsuppose an investor buys a bond at a dirty price of 110 and wants to hedge the risk of a default by the bond issuer she contacts a bank for an asset swap the bond s fixed coupons are 6 of par value the swap rate is 5 assume that the investor has to pay 0 5 price premium during the swap s lifetime then the asset swap spread is 0 5 6 5 0 5 hence the bank pays the investor libor rates plus 0 5 during the swap s lifetime investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is an asset swapped convertible option transaction ascot | an asset swapped convertible option transaction ascot is a structured investment strategy in which an option on a convertible bond is used to separate a convertible bond into its two components a fixed income piece and an equity piece more specifically the components being separated are the corporate bond with its regular coupon payments and the equity option that functions as a call option the ascot structure allows an investor to gain exposure to the option within the convertible without taking on the credit risk represented by the bond part of the asset it is also used by convertible arbitrage traders seeking to profit from apparent mis pricings between these two components understanding asset swapped convertible option transactionsascots are complex instruments that allow parties to take the role of equity investor and credit risk buyer bond investor in what was initially sold as a combined instrument the convertible bond itself an asset swapped convertible option transaction is done by writing selling an american option on the convertible bond this essentially creates a compound option as the convertible bond already comes with an embedded equity call option itself due to the conversion feature the american option can be exercised by the holder at any time but the strike price paid must include all the costs of unwinding the asset swap | |
how an ascot works | convertible bond traders are exposed to two types of risk one is the credit risk inherent in the bond portion of the investment the other is the market volatility on the share price of the underlying as it impacts whether or not the conversion option has any value for our purposes let s assume the convertible bond trader wants to focus on the equity angle of their convertible bond portfolio to do this the trader sells the convertible bond to an investment bank which will be the intermediary in the transaction the investment bank structures the ascot by writing a call option on the convertible portion of the bond and selling it back to the convertible bond trader the bond portion of the convertible bond with its payments is then sold to a different party who is prepared to take on the credit risk in return for the fixed returns the bond component may be broken down into smaller denomination bonds and sold to multiple investors acots and convertible arbitrage | |
what is the asset turnover ratio | the asset turnover ratio measures the value of a company s sales or revenues relative to the value of its assets the asset turnover ratio indicates the efficiency with which a company is using its assets to generate revenue the higher the asset turnover ratio the more efficient a company is conversely if a company has a low asset turnover ratio it means it is not efficiently using its assets to create revenue investopedia michela buttignolcalculating asset turnover ratiothe asset turnover ratio uses the value of a company s assets in the denominator of the formula the average value of the assets for the year is determined using the value of the company s assets on the balance sheet as of the start of the year and at the end of the year the sum of the two values is divided by two total sales or revenue is found on the company s income statement and is the numerator asset turnover total sales beginning assets ending assets 2 where total sales annual sales total beginning assets assets at start of year ending assets assets at end of year begin aligned text asset turnover frac text total sales frac text beginning assets text ending assets 2 textbf where text total sales text annual sales total text beginning assets text assets at start of year text ending assets text assets at end of year end aligned asset turnover 2beginning assets ending assets total sales where total sales annual sales totalbeginning assets assets at start of yearending assets assets at end of year | |
what the ratio means | typically the asset turnover ratio is calculated on an annual basis the higher the asset turnover ratio the better the company is performing since higher ratios imply that the company is generating more revenue per dollar of assets the asset turnover ratio tends to be higher for companies in certain sectors than others retail and consumer staples for example have relatively small asset bases but have high sales volume thus they have the highest average asset turnover ratio conversely firms in sectors such as utilities and real estate have large asset bases and low asset turnover the asset turnover ratio can vary widely from one industry to the next so comparing the ratios of different sectors like a retail company with a telecommunications company would not be productive comparisons are only meaningful when they are made for different companies within the same sector asset turnover examplesthe asset turnover ratio for walmart inc wmt target corporation tgt at t inc t and verizon communications inc vz for fy2023 is shown in the table below 1234at t and verizon have asset turnover ratios of less than one which is typical for firms in the telecommunications utilities sector these companies have large asset bases so it is expected that they slowly turn over their assets through sales it would not make sense to compare the asset turnover ratios for walmart and at t since they operate in different industries comparing the relative asset turnover ratios for at t with verizon may provide a better estimate of which company is using assets more efficiently in that sector from the table verizon turns over its assets at a faster rate than at t for every dollar in assets walmart generated 2 51 in sales while target generated 1 98 target s turnover could indicate that the retail company was experiencing sluggish sales or holding obsolete inventory fixed assets such as property or equipment could be sitting idle or not being utilized to their full capacity dupont analysisthe asset turnover ratio is a key component of dupont analysis a system that the dupont corporation began in the 1920s to evaluate performance across corporate divisions the first step of dupont analysis breaks down return on equity roe into three components including asset turnover profit margin and financial leverage roe net income revenue profit margin revenue aa asset turnover aa ae financial leverage where aa average assets ae average equity begin aligned text roe underbrace left frac text net income text revenue right text profit margin times underbrace left frac text revenue text aa right text asset turnover times underbrace left frac text aa text ae right text financial leverage textbf where text aa text average assets text ae text average equity end aligned roe profit margin revenuenet income asset turnover aarevenue financial leverage aeaa where aa average assetsae average equity sometimes investors and analysts are more interested in measuring how quickly a company turns its fixed assets or current assets into sales in these cases the analyst can use specific ratios such as the fixed asset turnover ratio or the working capital ratio to calculate the efficiency of these asset classes the working capital ratio measures how well a company uses its financing from working capital to generate sales or revenue asset turnover vs fixed asset turnoverthe asset turnover ratio considers the average total assets in the denominator while the fixed asset turnover ratio looks at only fixed assets the fixed asset turnover ratio fat ratio is used by analysts to measure operating performance this efficiency ratio compares net sales on the income statement to fixed assets on the balance sheet to measure a company s ability to generate net sales from its fixed asset investments namely property plant and equipment pp e the fixed asset balance is a used net of accumulated depreciation depreciation is the allocation of the cost of a fixed asset which is expensed each year throughout the asset s useful life typically a higher fixed asset turnover ratio indicates that a company has more effectively utilized its investment in fixed assets to generate revenue | |
what is asset turnover measuring | the asset turnover ratio measures the efficiency of a company s assets in generating revenue or sales it compares the dollar amount of sales to its total assets as an annualized percentage thus to calculate the asset turnover ratio divide net sales or revenue by the average total assets one variation on this metric considers only a company s fixed assets the fat ratio instead of total assets | |
what are some limitations of the asset turnover ratio | while investors may use the asset turnover ratio to compare similar stocks the metric does not provide all of the details that would be helpful for stock analysis a company s asset turnover ratio in any single year may differ substantially from previous or subsequent years investors should review the trend in the asset turnover ratio over time to determine whether asset usage is improving or deteriorating | |
what is asset valuation | asset valuation is the process of determining the fair market or present value of assets using book values absolute valuation models like discounted cash flow analysis option pricing models or comparables such assets include investments in marketable securities such as stocks bonds and options tangible assets like buildings and equipment or intangible assets such as brands patents and trademarks understanding asset valuationasset valuation plays a key role in finance and often consists of both subjective and objective measurements the value of a company s fixed assets also known as capital assets or property plant and equipment is straightforward to value based on their book values and replacement costs corporations use asset valuation when they apply for loans and banks review it during their credit analysis however there s no number on the financial statements that tell investors exactly how much a company s brand and intellectual property are worth companies can overvalue goodwill in an acquisition as the valuation of intangible assets is subjective and can be difficult to measure net asset valuethe net asset value also known as net tangible assets is the book value of tangible assets on the balance sheet their historical cost minus the accumulated depreciation less intangible assets and liabilities or the money that would be left over if the company was liquidated this is the minimum a company is worth and can provide a useful floor for a company s asset value because it excludes intangible assets a stock would be considered undervalued if its market value were below book value which means the stock is trading at a deep discount to book value per share however the market value for an asset is likely to differ significantly from book value or shareholders equity which is based on historical cost and some companies greatest value is in their intangible assets like the findings of a biomedical research company absolute valuation methodsabsolute value models value assets based only on the characteristics of that asset these models are known as discounted cash flow dcf models and value assets like stocks bonds and real estate based on their future cash flows and the opportunity cost of capital they include relative valuation comparable transactionsrelative valuation models determine the value based on the observation of market prices of similar assets for example one way of determining the value of a property is to compare it with similar properties in the same area likewise investors use the price multiples comparable public companies trade at to get an idea of relative market valuations stocks are often valued based on comparable valuation metrics such as the price to earnings ratio p e ratio price to book ratio or the price to cash flow ratio this method is also used to value illiquid assets like private companies with no market price venture capitalists refer to valuing a company s stock before it goes public as pre money valuation by looking at the amounts paid for similar companies in past transactions investors get an indication of an unlisted company s potential value this is called precedent transaction analysis real world example of asset valuationlet s work out net asset value for alphabet inc goog the parent company of search engine and advertising giant google all figures are for the period ending dec 31 2018 total net asset value 175 4 billion total assets 232 8 billion total intangible assets 2 2 billion total liabilities 55 2 billion | |
what are assets under management aum | assets under management aum is the market value of the investments managed by a person or entity on behalf of clients aum is used in conjunction with management performance and management experience when evaluating a company when calculating aum some financial institutions include bank deposits mutual funds and cash while others limit it to funds under discretionary management from individual investors understanding assets under management aum aum is the sum of the market value for all of the investments managed by a fund or family of funds a venture capital firm a brokerage company or an individual registered as an investment advisor or portfolio manager when an investor has 50 000 in a mutual fund those funds are part of the total aum of the pool of funds the fund manager can buy and sell shares according to the investment objective using all invested funds without obtaining special permissions aum includes the capital the manager can use to make transactions for one or all clients an investor may need a minimum amount of personal aum to qualify for a type of investment such as a hedge fund to ensure the client can withstand adverse markets an investor s aum may coincide with their net worth and may determine the type of services received from a financial advisor or brokerage company investors often consider higher investment inflows and higher aum of a financial institution as positive indicators of quality and management experience calculating aumcalculating assets under management varies among companies and depends on the flow of investor money in and out of a fund asset performance capital appreciation and reinvested dividends increase the aum of a fund assets under management also increase when new customers and their assets are acquired a decrease in aum occurs following losses in the market value or performance of assets fund closures and decreased investor in flows calculating aum involves aggregating the total market value of all assets that an investment manager oversees on behalf of clients this includes a diverse range of investment vehicles such as stocks bonds mutual funds etfs cash equivalents and other securities the process entails identifying and valuing each individual asset held within client portfolios taking into account factors such as current market prices fair values and any applicable currency conversions for this reason aum likely fluctuates constantly for most calculations once the market values of all assets are determined they are all added together to get aum aum and sec regulationthe u s securities and exchange commission sec requires firms to register with the sec with aum ranging between 25 million to 110 million depending on several factors including the size and location of the firm the sec regulates the financial markets to ensure that it functions properly 1it s important to note that state securities regulators have authority over advisers handling up to 100 million advisers with assets under management below 100 million are required to register with the securities regulator of the state where their principal place of business is located 2if a state registered adviser s aum reach the 100 million threshold they may choose to register with the sec however once their aum surpass 110 million registration with the sec is typically mandatory 2aum and feesaum can be a consideration when calculating fees many investment products charge management fees as a fixed percentage of aum financial advisors and personal money managers charge clients a fee as a percentage of personal assets under management the relationship between aum and fees is not necessarily straightforward for example you may assume that as aum increases so do the fees earned by investment managers this would be because management fees are typically calculated as a percentage of aum meaning that higher aum result in higher fee income for the manager however it is essential to recognize that fee structures can vary widely across different investment products and client segments for example actively managed funds may charge higher fees than passively managed funds due to the active management and research involved another exception to this is for larger institutional clients institutional clients may negotiate lower fee rates than retail clients due to their larger investment sizes and bargaining power management firms may also proactively lower their fees to entice large investors therefore higher aum doesn t always mean higher fees at least when it comes to a fixed percentage aum and investment management strategyone of the ultimate goals of investment firms is to increase its aum this means that the company is holding a higher amount of dollars to invest which creates greater leverage for future potential growth though not financial by any means one key strategy is effective marketing tactics aimed at raising awareness of the investment manager s capabilities expertise and track record part of this strategy may be to incorporate information on the current aum if it s worth boasting about though also not necessarily tied to quantitative financial analysis client acquisition strategies also play a role in aum growth investment firms can prioritize identifying and acquiring new clients who align with the investment manager s target market and investment objectives to grow aum last product development and differentiation is another important aspect of aum growth strategies this involves developing innovative investment products and solutions that address evolving market trends investor preferences and regulatory requirements for instance state street which we ll look at in the example below notes state street alpha in its 2023 annual report an architecture platform used to interpret data at a large scale 3 new products like this can help a firm bring in new capital from new or existing customers higher aum isn t always better high aum does not guarantee financial success and lower aum opportunities may have better risk reward ratios as less investors if less investors are participating in the pportunity aum and investor psychologyinvestor psychology plays a role in influencing fluctuations aum during periods of optimism and bullish sentiment investors may allocate more capital to investment vehicles leading to increases in aum for investment managers conversely during times of pessimism and bearish sentiment investors may withdraw funds or reallocate assets to safe havens resulting in declines in aum behavioral biases such as herd behavior can play a factor as well for instance beginning investors may not know where to start therefore they may think it s safest to simply invest in etfs or with global investment companies that have the highest aum though there is at least some legitimacy to this mindset this also plays into a dangerous cycle where investors simply follow each other not on the basis of fundamental analysis but simply because it s what others are doing example of aumthe spdr s p 500 etf spy is an exchange traded fund an etf is a fund that contains several stocks or securities that match or mirror an index such as the s p 500 as of may 31 2024 spy s nav was 522 58 per share and total assets under management was 526 22 billion 4meanwhile the management firm state street global advisors manages other funds as well therefore at the end of 2023 the global investment firm had aum of 4 1 trillion the fourth highest of all investment firms 3 | |
how is aum used as a tool by investment companies | investment companies use assets under management as a marketing tool to attract new investors aum helps investors determine the size of a company s operations relative to its competitors | |
what is the benefit of a fund with a large aum | funds with large aums have sufficient holdings to meet any redemption pressure if a few large investors leave the fund it would not likely impact it the bottom lineassets under management aum is the market value of the investments managed by a person or entity on behalf of clients aum can reveal the management performance and experience when investors evaluate a company or investment the sec regulates firms with large aums to protect investors | |
what is an assignment | assignment most often refers to one of two definitions in the financial world uses for assignmentsassignment refers to the transfer of some or all property rights and obligations associated with an asset property contract or other asset of value to another entity through a written agreement assignment rights happen every day in many different situations a payee like a utility or a merchant assigns the right to collect payment from a written check to a bank a merchant can assign the funds from a line of credit to a manufacturing third party that makes a product that the merchant will eventually sell a trademark owner can transfer sell or give another person interest in the trademark or logo a homeowner who sells their house assigns the deed to the new buyer to be effective an assignment must involve parties with legal capacity consideration consent and legality of the object examplesa wage assignment is a forced payment of an obligation by automatic withholding from an employee s pay courts issue wage assignments for people late with child or spousal support taxes loans or other obligations money is automatically subtracted from a worker s paycheck without consent if they have a history of nonpayment for example a person delinquent on 100 monthly loan payments has a wage assignment deducting the money from their paycheck and sent to the lender wage assignments are helpful in paying back long term debts another instance can be found in a mortgage assignment this is where a mortgage deed gives a lender interest in a mortgaged property in return for payments received lenders often sell mortgages to third parties such as other lenders a mortgage assignment document clarifies the assignment of contract and instructs the borrower in making future mortgage payments and potentially modifies the mortgage terms a final example involves a lease assignment this benefits a relocating tenant wanting to end a lease early or a landlord looking for rent payments to pay creditors once the new tenant signs the lease taking over responsibility for rent payments and other obligations the previous tenant is released from those responsibilities in a separate lease assignment a landlord agrees to pay a creditor through an assignment of rent due under rental property leases the agreement is used to pay a mortgage lender if the landlord defaults on the loan or files for bankruptcy any rental income would then be paid directly to the lender options assignmentoptions can be assigned when a buyer decides to exercise their right to buy or sell stock at a particular strike price the corresponding seller of the option is not determined when a buyer opens an option trade but only at the time that an option holder decides to exercise their right to buy stock so an option seller with open positions is matched with the exercising buyer via automated lottery the randomly selected seller is then assigned to fulfill the buyer s rights this is known as an option assignment once assigned the writer seller of the option will have the obligation to sell if a call option or buy if a put option the designated number of shares of stock at the agreed upon price the strike price for instance if the writer sold calls they would be obligated to sell the stock and the process is often referred to as having the stock called away for puts the buyer of the option sells stock puts stock shares to the writer in the form of a short sold position suppose a trader owns 100 call options on company abc s stock with a strike price of 10 per share the stock is now trading at 30 and abc is due to pay a dividend shortly as a result the trader exercises the options early and receives 10 000 shares of abc paid at 10 at the same time the other side of the long call the short call is assigned the contract and must deliver the shares to the long | |
what is an assortment strategy | an assortment strategy in retailing involves the number and type of products that stores display for purchase by consumers also called a product assortment strategy it is a strategic tool that retailers use to manage and increase sales the strategy is made up of two major components | |
how assortment strategies work | essentially a product assortment strategy is a retail industry sales tool with the concepts of depth and breadth at its core however not all retailers will be able to use both components of this strategy at the same time an assortment strategy can have many layers of sub and related strategies as each store will need to tailor the strategy to address its own particular needs and goals a deep assortment the opposite of a narrow assortment of products means that a retailer carries a number of variations of a single product a wide variety the opposite of a narrow variety of products means that a retailer carries a large number of different kinds of products an assortment strategy is not one size fits all it needs to be customized to respond to a business s parameters retailers face a trade off when determining an assortment strategy choosing both a wide variety and a deep assortment of products simultaneously requires a large amount of space and is typically reserved for big box retailers stores with smaller spaces may choose to specialize in a certain type of product and offer customers a variety of colors and styles other stores may offer a deep assortment of products but a narrow variety one reason why a 7 eleven private since 2005 might carry just one brand of canned cat food for example while a kroger nyse kr likely would have the space to stock 12 brands of canned cat food if it chose to originally assortment strategy referred only to brick and mortar stores because the strategy s components of depth and breadth had a lot to do with physical space and the visual and tactile interaction between consumer and product recently though all sales venues brick and mortar click and mortar and e tailing have used varieties of the strategy to gain competitive advantage by grouping together items that they believe will appeal to certain types of customers retailers may fine tune their assortment strategies to target consumers demographic profiles if a retailer wants to attract customers who are new parents for example it might fill the shelves with infant apparel from trendy brands along with toys bedding and other products new parents need a strategic selling toola strategically arranged product assortment can upsell customers on supplemental items as they search for the item that brought them to the store grouping related items together strategically whether or not they are necessities is a common way to stimulate impulse buying potential disadvantages of assortment strategiesalthough the depth of product assortment may help attract customers there are certain caveats to relying only on an assortment strategy if items in an assortment are placed incorrectly the demand for these products may vary drastically if less popular items are mixed in with popular items for example they could detract from the more popular items appeal or if the assortment is too vast customers may have difficulty finding the item they are seeking overwhelming shoppers with too many buying options can be counterproductive and discourage customer engagement | |
what is an assumable mortgage | an assumable mortgage is a type of home financing arrangement where an outstanding mortgage and its terms are transferred from the current owner to the buyer by assuming the previous owner s remaining debt the buyer can avoid obtaining their own mortgage different types of loans can qualify as assumable mortgages though there are some special considerations to keep in mind investopedia mira norianunderstanding assumable mortgagesif you are buying a house you may take out a mortgage from a lending institution to finance the purchase of the home or property the contractual agreement for repaying the mortgage includes paying the principal payments plus interest to the lender if you decide to sell your home later you may be able to transfer the mortgage to the homebuyer in this case the original mortgage taken out is assumable 1an assumable mortgage allows a homebuyer to assume the current principal balance interest rate repayment period and any other contractual terms of the seller s mortgage rather than going through the rigorous process of obtaining a home loan from a bank a buyer can take over an existing mortgage there could be a cost saving advantage if current interest rates are higher than the interest rate on the assumable loan in a period of rising interest rates the cost of borrowing also increases when this happens borrowers will face high interest rates on any loans for which they are approved an assumable mortgage may have a lower interest rate an attractive feature to buyers if the assumable mortgage has a fixed interest rate it will not be impacted by rising interest rates a mortgage calculator can be a good resource to budget for the monthly cost of your payment an assumable mortgage is attractive to buyers when the existing mortgage rate is lower than current market rates | |
what types of loans are assumable | some of the most popular types of mortgages are assumable if you are a buyer who wishes to assume a mortgage from a seller you must meet specific requirements and receive approval from the agency sponsoring the mortgage fha loans are assumable when both transacting parties meet the requirements for the assumption for instance the property must be used by the seller as their primary residence if you were the buyer you must first verify that the fha loan is assumable and then apply as you would for an individual fha loan the seller s lender will verify that you meet the qualifications including being creditworthy if approved you will then assume the mortgage however until the seller is released from the loan they are still responsible for it 2the department of veterans affairs offers mortgages to qualified military members and spouses of military members however to assume a va loan you need not be a member of the military to qualify however the lender and the regional va loan office will need to approve you for the loan assumption and most often buyers who assume va loans are military members for loans initiated before march 1 1988 buyers may freely assume the va loan in other words you would not need the approval of the va or the lender to assume the mortgage 3usda loans are offered to buyers of rural properties they require no down payment and often have low interest rates to assume a usda loan you must meet the standard qualifications such as meeting credit and income requirements and receive approval from the usda to transfer title you may assume the existing rate of interest and loan terms or new rates and terms 4 even if you meet all requirements and receive approval the mortgage cannot be assumed if the seller is delinquent on payments conventional loans backed by fannie mae and freddie mac are generally not assumable though exceptions may be allowed for adjustable rate mortgages upfront fees on fannie mae and freddie mac home loans changed in may 2023 fees were increased for homebuyers with higher credit scores such as 740 or higher while they were decreased for homebuyers with lower credit scores such as those below 640 another change your down payment will influence what your fee is the higher your down payment the lower your fees though it will still depend on your credit score fannie mae provides the loan level price adjustments on its website 4advantages and disadvantages of assumable mortgagesrate on the mortgage may be lower than current market ratesmay not need to apply for a new mortgageif seller s home equity is low there are less out of pocket costs for the buyermay need a substantial down payment when the seller s home equity is highlenders may not cooperate when a second mortgage is neededwith two mortgages the risk of default increasesthe advantages of acquiring an assumable mortgage in a high interest rate environment are limited to the amount of existing mortgage balance on the loan or the home equity for example if you are purchasing a home for 250 000 and the seller s assumable mortgage only has a balance of 110 000 you will need to make a down payment of 140 000 to cover the difference or you will need a separate mortgage to secure the additional funds a disadvantage is when the home s purchase price exceeds the mortgage balance by a significant amount requiring you to obtain a new mortgage depending on your credit profile and current rates the interest rate may be considerably higher than the assumed loan usually you will take out a second mortgage on the existing mortgage balance if the seller s home equity is high you may have to take out the second loan with a different lender from the seller s lender which could pose a problem if both lenders do not cooperate with one another also having two loans increases the risk of default especially when one has a higher interest rate if the seller s home equity is low however the assumable mortgage may be an attractive acquisition if the value of the home is 250 000 and the assumable mortgage balance is 210 000 you only need to put up 40 000 if you have this amount in cash you can pay the seller directly without having to secure another credit line assumable mortgage transfer approvalthe final decision over whether an assumable mortgage can be transferred is not left to the buyer and seller the lender of the original mortgage must approve the mortgage assumption before the deal can be signed off on by either party the homebuyer must apply for the assumable loan and meet the lender s requirements such as having sufficient assets and being creditworthy a seller is still responsible for any debt payments if the mortgage is assumed by a third party unless the lender approves a release request releasing the seller of all liabilities from the loan if approved the title of the property is transferred to the buyer who makes the required monthly repayments to the bank if the transfer is not approved by the lender the seller must find another buyer that is willing to assume the mortgage and has good credit a mortgage that has been assumed by a third party does not mean that the seller is relieved of the debt payment the seller may be held liable for any defaults which in turn could affect their credit rating to avoid this the seller must release their liability in writing at the time of assumption and the lender must approve the release request releasing the seller of all liabilities from the loan | |
what does assumable mean | assumable refers to when one party takes over the obligation of another in terms of an assumable mortgage the buyer assumes the existing mortgage of the seller when the mortgage is assumed the seller is often no longer responsible for the debt | |
what does not assumable mean | not assumable means that the buyer cannot assume the existing mortgage from the seller conventional mortgages are non assumable some mortgages have non assumable clauses preventing buyers from assuming mortgages from the seller | |
how does an assumable loan work | to assume a loan you must qualify with the lender if the price of the house exceeds the remaining mortgage you must remit a down payment worth the difference between the sale price and the mortgage if the difference is substantial the buyer may need to secure a second mortgage | |
how do i know if my mortgage is assumable | certain types of home loans are assumable for example usda va and fha loans are assumable each agency has specific requirements that both parties must fulfill for the loan to be assumed by the buyer the usda requires that the house is in a usda approved area the seller must not be delinquent on payments and the buyer must meet certain income and credit limits the buyer must confirm with the seller and the seller s lender if the loan is assumable | |
when current interest rates are higher than an existing mortgage s rates assuming a loan may be the favorable option also there are not as many costs due at closing on the other hand if the seller has a considerable amount of equity in the home the buyer will either have to pay a large down payment or secure a second mortgage for the balance not covered by the existing mortgage | the bottom linean assumable mortgage may be attractive to buyers when current mortgage rates are high and because closing costs are considerably lower than those associated with traditional mortgages however if the owner has a lot of equity in the home the buyer may need to pay a substantial down payment or secure a new loan for the difference in the sale price and the existing mortgage also not all loans are assumable and if so the buyer must still qualify with the agency and lender if the benefits outweigh the risks an assumable mortgage might be a good option for homeownership | |
what is assurance | assurance refers to financial coverage that provides remuneration for an event that is certain to happen assurance is similar to insurance with the terms often used interchangeably however insurance refers to coverage over a limited time whereas assurance applies to persistent coverage for extended periods or until death assurance may also apply to validation services provided by accountants and other professionals | |
how assurance works | one of the best examples of assurance is whole life insurance as opposed to term life insurance in the u k life assurance is another name for life insurance the adverse event that both whole life and term life insurance deal with is the death of the person the policy covers since the death of the covered person is certain a life assurance policy whole life insurance results in payment to the beneficiary when the policyholder dies a term life insurance policy however covers a fixed period such as 10 20 or 30 years from the policy s purchase date if the policyholder dies during that time the beneficiary receives money but if the policyholder dies after the term no benefit is received the assurance policy covers an event that will happen no matter what while the insurance policy covers a covered incident that might occur the policyholder might die within the next 30 years types of assuranceassurance can also refer to professional services provided by accountants lawyers and other professionals these professionals assure the integrity and usability of documents and information produced by businesses and other organizations assurance in this context helps companies and other institutions manage risk and evaluate potential pitfalls audits are one example of assurance provided by such firms for businesses to assure that information provided to shareholders is accurate and impartial assurance services are a type of independent professional service usually provided by certified or chartered accountants such as certified public accountants cpas assurance services can include a review of any financial document or transaction such as a loan contract or financial website this review certifies the correctness and validity of the item being reviewed by the cpa example of assuranceas an example of assurance services say investors of a publicly traded company grow suspicious that the company is recognizing revenue too early early realization of revenue might lead to positive financial results in upcoming quarters but it can also lead to worse results in the future under pressure from shareholders company management agrees to hire an assurance firm to review its accounting procedures and systems to provide a report to shareholders the summary will assure shareholders and investors that the company s financial statements are accurate and revenue recognition policies are in line with generally accepted accounting principles gaap the assurance firm reviews the financial statements interviews accounting department personnel and speaks with customers and clients the assurance firm makes sure that the company in question has followed gaap and assures stakeholders that the company s results are sound assurance vs negative assuranceassurance refers to the high degree of certainty that something is accurate complete and usable professionals affirm these positive assurances after careful review of the documents and information subject to the audit or review negative assurance refers to the level of certainty that something is accurate because no proof to the contrary is present in other words since there is no proof that the information is inaccurate or that deceptive practices e g fraud occurred it is presumed to be accurate negative assurance does not mean that there is no wrongdoing in the company or organization it only means that nothing suspecting or proving wrongdoing was found negative assurance usually follows assurance of the same set of facts and is done to ensure that the first review was appropriate and without falsifications or gross errors therefore the amount of scrutiny is not as intense as the first review because the negative assurance auditor purposefully looks for misstatements violations and deception assurance faqsassurance has dual meanings in business it refers to the coverage that pays a benefit for a covered event that will eventually happen assurance also refers to the assurance given by auditing professionals regarding the validity and accuracy of reviewed documents and information these auditors exercise great care to make these positive assurances whole life insurance is perhaps one of the best understood examples of assurance as long as the policy remains in force this type of insurance guarantees to pay a death benefit at the death of the insured despite how long that event takes to occur assurance in auditing refers to the opinions issued by a professional regarding the accuracy and completeness of what s analyzed for example an accountant assuring that financial statements are accurate and valid asserts that they have reviewed the documents using acceptable accounting standards and principles life insurance and life assurance are often used interchangeably and sometimes refer to the same type of contract however life insurance is coverage that pays a benefit for the death of the insured if the death occurs during the limited contractual term assurance or life assurance is coverage that pays a benefit upon the death of the insured despite how long it takes for that death to occur an assurance company could be a life insurance assurance company providing benefits upon the certain death of the insured but commonly refers to an accounting or auditing firm providing assurance services to businesses and organizations these services include complete and intense reviews of documents transactions or information the purpose of these reviews is to confirm and assure the accuracy of what was reviewed the bottom lineassurance is coverage that pays a benefit upon the eventual occurrence of a certain event it also refers to a service rendered by a professional to confirm the validity and accuracy of reviewed documents and information assurances in auditing can help companies address risks and potential problems affecting the accuracy of their reporting on the contrary negative assurance is a less intense review that also provides a form of assurance negative assurance asserts that what was reviewed is accurate because nothing contradicting this claim exists | |
what are assurance services | assurance services are a type of independent professional service usually provided by certified or chartered accountants such as certified public accountants cpas assurance services can include a review of any financial document or transaction such as a loan contract or financial website this review certifies the correctness and validity of the item being reviewed by the cpa understanding assurance servicesassurance services are aimed at improving the quality of information for the individuals making decisions providing independent assurance is a way to bring comfort that the information on which one makes decisions is reliable and therefore reduces risks in this case information risk providers of assurance services will help clients navigate the complexities risks and opportunities in their partner networks by proactively managing and monitoring risks presented by third party relationships businesses use assurance services to increase the transparency relevance and value of the information they disclose to the market and their investors many find by sharing business performance better it becomes a sustainable growth and competitive differentiation strategy technical guidance for certified accountants who wish to engage in assurance services can be found in the international standard on assurance engagements isae 3000 and in the assurance sourcebook published by the institute of chartered accountants in england and wales icaew that also includes practical advice for firms choosing among different assurance services certain regulations over the past years have increased the demand for assurance services such as the sarbanes oxley act of 2002 with the goal of protecting investors from false financial information types of assurance servicesassurance services can come in a variety of forms and are meant to provide the firm contracting the cpa with pertinent information to ease decision making for example the client could request that the cpa carefully go over all of the numbers and math that are on the client s mortgage website to ensure that all of the calculations and equations are correct below is a list of the most common assurance services entities are subjected to greater risks and more precipitous changes in fortune than ever before managers and investors are concerned about whether entities have identified the full scope of these risks and taken precautions to mitigate them this service assures that an entity s profile of business risks is comprehensive and evaluates whether the entity has appropriate systems in place to effectively manage those risks investors and managers demand a more comprehensive information base than just financial statements they need a balanced scorecard this service evaluates whether an entity s performance measurement system contains relevant and reliable measures for assessing the degree to which the entity s goals and objectives are achieved or how its performance compares to its competitors managers and other employees are more dependent on good information than ever and are increasingly demanding it online it must be right in real time the focus must be on systems that are reliable by design not correcting the data after the fact this service assesses whether an entity s internal information systems financial and non financial provide reliable information for operating and financial decisions the growth of electronic commerce has been hindered by a lack of confidence in the systems this service assesses whether systems and tools used in electronic commerce provide appropriate data integrity security privacy and reliability the motivations in the 1 trillion healthcare industry have flipped 180 degrees in the last few years the old system fee for service rewarded those who delivered the most services the new system managed care rewards those who deliver the fewest services as a result healthcare recipients and their employers are increasingly concerned about the quality and availability of healthcare services this service provides assurance about the effectiveness of healthcare services provided by hmos hospitals doctors and other providers | |
what is asymmetric information | asymmetric information also known as information failure occurs when one party to an economic transaction possesses greater material knowledge than the other party this typically manifests when the seller of a good or service possesses greater knowledge than the buyer however the reverse dynamic is also possible almost all economic transactions involve information asymmetries investopedia nono floresunderstanding asymmetric informationasymmetric information exists in certain deals with a seller and a buyer whereby one party is able to take advantage of another this is usually the case in the sale of an item for example if a homeowner wanted to sell their house they would have more information about the house than the buyer they might know some floorboards are creaky the home gets too cold in winter or that the neighbors are too loud information that the buyer would not know until after they purchased the house the buyer then might feel they paid too much for the house or would not have purchased it at all if they had this information beforehand asymmetric information can also be viewed as the specialization and division of knowledge as applied to any economic trade for example doctors typically know more about medical practices than their patients after all physicians have extensive medical school educational backgrounds that their patients generally don t have this principle equally applies to architects teachers police officers attorneys engineers fitness instructors and other trained professionals asymmetric information therefore is most often beneficial to an economy and a society in increasing efficiency advantages and disadvantages of asymmetric informationasymmetric information isn t necessarily a bad thing in fact growing asymmetrical information is the desired outcome of a healthy market economy as workers strive to become increasingly specialized in their chosen fields they become more productive and can consequently provide greater value to workers in other fields for example a stockbroker s knowledge is more valuable to a non investment professional such as a farmer who may be interested in confidently trading stocks to prepare for retirement on the flip side the stockbroker does not need to know how to grow crops or tend to livestock to feed themself but rather can purchase the items from a grocery store that are provided by the farmer in each of their respective trades both the farmer and the stockbroker hold superior knowledge over the other but both benefit from the trade and the division of labor one alternative to ever expanding asymmetric information is for workers to study all fields rather than specialize in fields where they can provide the most value however this is an impractical solution with high opportunity costs and potentially lower aggregate outputs which would lower standards of living in some circumstances asymmetric information may have near fraudulent consequences such as adverse selection which describes a phenomenon where an insurance company encounters the probability of extreme loss due to a risk that was not divulged at the time of a policy s sale in certain asymmetric information models one party can retaliate for contract breaches while the other party cannot for example if the insured hides the fact that they re a heavy smoker and frequently engage in dangerous recreational activities this asymmetrical flow of information constitutes adverse selection and could raise insurance premiums for all customers forcing the healthy to withdraw the solution is for life insurance providers to perform thorough actuarial work and conduct detailed health screenings and then charge different premiums to customers based on their honestly disclosed risk profiles special considerationsto prevent abuse of customers or clients by finance specialists financial markets often rely on reputation mechanisms financial advisors and fund companies that prove to be the most honest and effective stewards of their client s assets tend to gain clients while dishonest or ineffective agents tend to lose clients face legal damages or both | |
what is at par | the term at par means at face value a bond preferred stock or other debt instrument may trade at par below par or above par par value is static unlike market value which fluctuates with credit ratings time to maturity and interest rate fluctuations the par value is assigned at the time the security is issued when securities were issued in paper form the par value was printed on the face of the security hence the term face value understanding at pardue to the constant fluctuations of interest rates bonds and other financial instruments almost never trade exactly at par a bond will not trade at par if current interest rates are above or below the bond s coupon rate which is the interest rate that it yields a bond that was trading at par would be quoted at 100 meaning that it traded at 100 of its par value a quote of 99 would mean that it is trading at 99 of its face value par value for common stock exists in an anachronistic form in its charter the company promises not to sell its stock at lower than par value the shares are then issued with a par value of one penny this has no effect on the stock s actual value in the markets a new bondif when a company issues a new bond it receives the face value of the security the bond is said to have been issued at par if the issuer receives less than the face value for the security it is issued at a discount if the issuer receives more than the face value for the security it is issued at a premium the yield for bonds and the dividend rate for preferred stocks have a material effect on whether new issues of these securities are issued at par at a discount or at a premium a bond that trades at par has a yield equal to its coupon investors expect a return equal to the coupon for the risk of lending to the bond issuer example of at parif a company issues a bond with a 5 coupon but prevailing yields for similar bonds are 10 investors will pay less than par for the bond to compensate for the difference in rates the bond s value at its maturity plus its yield up to that time must be at least 10 to attract a buyer if prevailing yields are lower say 3 an investor is willing to pay more than par for that 5 bond the investor will receive the coupon but have to pay more for it due to the lower prevailing yields | |
what is a bond s par value | a bond s par value is its face value the price that it was issued at most bonds are issued with a par value of 1 000 or 100 over time the bond s price will change due to changes in interest rates credit ratings and time to maturity when this happens a bond s price will either be above its par value above par or below its par value below par | |
are bonds always issued at par value | no bonds are not always issued at par value they can be issued at a premium price is higher than the par value or at a discount price is below the par value the reason for a bond being issued at a price that is different than its par value has to do with current market interest rates for example if a bond s yield is higher than market rates then a bond will trade at a premium conversely if a bond s yield is below market rates then it will trade at a discount to make it more attractive | |
what is a bond s coupon rate | the coupon rate of a bond is the stated amount of interest that the bond will pay an investor at the time of its issue a bond s coupon rate is different from a bond s yield a bond s yield is its effective rate of return when the bond s price changes a bond s yield is calculated as coupon rate current bond price | |
what is an atomic swap | an atomic swap is an exchange of cryptocurrencies from separate blockchains the swap is conducted between two entities without a third party s involvement the idea is to remove centralized intermediaries like regulated exchanges and give token owners total control the term atomic derives from the term atomic state in which a state has no substates it either happens or it doesn t there is no other alternative this refers to the state of the cryptocurrency transaction it happens or it doesn t most atomic swap enabled wallets and blockchains use smart contracts smart contracts are programs within blockchains that execute when certain conditions are met in this case the conditions are that each party agrees to the transaction before a timer runs out using a smart contract in the trade prevents either party from stealing a cryptocurrency from the other atomic swaps are also called cross chain atomic swaps understanding atomic swapseach cryptocurrency is supported by a blockchain designed only to accept transactions in specific tokens for example bitcoin btc has a blockchain and eth ether has another you cannot easily exchange btc and eth without first converting to fiat currency then buying the other another technique is to convert between cryptocurrencies and exchanges multiple times to get the one you want atomic swaps allow you to exchange tokens from different blockchains in one trade decentralized exchanges can conduct atomic swaps for you a decentralized exchange dex has no central authority regulating it it is a platform you can trade on without third parties you can also choose from cross chain swap providers where you transfer your digital assets into another wallet conduct the swap and transfer them back out atomic swaps rely on each party to provide proof through key encryption and acceptance of both parties through the encrypted key the concept was conceived shortly after altcoins cryptocurrencies other than bitcoin materialized the creation of altcoins meant some cryptocurrency owners became interested in moving capital between coins this type of token swap first appeared in september 2017 when an atomic swap between decred and litecoin was conducted 1since then startups and decentralized exchanges have implemented swaps and allowed users the same facility for example lightning labs a startup that uses bitcoin s lightning network for transactions has conducted off chain swaps utilizing the technology 2special cryptocurrency wallets have also been developed that are capable of cross chain atomic swaps liquality has developed a wallet that will swap bitcoin eth and more 3atomic swap processin an atomic swap two token owners agree to exchange their tokens for any amount they agree on the smart contract program sees that they both agreed to it so it executes the trade for them the transaction is recorded in the blockchain and validated by the network nodes and then a new block is opened for another transaction the transaction cannot be reversed both parties must agree to another transaction to exchange the tokens again if they would like them back atomic swaps use hash timelock contracts htlc to automate the exchange of tokens as its name denotes htlc is a time bound smart contract between parties that involves generating one cryptographic hash on each end a cryptographic hash function is an algorithm that converts data of variable length such as a person s wallet address and transaction information it converts it to a hexadecimal number with a fixed length in general the number that is generated is called the hash htlc requires both parties to acknowledge receipt of funds within a specified timeframe if one party fails to confirm the transaction within the timeframe then the entire transaction is voided and funds are returned this eliminates counterparty risk or the risk that one party will accept the offered coins and decline the transfer of their coins for instance suppose jane wants to convert 1 btc to an equivalent number of litecoins with john she submits the transaction through an atomic swap capable wallet a cryptographic hash function generates a hex number to encrypt the transaction during this process the process is repeated at john s end both jane and john unlock their respective funds using their encrypted numbers they have to do this within a specified timeframe or the transfer will not occur the htlc within the blockchains then executes the trade | |
is an atomic swap expensive | the mainstream s ability to do atomic swaps is new but they don t yet generate fees unless there are blockchain fees involved | |
how do you do an atomic swap | it is done using cryptocurrency wallets and hash timelock contracts htlc which enforce the exchange when both parties agree to it in reality there are only a few atomic swap wallet providers and decentralized exchanges that can be used in a swap | |
what are cross chain atomic swaps | cross chain atomic swaps are cryptocurrency exchanges or trades between cryptocurrencies that use separate blockchains investing in cryptocurrencies and other initial coin offerings icos is highly risky and speculative and this article is not a recommendation by investopedia or the writer to invest in cryptocurrencies or other icos since each individual s situation is unique a qualified professional should always be consulted before making any financial decisions investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein | |
what is at the money atm | at the money atm is a situation where an option s strike price is identical to the current market price of the underlying security an atm option has a delta of 0 50 positive if it is a call negative for a put both call and put options can be simultaneously atm for example if xyz stock is trading at 75 then the xyz 75 call option is atm and so is the xyz 75 put option atm options have no intrinsic value but will still have extrinsic or time value prior to expiration and may be contrasted with either in the money itm or out of the money otm options understanding at the money atm at the money atm sometimes referred to as on the money is one of three terms used to describe the relationship between an option s strike price and the underlying security s price also called the option s moneyness options can be in the money itm out of the money otm or atm itm means the option has intrinsic value and otm means it doesn t simply put atm options are not in a position to profit if exercised but still have value there is still time before they expire so they may yet end up itm the intrinsic value for a call option is calculated by subtracting the strike price from the underlying security s current price the intrinsic value for a put option on the other hand is calculated by subtracting the underlying asset s current price from its strike price a call option is itm when the option s strike price is less than the underlying security s current price conversely a put option is itm when the option s strike price is greater than the underlying security s stock price meanwhile a call option is otm when its strike price is greater than the current underlying security s price and a put option is otm when its strike price is less than the underlying asset s current price special considerationsoptions that are atm are often used by traders to construct spreads and combinations straddles for instance will typically involve buying or selling both an atm call and put image by julie bang investopedia 2019atm options are the most sensitive to various risk factors known as an option s greeks atm options have a 0 50 delta but have the greatest amount of gamma meaning that as the underlying moves its delta will move away from 0 50 rapidly and most rapidly as time to expiration nears options trading activity tends to be high when options are atm atm options are the most sensitive to time decay as represented by an option s theta moreover their prices are most responsive to changes in volatility especially for farther maturities and is expressed by an option s vega finally atm options are also most sensitive to changes in interest rates as measured by the rho at the money atm and near the moneythe term near the money is sometimes used to describe an option that is within 50 cents of being atm for example assume an investor purchases a call option with a strike price of 50 50 and the underlying stock price is trading at 50 in this case the call option is said to be near the money in the above example the option would be near the money if the underlying stock price was trading between about 49 50 and 50 50 near the money and atm options are attractive when traders expect a big movement options that are even further otm may also see a jump when a swing is anticipated options pricing for at the money atm optionsan option s price is made up of intrinsic and extrinsic value extrinsic value is sometimes called time value but time is not the only factor to consider when trading options implied volatility also plays a significant role in options pricing similar to otm options atm options only have extrinsic value because they possess no intrinsic value for example assume an investor purchases an atm call option with a strike price of 25 for a price of 50 cents the extrinsic value is equivalent to 50 cents and is largely affected by the passage of time and changes in implied volatility assuming volatility and the price stay steady the closer the option gets to expiry the less extrinsic value it has if the price of the underlying moves above the strike price to 27 the option now has 2 of intrinsic value plus whatever extrinsic value remains | |
what is an attorney in fact | an attorney in fact also called an agent is a person who is authorized to act on behalf of another person known as the principal typically to perform business or other official transactions the principal usually designates someone as their attorney in fact by assigning them in a power of attorney although a court may choose to assign it if the person being represented is incapacitated the rules regulating power of attorney vary from state to state an attorney in fact is not necessarily a lawyer indeed attorneys in fact don t require any special qualifications at all they can be a family member or close friend 1 power of attorney may also be granted to more than one person in such a case it should be stated whether a simple majority or unanimity is required for an action to be taken 2attorney in fact and power of attorneyan attorney in fact is a person who has been legally appointed to act on behalf of another person in a legal or business matter the person appointing the attorney in fact is called the principal and the attorney in fact is sometimes referred to as the agent an attorney in fact is usually appointed through a legal document called a power of attorney poa this document gives the attorney in fact the authority to make decisions and take actions on behalf of the principal in a variety of legal and financial matters for example an attorney in fact might be given the power to sign documents manage a bank account or sell property on behalf of the principal the attorney in fact is not required to be an actual lawyer but they must act in the best interests of the principal and follow any instructions or guidelines set forth in the power of attorney 3 the attorney in fact is also required to keep the principal s affairs confidential and to keep records of all actions taken on behalf of the principal it s important to note that an attorney in fact is not the same as a lawyer or an attorney a lawyer is a professional who is licensed to practice law while an attorney in fact is simply a person who has been given the authority to act on behalf of another person 2attorneys are trained in the legal system and are responsible for representing clients in legal matters such as in court or in negotiations with other parties attorneys are also responsible for giving legal advice and guidance to their clients an attorney in fact on the other hand is any person who has been appointed to act on behalf of another person in a legal or business matter types of power of attorneythere are two basic types of power of attorney poa granted to attorneys in fact 45anyone assigning attorney in fact should take care to choose someone they trust the powers and duties of an attorney in factif the attorney in fact is designated by a general power of attorney they are allowed to conduct any actions that the principal would reasonably take this means an attorney in fact would be able to open and close bank accounts withdraw funds trade stocks pay bills and cash checks all on behalf of the principal with a limited power of attorney the attorney in fact is granted broad powers in one or more areas but not others for example the attorney in fact could be authorized to carry out transactions at the direction of the principal but not to make business or financial decisions it could also be narrower such as only granting the right to sign documents related to the pending sale of a specific piece of property attorney in fact vs attorney at lawas noted above an attorney in fact need not be a lawyer and another term for lawyer is attorney at law if you have passed a state bar exam and are thus legally qualified in that state to prosecute and defend actions in a court on behalf of a client who has retained you then you are an attorney at law 67their functions are also different an attorney in fact must make decisions for their principal while an attorney at law makes no decisions for their client instead they offer advice to their client and can represent them in the courtroom 8 | |
when a power of attorney is deemed durable it continues even after the principal becomes incapacitated an event that would normally terminate it | durable power of attorneya power of attorney generally terminates when a person dies becomes incapacitated or consciously chooses to revoke it via a written witnessed signed and notarized notice it can also end if it has a set date or its purpose has been accomplished however if it has been designated as a durable power of attorney the attorney in fact retains the power of attorney should a principal become incapacitated in such a situation the attorney in fact can continue to make decisions for the principal including in matters of finance and health care 910a durable power of attorney can be granted ahead of time on condition that it only takes effect due to a triggering event such as when the principal becomes incapacitated this is also called a springing power of attorney in this case it is a good idea to name one or more successors as the original designee may be unavailable or due to changed circumstances be unwilling to assume the responsibility of becoming an attorney in fact 1112 | |
why do you need an attorney in fact | there can be a variety of reasons to designate an attorney in fact it can simply be for convenience if for example you are buying or selling an asset and it is a burden for you to appear in person to close the deal it can also be for cases in which you cannot act for yourself whether due to physical or mental incapacity or something less serious such as travel illness or accident 12 |
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