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how do you profit from a value stock | you can profit from a value stock by buying the equity and holding it as opposed to attempting to swing trade or look for quick appreciation of capital value stocks may take longer to appreciate in value as the market comes to fully realize its value in addition you can make money from value stocks as they generally issue dividends allowing for cash proceeds during this holding period | |
are value stocks high risk | value stocks are generally considered less risky than growth stocks however consider that both value stocks and growth stocks are equities which are generally more risky than other types of investments | |
are value stocks better than growth stocks | depending on a number of variables such as an individual s investment goals risk tolerance and market conditions value stocks or growth stocks may be preferable value and growth stocks each have advantages and each investment strategy might perform differently depending on the market conditions the bottom linea value stock is a class of stock that the market perceives as being cheap in comparison to its intrinsic worth its price is lower compared to its fundamental metrics such earnings book value or cash flow and this is one of its defining characteristics value stocks are frequently linked to businesses with strong financials consistent operations and well established market positions | |
what is a value trap | a value trap is a stock or other investment that appears attractively priced because it has been trading at low valuation metrics such as price to earnings p e price to cash flow p cf or price to book value p b for an extended period a value trap persuades investors because the trade appears inexpensive relative to historical valuation multiples of the stock industry peers or the prevailing market multiple a value trap can drop further after an investor buys into the company low multiplesa company trading at low earnings cash flow or book value multiples for an extended period is usually experiencing instability even if the price of the stock appears attractive the company data and fundamentals do not meet investor criteria a company that does not reinvest profits with material improvements research development processes or contain costs could signal a value trap if there are many leadership changes this could be a warning for investors a company with previously rising profits and a healthy share price can fall into a situation where it cannot generate revenue and grow to avoid value traps investors should determine the cause of the current low stock price and whether the reasons are temporary or permanent identifying value trapsidentifying value traps can be tricky but a careful fundamental analysis of the stock can reveal what is a trap and what is a good investment opportunity here are some examples of possible value traps | |
which investors are most vulnerable to value traps | some value investors are particularly susceptible to value traps because they look for fundamentals and follow companies before investing it can become tempting for them to overlook failure indications when watching a company for a time optimistic it will recover because it has in the past | |
what is a dividend trap | a dividend trap is where the stock s dividend and price decrease over time due to high payout ratios high levels of debt or the difference between profits and cash these situations commonly produce an unsupported but attractive yield | |
what is a valued marine policy | a valued marine policy is a type of marine insurance coverage that places a specific value on the insured property such as the hull or cargo of a shipping vessel prior to a claim being made in the event of a loss a valued marine policy will pay a specified pre determined amount provided of course that there are no traces of fraud a valued marine policy differs from an unvalued or open marine policy under that type of coverage the value of the property would need to be proven subsequent to a loss through the production of invoices estimates and other evidence | |
how a valued marine policy works | insurance provides individuals or an entity with financial protection against a specified type of loss in exchange for payment of a fee known as a premium it is possible to insure pretty much anything for a price including high stake items such as ships and cargo all marine insurance policies are either valued or unvalued in the case of the former the monetary value is pre determined and stated in the policy document therefore making clear any questions about the value of the reimbursements in case of a total or partial loss to the ships cargo and terminals covered under the policy these types of plans serve to avoid disputes as to the value of the insured property when a marine policy contains the words valued at or so valued there is generally no reassessment or revaluation necessary if an insured event or loss were to occur a marine insurance policy should fall under the valued category if it contains somewhere in the contract the words valued at or so valued a valued marine policy pays a fixed amount regardless of the extent of the damages for example a policy may pay 1 000 per box of lost cargo regardless of whether the value of the cargo is actually 500 or 2 000 per box special considerationsit is important to note that if the insured item depreciates in value it will not affect the amount which can be claimed in the event of a total loss the same is also true if the value of the item appreciates in which case the insured would be unable to receive any additional damages based on the increased value of the item the distinction between valued and unvalued policies was first stated in the united kingdom s marine insurance act of 1906 1 which has become the basis for maritime insurance policies and laws in most countries including the united states the marine insurance act of 1906 states that for an unvalued policy the measure of indemnity is the insurable value of the subject matter insured so shipowners with valued policies may fare better if they make a claim during periods of falling market rates 2 in such scenarios those with unvalued policies may find that any recovery will be only a fraction of what the ship was worth at the time when they took out the policy this makes it extremely important for those insuring ships to obtain policies with the proper wording especially since the distinction between valued and unvalued marine policies has become the subject of legal disputes in many countries policies will also include language to include elements of the york antwerp rules these rules establish costs and liability for the maritime industry | |
what is valued policy law | valued policy law vpl is a legal statute that requires insurance companies to pay the full value of a policy to the insured in the event of a total loss valued policy law does not consider the actual cash value of the insured property at the time of the loss instead the law mandates total payment 1a valued policy differs from an unvalued or open insurance policy in which the value of the property would need to be proven subsequent to a loss through the production of invoices estimates claims adjusters or other evidence understanding valued policy lawa total loss is a loss that occurs when an insured property is destroyed or damaged to such an extent that it can be neither recovered nor repaired for further use 2 often a total loss triggers the maximum settlement possible according to the terms of the insurance policy insurance policies generally use one of two methods to determine the value of a loss actual cash value or replacement cost 3in general valued policy laws require that the amount stated in policy declarations shall be dollar amount paid to the insured at the time of loss if the value of an insured item at the time of loss is less than the amount of insurance the insurer has no recourse to contest payment in full moreover in most valued policy states any policy provision inconsistent with the valued policy law is considered void not all states within the united states have these laws states that do have valued policy laws include arkansas california florida georgia kansas louisiana minnesota mississippi missouri montana nebraska new hampshire north dakota ohio south carolina south dakota tennessee texas west virginia and wisconsin 4wisconsin was the first state to pass a valued policy law in 1874 5valued policy law controversyhurricane katrina forced the insurance industry in louisiana to examine the valued policy law few policyholders were paid their entire coverage amount because of interpretations of the valued policy law 6 some insurers claim that the law does not apply because certain losses were a result of a non covered peril flood that certain losses were a result of mixed causation a combination of a covered peril wind and a non covered peril flood and that the total loss was offset by other sources including the national federal flood insurance program and fema grants | |
what is the vancouver stock exchange van | the vancouver stock exchange van vse is a now defunct stock exchange formerly located in vancouver british columbia canada it was incorporated in 1907 as the third largest marketplace in canada behind the toronto stock exchange tsx and montreal stock exchange stocks listed on this exchange were denoted by a v following the ticker symbol understanding the vancouver stock exchange van the vancouver exchange originally featured primarily small capitalization mining oil and gas exploration stocks by the early 1990s however the vancouver exchange had grown into a specialty market for venture capital securities today the vancouver stock exchange falls under the tsx venture exchange umbrella after a merger with the canadian venture exchange in 1999 1the vancouver stock exchange was recognized as the home for venture capital solutions but many saw through the facade and quickly labeled it the scam capital of the world at one point the van listed about 2 300 stocks many of which were considered total failures or frauds the exchange provides a textbook example of how errors in floating point calculations can lead to enormous discrepancies in the correctness of the index reading ultimately however the van is an example of one of the world s least successful stock exchanges as it was mostly known for low volumes and speculative listings still the vancouver stock exchange managed to reemerge throughout the market turmoil of the dotcom bubble and in 1999 it merged with the alberta stock exchange and bourse de montreal to become part of the canadian venture exchange now known as the tsx venture exchange 1the trading floor of the vancouver exchange remained the center of the new venture division but that only lasted for two years in 2001 tmx group the parent company of the toronto stock exchange purchased the newly formed marketplace and quickly renamed it today the tsx venture exchange is headquartered in calgary alberta with offices in other major cities throughout canada all trading is executed electronically so a trading floor no longer exists 1the tsx venture exchange at a glancetoday the toronto venture exchange is considered a leader in global benchmarks and venture capital listings despite its previous reputation the strength of the toronto stock exchange and venture exchange now stretches to about 3 5 trillion in market capitalization the venture division alone offers solutions to 1 713 companies with a total market value of about 70 billion 2trading on the exchange is comparable with most other major exchanges there are slightly different order types rules regulations and services that keep the exchange operating smoothly some of those orders include traditional limit and market orders to more unfamiliar dark order types companies listed on the exchange are subject to various fees like initial application registration and monthly costs | |
what is vandalism and malicious mischief insurance | vandalism and malicious mischief insurance is insurance coverage that protects against losses sustained as a result of vandals this type of insurance is included in most basic commercial and homeowner policies it is an important insurance component for properties that are not occupied during well known periods of the day such as churches and schools these structures can become targets when they are unoccupied because vandals know there is a reduced risk of being caught | |
how vandalism and malicious mischief insurance works | due to the risk and frequency of loss this coverage typically carries a higher deductible for properties that are known to be unoccupied for certain hours of the day including churches and schools vandalism and mischief are described as the intentional injury or destruction of property vandalism and malicious mischief can be written as an endorsement to a standard policy such as the standard fire policy in the event that the policy requires a separate endorsement for this type of coverage landlords can also benefit from this type of policy especially if some of their properties are in high crime areas it may be worth researching the best rental property insurance companies to find the best policies and rates | |
what is covered | vandalism is damage done to someone else s property simply for the sake of causing damage it is one of the most common property crimes malicious mischief is similar though the damage may not have been intended some situations like egging a house straddle the line depending on the outcome the peril of vandalism or malicious mischief covers damage to parts of the premises for which you re responsible as well as to personal property if for example someone slashes the tires of your bike which is stored on the property that s vandalism if someone thinks your music is too loud and sneaks into your home to destroy your stereo that too is vandalism both would likely be covered losses if they met your deductible | |
what type of vandalism most commonly results in an insurance claim damage inflicted by angry ex husbands wives partners often fueled by alcohol exes have been known to take revenge on a former spouse by causing property damage and destruction if your ex comes into your home and trashes it that s vandalism and it s usually covered | if you re not living in a dwelling it s important to take additional precautions against vandalism | |
what s not covered | vandalism or malicious mischief losses are not covered if a dwelling has been vacant for over 60 consecutive days 1 a structure is vacant if no one is living there and it s substantially empty of the personal property necessary for normal use vandalism committed by any of the insured is also not covered what does this mean imagine that you live with a partner who is a named insured on your policy things go south and they move out but you neglect to have the policy rewritten that means they re still insured under the policy if they return and trash the place reimbursement would likely be denied because it s an intentional act committed by one insured against another | |
what does vandalism mean in insurance | for insurance purposes vandalism means intentional damage and destruction of property without theft for example a person deliberately breaking a home s windows for the purpose of destroying property could be considered vandalism but if they broke in for the purpose of burglary it would not be considered vandalism 1 | |
is tenant damage considered vandalism | intentional damage by tenants will not be covered as vandalism under a typical homeowner s policy the best way to prevent these damages is to carefully screen your tenants 1 | |
does car insurance cover vandalism | if you have comprehensive insurance for your car it will cover deliberate acts of vandalism such as slashed tires broken windows or taillights or damaged paint the exact level of coverage will depend on your provider and your deductible 2the bottom linevandalism and malicious mischief insurance is a type of insurance coverage that protects your property against deliberate damage it does not provide protection against theft or accidental damage depending on where you live this type of insurance can offer an important level of protection along with the types of coverage that protect property against fire weather and other causes of damage | |
what are vanguard exchange traded funds | vanguard exchange traded funds etfs are a class of funds offered by vanguard exchange traded funds combine the diversification of mutual funds with a lower investment minimum required vanguard also offers real time pricing etfs are traded the same way that individual stocks are traded understanding vanguard exchange traded fundsthere are currently more than 50 vanguard exchange traded funds which are traded like any other shares on the u s stock exchanges such as the new york stock exchange nyse or nasdaq their underlying indexes cover both individual sectors such as materials and energy and domestic and international indexes the vanguard etfs were previously known as vanguard index participation receipts vipers in their current form vanguard etfs aim to track their underlying indexes as closely as possible and offer the flexibility of intraday trading by developing this class of low cost funds vanguard sought to bring its longstanding leadership in the passive management market to the etf space etfs can have thousands of stocks or bonds in a single fund so they provide more flexibility for portfolios they include all the benefits of an index fund but provide more control for the individual investor types of vanguard exchange traded fundsvanguard offers a range of etf products that are focused on u s stocks these etfs can further be broken down into the size of the companies they target large cap mid cap or small cap these funds can also be broken down into the performance of the companies that they invest in growth etfs invest in stocks with above average growth rates value etfs invest in companies with below average valuations and finally blend etfs invest in a combination of growth and value etfs for example the vanguard dividend appreciation etf invests in large cap companies this fund is comprised of a blend of value and growth stocks it has an expense ratio of 0 06 and a dividend yield of 1 71 as of sept 30 2021 1vanguard has three types of international etfs global international and emerging markets global stock etfs invest in stocks from all around the world including the u s international stock etfs invest in stocks from all around the world with the exception of the u s emerging market etfs invest only in stocks from developing countries for example the vanguard international high dividend yield etf invests in the international market its expense ratio is 0 28 and its dividend yield is 4 08 as of sept 30 2021 2vanguard s sector etfs are stock based etfs that invest in indexes tracking specific sectors of the economy some of these sectors include telecommunications energy materials information technology it and healthcare the advantage of choosing a sector based etf is that investors can target a certain part of the market without the risk and research involved in choosing individual companies to invest in for example if you think the banking business as a whole will perform well in the coming months you might invest in the vanguard financials etf it has an expense ratio of 0 10 and a dividend yield of 1 69 as of sept 30 2021 3for investors that want to allocate their investment assets to an age appropriate combination of stocks and bonds vanguard offers 15 different etfs focused on u s bonds they can be split into four main categories government bonds investment grade corporate bonds a blend of these two government and corporate and tax exempt bonds government bonds tend to pay relatively low dividend yields when compared with corporate bonds however they also have a significantly lower risk of default while corporate bonds pay relatively high interest rates they also have a higher risk of default than government bonds finally vanguard s tax exempt etf bond category is ideal for investors who hold their investments in taxable brokerage accounts and are in relatively high tax brackets exchange traded funds etfs vs stocks vs mutual fundsowning an etf is similar to owning a mutual fund individual stocks or bonds offer the same built in diversification and low costs the funds are also tradable like individual stocks compared with stocks and bonds however etfs offer less risk and less ongoing maintenance vanguard s mix of preselected stocks or bonds means that if one stock or bond in the fund performs poorly others are likely performing well also investors can leave security selection to professional fund managers both mutual funds and etfs are less risky than investing in individual stocks and bonds and they offer a wide variety of options to meet specific investment goals however compared with standard mutual funds etfs have some unique characteristics that might make them appealing to some investors for example vanguard s etfs are managed by portfolio professionals and are commission free in addition etfs require smaller investment minimums to start with they also offer real time intraday pricing assessing minute by minute changes whenever they re bought and sold whereas mutual funds are only priced at the close of a trading day | |
what is a vanilla option | a vanilla option is a financial instrument that gives the holder the right but not the obligation to buy or sell an underlying asset at a predetermined price within a given timeframe a vanilla option is a call option or put option that has no special or unusual features such options are standardized if traded on an exchange such as the chicago board options exchange basics of a vanilla optionvanilla options are used by individuals companies and institutional investors to hedge their exposure in a particular asset or to speculate on the price movement of a financial instrument if a vanilla option is not the right fit exotic options such as barrier options asian options and digital options are more customizable exotic options have more complex features and are generally traded over the counter they can be combined into complex structures to reduce the net cost or increase leverage calls and putsthere are two types of vanilla options calls and puts the owner of a call has the right but not the obligation to buy the underlying instrument at the strike price the owner of a put has the right but not the obligation to sell the instrument at the strike price the seller of the option is referred to as its writer shorting or writing an option creates an obligation to buy or sell the instrument if the option is exercised by its owner calls and puts both have an expiry date this puts a time limit on how long the underlying asset has to move for example stock xyz may be trading at 30 a call option that expires in one month has a strike price or 31 the cost of this option called the premium is 0 35 each option contract controls 100 shares so buying one option costs 0 35 x 100 shares or 35 if the price of xyz stock moves above 31 that option is in the money but the underlying asset needs to move above 31 35 in order for the buyer to start seeing a profit on the trade the most the option buyer can lose is the amount they paid for the option the profit potential is unlimited and depends on how far the underlying moves above the strike price the option writer collects 35 0 35 x 100 shares for writing the option if the price of xyz stock stays below 31 the option is said to be out of the money and the writer keeps the premium however if the price rises above 31 the option writer has an obligation to sell that stock to the option buyer at 31 for example if the stock rises to 33 this would represent a loss of 165 or 35 31 x 100 200 then subtract the 35 premium already collected for a loss of 165 vanilla option featuresevery option has a strike price if the strike price is better than the price in the underlying market at maturity the option is deemed in the money and can be exercised by its owner a european style option requires the option be in the money on the expiration date in order for it to be exercised an american style option can be exercised if it is in the money on or before the expiration date the premium is the price paid to own the option the premium is based on how close the strike is to the price of the underlying in the money out of the money or at the money the volatility of the underlying asset and the time until expiration higher volatility and a longer maturity increase the premium an option gains intrinsic value or moves into the money as the underlying surpasses the strike price above the strike for a call and below the strike for a put option traders don t need to wait until expiry to close out an options trade nor do they need to exercise the option they can take an offsetting position at any time to close the options trade and realize their profit or loss on the option exotic and binary optionstwo other types of options can be combined with vanilla options to create tailored outcomes the first type are exotic options which have conditions or calculations attached to their execution for example barrier options include a level that if reached causes the option to begin to exist or cease to exist digital options pay the owner if the underlying is above or below a specific price level an asian option s payoff depends on the average traded price of the underlying instrument during the life of the option the second type of options which can be combined with vanilla options are binary options the outcome of such options is typically restricted to just two possible results meaning that the payouts are also restricted they are typically used to speculate on price movements of an asset a possible combination between binary and vanilla options would be the purchase of a call put vanilla option and a binary option in the opposite direction of the former | |
what is a vanilla strategy | a vanilla strategy refers broadly to one that is simple and straightforward with little complexity vanilla strategies can be a common or popular approach to investing by ordinary investors or certain decisions made in business although the approach is relatively basic many investors succeed by sticking with a simple proven strategy such as passive investing through broad exchange traded funds similarly businesses can succeed through plain vanilla strategies such as focusing business lines in areas where there is a clear competitive advantage in business however a vanilla strategy must allow for some innovation as a competitive advantage can weaken over time for many products and services understanding a vanilla strategyvanilla strategies tend to be simple practical and often conservative generally a vanilla strategy makes sense when explained in a few short sentences for example to build an income portfolio buy and hold dividend paying stocks with a history of paying dividends for 10 years or more compare this relatively simple explanation to something like an iron condor options strategy and you can see why it is considered to be a vanilla strategy vanilla strategies are not diminished by their simplicity they are simply not as flashy or aggressive as other approaches more importantly it can actually be difficult to implement and stick to a vanilla strategy long term when speaking about investment strategies a vanilla strategy can often be outperformed by any number of short term strategies over the long term however a vanilla strategy will generally see less under performance than more aggressive strategies do in challenging markets similarly a simple conservative approach in business may not catch the attention of the financial media compared to a highly leveraged tech start up but investors will eventually appreciate the strong balance sheet that these companies employing vanilla strategies usually have elements of vanilla strategies in business include things like focusing resources where the competitive advantage is strongest using only moderate debt financing to fund growth and avoiding overdependency on a single client or product example a vanilla strategy for retirementthere are many strategies in the world of finance that fit the definition of a vanilla strategy but one of the most popular is the basic advice for retirement planning a vanilla strategy for retirement savings includes saving at least 10 of one s annual income investing in a diversified portfolio of stocks and bonds through tax advantaged savings accounts like a 401 k and roth ira and buying a home with a plan to pay off the mortgage before reaching retirement there is nothing interesting or unique about this strategy it is vanilla because it is ordinary and many people find success with it a higher risk portfolio approach to retirement by contrast would include a focus on momentum concentration penny stocks emerging countries or technologies currencies futures and or options it may work but there are not many people who have had success with such an aggressive approach to their retirement portfolio part of the reason for that is the fact that a higher risk portfolio requires skill and constant attention the vanilla strategy is much less work | |
what is a vanishing premium | a vanishing premium is a periodic fee paid for an insurance policy that continues until the cash value of the policy grows enough to cover the fee at that point the premium vanishes as payments are no longer necessary but are instead covered by the policy s internal value and dividend stream | |
how a vanishing premium works | a vanishing premium provides a holder of a life insurance policy with an option to pay premiums from the cash accrued in the policy rather than via payments made by the insured the premium only vanishes in the sense that the policyholder no longer has to pay it out of pocket after a period of time the funds for the premiums simply come out of the dividends thrown off by the cash accrued in the investment this allows the policyholder to put cash otherwise needed for premiums to some other more lucrative use it also guarantees the insurance coverage will not lapse as the premium payments get made automatically consumers interested in policies with vanishing premiums should pay close attention to the math used to justify the date the premiums will vanish in order to eliminate premiums the underlying investments in the policy must maintain interest or dividend rates sufficient to make payments overly optimistic assumptions and vanishing premiumshistorically vanishing premiums have been implicated in insurance fraud schemes in which insurers used misleading sales illustrations to fool potential clients into believing their premiums would vanish much sooner than they actually did unrealistic assumptions about interest rates and investment returns can make a big difference when an investor attempts to accrue enough principal to throw off dividends at a defined threshold which essentially describes the case of a vanishing premium vanishing premiums have been controversial in the past when insurance companies have been overly optimistic about potential future investment returns and the timing for when premiums will vanish vanishing premium examplefor example consider a whole life insurance policy with a 5 000 premium in order for the premium to vanish the accrued cash value of the policy must throw off an annual dividend of 5 000 at an interest rate of 5 percent the cash value of the policy would need to reach 100 000 to get rid of the premium special considerationswhole life policies typically provide a minimum annual growth number alongside an expected growth number that depends upon the performance of the insurance company s investment portfolio the minimum growth rate could require significantly more time to reach the threshold needed to make premiums vanish and that would only work if the interest rate remained high enough to keep the threshold amount of principal in place given that premiums do not vanish so much as they decrease dividend payouts savvy investors will calculate the total cost of a whole life investment with vanishing premiums and set it against cheaper options such as term life calculating potential upside from investing the difference between those two premium prices in another investment vehicle | |
what is vanishing premium policy | a vanishing premium policy is a form of permanent life insurance in which the holder can use dividends from the policy to pay its premiums over time the cash value of the policy increases to the point where dividends earned by the policy equal the premium payment at this point the premium is said to disappear or vanish understanding vanishing premium policyvanishing premium policies may be appropriate for consumers worried about longer term fluctuations in income such as the self employed people who wish to start a business or individuals who wish to retire early some come with a high annual premium in the early years at which time the life insurance policy offers modest benefits the premium may subsequently drop and benefits then increase other policies may have a fairly steady premium and a set level of benefits until the vanishing point in each case cash value generally increases over time a vanishing premium policy may be suitable for consumers who plan to use the policy benefits as supplemental income upon retirement in the interim the policy offers policyholders tax deferred advantages while cash value accumulates in some instances a person uses a vanishing premium policy in conjunction with estate planning one criticism of vanishing premium policies is that some insurance representatives who had sold these products in the past faced accusations that they misled consumers regarding the number of years for which they would have to pay premiums before the policy could support itself this situation was a result of circumstances in which vanishing premium policies came into existence see below consumers may also want to be careful not to rely mainly on the maximum benefit relative to minimum premiums as the amount earned could fall below this scenario lastly it is important for prospective buyers to understand that the amount credited to cash value is lower when interest rates are lower than the expectation described in the policy if this happens policyholders may end up paying premiums for more years than they first thought this also is why buying a vanishing premium policy during a period of historically high interest rates might be a bad idea a brief history of the vanishing premium policyvanishing premium policies were popular in late 1970s and early 1980s when nominal interest rates were high in the united states many policies were sold as a form of whole life insurance however when dividend rates eventually followed interest rates lower policyholders were forced to continue paying premiums for periods longer than they had initially expected in some cases the premiums never went away the vanishing premiums never vanished policyholders sued claiming they were misled suits were filed against major insurers including new york life prudential metropolitan transamerica john hancock great west jackson national and crown life insurance crown life settled a class action suit with policyholders for 27 million in a separate case brought by a policyholder in texas crown life was initially hit with a 50 million ruling but later settled out of court for an undisclosed sum great west settled its class action suit for 30 million while new york life insurance paid out 65 million 1 negative publicity concerning vanishing premium policies led to regulatory investigations and money magazine to list the policies as one of the eight biggest rip offs in america on its august 1995 cover 1 however legal scholars suggest the insurance companies did not breach their contracts with policyholders the written contracts expressly stated that future interest rate credits were not guaranteed and depended on the discretion of the insurers in light of future economic events additionally state laws also provided customers with a free look period during which they could back out of an insurance contract 1 examples of vanishing premium insurance policyinterest rates on one year treasury bills rose as high as 16 at the start of the 1980s but fell to 3 in the early 1990s 2 insurance companies enjoyed peak sales of vanishing premium insurance policies during the 1980s but when interest rates dropped in the 1990s they faced lawsuits from customers in one case mark markarian sued connecticut mutual life insurance when markarian bought a life insurance policy in 1987 his broker said he would only need to pay premiums of 1 255 for the next seven years and 244 in the eighth year but markarian received a notice from connecticut mutual in 1995 claiming he still owed premium payments 3 other cases raised similar complaints for example an insurance broker filed a cross claim against crown life insurance company after a client had filed suit against him based on crown s projections the broker had told his client their premiums would not exceed 91 520 when in fact the clients later learned the premiums would never vanish and could total more than 800 000 4 | |
what is vantagescore | vantagescore is a consumer credit scoring model introduced by the major three credit bureaus equifax experian and transunion in 2006 as an alternative to the fico score created by the fair isaac corporation in 1989 both it and fico scores are in wide use today | |
how vantagescore works | the latest version of vantagescore is vantagescore 4 it is calculated based on six factors each assigned its own weighting 1the first three factors are by far the most important accounting for 81 of a person s vantagescore payment history reflects how consistently the person has paid their credit bills on time age and mix of credit refers to how long they have had their credit accounts and whether they have used different kinds of credit such as a credit card and an auto loan it s a plus to have older accounts and several account types credit utilization looks at how much of a person s available credit they re currently using the lower the percentage the better vantagescore obtains its information from all three credit bureaus private companies that create and sell credit reports about individuals to lenders credit reports consist of information on the person s current and recent credit accounts such as mortgages auto loans and credit cards typically going back as far as seven years they do not contain information on the person s income or assets or personal details such as their marital status race or ethnicity 2credit bureaus obtain their information from individuals creditors and in some cases court records because not every creditor supplies information to all three bureaus and some don t supply it to any of them a person s credit report can differ from one bureau to another vantagescore cites its access to reports from all three bureaus as one of its advantages billing itself as the first and only tri bureau credit scoring model 3vantagescore also highlights its use of machine learning and trended data trended credit data it explains reflects changes in credit behaviors over time in contrast to the static individual credit history records that have long been available in consumer credit files and used in generic scoring models these techniques it says allow it to assign credit scores to more people especially those whose credit histories are too short for other credit scoring models often referred to as people with thin files 4 | |
what is a good vantagescore | like fico scores vantagescores currently run from 300 to 850 earlier vantagescores used a 501 to 990 scale 5 the higher a person s score the more creditworthy they are judged to be according to the credit bureau experian vantagescores break down this way 5differences between fico scores and vantagescoresfico scores remain the most widely used credit score employed by about 90 of top lenders fico says 6 however vantagescores are becoming more widely adopted according to the consulting firm oliver wyman between 2019 and 2022 vantagescore usage grew by 18 7unlike vantagescore fico bases its scores on five rather than six factors and assigns them somewhat different weightings these are the weights that fico says it uses 8there are several other points of difference between fico and vantagescore as mentioned vantagescores combine information from all three credit bureaus while the fico scores issued by a particular credit bureau are based on the information in that bureau s files the three bureaus also issue multiple versions of fico scores based on different fico models including some tailored for specific types of lenders such as mortgage companies or credit card issuers equifax and transunion each offer 13 different fico scores while experian has 14 9fico scores require a credit history of at least six months or at least one update to the person s files in the past six months while vantagescores can be calculated for people with briefer credit histories or dormant files vantagescore says that allows it to score approximately 37 million more consumers who typically are not scored by conventional models without relaxing standards 1 all told vantagescore adds its model is capable of scoring about 94 of the adult population in the u s 10 | |
how can you obtain your credit score | you can obtain your credit score free of charge from many banks and credit card companies there are also websites that make free credit scores available in many instances the free credit scores that these sources provide will be vantagescores | |
how can you obtain your credit reports | by law you are entitled to a free copy of your credit report from each of the three major credit bureaus at least once every 12 months the official website for all three bureaus is annualcreditreport com note that your credit score is not part of your credit report so you have to obtain it separately | |
how can you improve your credit score | whether it s a fico score or a vantagescore the best ways to improve your credit score and keep it in good shape are to pay your credit bills on time every month and to keep your credit utilization ratio as low as possible as a general rule that s under 30 11the bottom linevantagescore says its credit scoring model allows it to assign scores to some 94 of adults so chances are that you have one or will soon vantagescores differ from fico scores in a number of ways but the credit habits that will earn you a good score or a bad one are similar and worth paying attention to if you hope to obtain a loan or other form of credit in the future | |
what is variability | variability almost by definition is the extent to which data points in a statistical distribution or data set diverge vary from the average value as well as the extent to which these data points differ from each other in financial terms this is most often applied to the variability of investment returns understanding the variability of investment returns is just as important to professional investors as understanding the value of the returns themselves investors equate a high variability of returns to a higher degree of risk when investing understanding variabilityprofessional investors perceive the risk of an asset class to be directly proportional to the variability of its returns as a result investors demand a greater return from assets with higher variability of returns such as stocks or commodities than what they might expect from assets with lower variability of returns such as treasury bills this difference in expectation is also known as the risk premium the risk premium refers to the amount required to motivate investors to place their money in higher risk assets if an asset displays a greater variability of returns but does not show a greater rate of return investors will not be as likely to invest money in that asset variability in statistics refers to the difference being exhibited by data points within a data set as related to each other or as related to the mean this can be expressed through the range variance or standard deviation of a data set the field of finance uses these concepts as they are specifically applied to price data and the returns that changes in price imply the range refers to the difference between the largest and smallest value assigned to the variable being examined in statistical analysis the range is represented by a single number in financial data this range is most commonly referring to the highest and lowest price value for a given day or another time period the standard deviation is representative of the spread existing between price points within that time period and the variance is the square of the standard deviation based on the list of data points in that same time period special considerations variability in investingone measure of reward to variability is the sharpe ratio which measures the excess return or risk premium per unit of risk for an asset in essence the sharpe ratio provides a metric to compare the amount of compensation an investor receives with regard to the overall risk being assumed by holding said investment the excess return is based on the amount of return experienced beyond investments that are considered free of risk all else being equal the asset with the higher sharpe ratio delivers more return for the same amount of risk | |
what is variable annuitization | variable annuitization is an annuity option in which the amount of the income payments received by the policyholder will vary according to the investment performance of the annuity variable annuitization is one option that can be selected by the policyholder during the annuitization phase of a contract which is the phase in which the policyholder exchanges the accumulated value of the annuity for a stream of regular income payments guaranteed for life or guaranteed for a specified number of years understanding variable annuitizationthere are two phases to the life of an annuity during the accumulation phase an investor adds into the annuity with all earnings that accrue during this phase being exempt from current income tax once a policyholder is ready to start receiving income from the annuity they can choose to make withdrawals on an ad hoc or systematic basis or annuitize the contract and elect either fixed or variable payments during the annuitization phase for annuities purchased with after tax dollars a fixed amount of each payment is treated as a non taxable return of the original basis and the balance is taxed as income alternatively all annuity income received through withdrawals is generally taxed as income until all the earnings have been withdrawn after all earnings have been withdrawn withdrawals are non taxable returns of the original already taxed investment in the annuity for annuities purchased with pre tax dollars all income whether via annuitization or from withdrawals is fully taxable as ordinary income variable annuity considerationschoosing how to receive payments from an annuity can be difficult for investors and often comes down to the amount of risk the policyholder is willing to take compared with the amount of returns the policyholder wants choosing a fixed annuitization means that the policyholder will receive the same amount of money in each periodic annuity income payment over the life of the annuity regardless of how the portfolio of the annuity company performs but variable annuity payments differ in that the value received by the policyholder is designed to vary over time this is because the payments are based on the performance of an underlying portfolio variable annuities are highly complex financial products according to the financial industry regulatory authority finra which regulates advisors they have multiple insurance features that might be appealing to some individuals but it s important to understand that those features come with a myriad of fees and charges because variable annuities are complicated and costly they require especially careful consideration 1considerations include how long your money will be tied up whether there are surrender charges or other penalties if money is withdrawn early what financial benefit or commission a firm receives for selling you the annuity what are the risks that the investment could lose value and what fees and expenses you can expect purchasing an annuity can provide a level of income security but can also lock in funds into a specific product that may not perform as well as expected professionals who sell annuities typically receive a commission based on the type and value of the annuity sold variable annuities values are tied to the performance of mutual fund like instruments called sub accounts the annuity owner selects | |
what is a variable annuity | variable annuities are a type of investment income stream that rises or falls in value periodically based on the market performance of the investments that fund the income an investor who chooses to create an annuity may choose either a variable annuity or a fixed annuity an annuity is a financial product offered by an insurance company and available through financial institutions the investor pays a lump sum or makes a series of payments into an annuity to fund a guaranteed series of payments that begin at a future date annuities are most commonly used to create a regular stream of retirement income the fixed annuity is an alternative to the variable annuity a fixed annuity establishes the amount of the payment in advance understanding variable annuitiesa variable annuity is created by a contract agreement made by an investor and an insurance company the investor makes a lump sum payment or a series of payments over time to fund the annuity which will begin paying out at a future date there are many choices available to the investor the payments can continue for the life of the investor or for the life of the investor or the investor s surviving spouse it also can be paid out in a set number of payments one of the other major decisions is whether to arrange for a variable annuity or a fixed annuity which sets the amount of the payment in advance in a variable annuity the amount of each payment varies based on the performance of an underlying portfolio of sub accounts sub accounts are structured like mutual funds although they don t have ticker symbols that investors can easily use to track their accounts two factors contribute to the payment amounts in a variable annuity the principal which is the amount of money the investor pays in advance and the returns that the annuity s underlying investments deliver on that principal over time 1the most popular type of variable annuity is a deferred annuity often used for retirement planning purposes it is meant to provide a regular monthly quarterly or annual income stream starting at some point in the future there are immediate annuities which begin paying income as soon as the account is fully funded you can buy an annuity with either a lump sum or a series of payments and the account s value will grow over time in the case of deferred annuities this is often referred to as the accumulation phase the second phase is triggered when the annuity owner asks the insurer to start the flow of income this is referred to as the payout phase some annuities will not allow you to withdraw additional funds from the account once the payout phase has begun 2variable annuities should be considered long term investments due to the limitations on withdrawals typically one withdrawal each year is permitted during the accumulation phase however if you take a withdrawal during the contract s surrender period which can be as long as 10 years you ll generally have to pay a surrender fee 3as with retirement savings plans like individual retirement accounts iras the investment growth in the account is not taxed during the accumulation phase as with iras withdrawals before the age of 59 will result in a 10 tax penalty as well as taxes due 4variable annuities vs fixed annuitiesvariable annuities were introduced in the 1950s as an alternative to fixed annuities which offer a guaranteed but often low payout during the annuitization phase 5 the exception is the fixed income annuity which has a moderate to high payout that rises as the annuitant ages variable annuities like l share annuities give investors the opportunity to increase their annuity income if their investments thrive they can invest in their choice of a menu of mutual funds offered by the insurer the upside is the possibility of higher returns during the accumulation phase and a larger income during the payout phase the downside is that the buyer is exposed to market risk which could mean losses with a fixed annuity the insurance company assumes the risk of delivering whatever return it has promised variable annuity advantages and disadvantagesin deciding whether to put money into a variable annuity vs some other type of investment it s worth weighing these pros and cons tax deferred growthincome stream tailored to your needsguaranteed death benefitfunds off limits to creditorsriskier than fixed annuitiessurrender fees and penalties for early withdrawalhigh feesbelow are some details for each side | |
what is an annuity | an annuity is an insurance product that guarantees a series of payments at a future date based on an amount deposited by the investor the issuing company invests the money until it is disbursed in a series of payments to the investor the payments may last for the life of the investor or a set number of years annuities usually have higher fees than most mutual funds | |
which earns more variable or fixed annuities | there is no clear answer to this variable annuities have greater potential for earnings growth but they can also lose money they also tend to be riddled with fees which cuts into profits fixed annuities typically pay out at a lower but stable rate compared to variable annuities carefully look at your options when choosing an annuity | |
are annuities fdic insured | no annuities are not insured by the federal deposit insurance corp fdic as they are not bank products however they are protected by state guaranty associations if the insurance company providing the product goes out of business 7the bottom linebefore buying a variable annuity investors should carefully read the prospectus to understand the expenses risks and formulas for calculating investment gains or losses annuities are complicated products so that can be easier said than done bear in mind that between the numerous fees such as investment management fees mortality fees and administrative fees and charges for any additional riders a variable annuity s expenses can quickly add up that can adversely affect your returns over the long term compared with other types of retirement investments | |
what is a variable benefit plan | a variable benefit plan is a type of retirement plan in which the payout changes depending on how well the plan s investments perform 401 k plans are one example of a variable benefit understanding a variable benefit planvariable benefit plans also called defined contribution plans allow the plan holder to manage his or her own account by contrast a defined benefit plan provides the plan holder with predetermined payments upon retirement that do not change and which are based on an eligibility formula rather than on investment returns variable benefit plans shift investment risk from the employer to the employee it is possible that the employee will end up with less money from a variable benefit plan if he makes poor investment choices however he also has the power to make superior investment choices and end up with better benefits therefore the ability of the employee to make smart investment decisions is critical in variable benefit plans history of variable benefit planspeople have been investing in financial markets in order to provide for their retirement for as long as the history of capitalism itself the american express company first offered its employees a pension plan in 1875 establishing the first private pension plan in the united states as americans life expectancy rose throughout the late nineteenth and early twentieth centuries the problem of how to provide for the retirement of members of the growing middle class became of increasing importance congress sought to encourage the growth of private pensions by making contributions to such accounts tax deductible in the 1920s by 1929 there were 397 private sector plans extant in the united states and canada the growth of pension plans exploded following world war two when unions began to strike in large numbers demanding the provision of pensions from the end of world war two to about 1980 defined benefit pensions or a pension in which a worker is guaranteed a predetermined set of benefits until death were a major form of retirement security for american workers but these sorts of pensions put great pressure on american companies which were facing increased competition from foreign rivals and from shareholders who were demanding maximum returns this led the private sector to rely more on variable benefit plans in which the contribution from the company is defined but the actual payout depends on how the pension investments perform since the early 1980s workers access to defined benefit plans has declined 1 according to the national compensation survey conducted by the bureau of labor statistics in 2020 only 15 of private sector workers participated in defined benefit plans 2 by comparison around 65 of private sector workers had access to a defined contribution plan | |
what is a variable cost | a variable cost is an expense that changes in proportion to how much a company produces or sells variable costs increase or decrease depending on a company s production or sales volume they rise as production increases and fall as production decreases examples of variable costs include a manufacturing company s costs of raw materials and packaging or a retail company s credit card transaction fees or shipping expenses which rise or fall with sales a variable cost can be contrasted with a fixed cost investopedia sydney saporitounderstanding variable coststhe total expenses incurred by any business consist of variable and fixed costs variable costs are dependent on production output or sales the variable cost of production is a constant amount per unit produced as the volume of production and output increases variable costs will also increase conversely when fewer products are produced the variable costs associated with production will consequently decrease examples of variable costs are sales commissions direct labor costs cost of raw materials used in production and utility costs variable costs are usually viewed as short term costs as they can be adjusted quickly for example if a company is having cash flow issues it may immediately decide to alter production to not incur these costs | |
what is variable cost plus pricing | variable cost plus pricing is a pricing method whereby the selling price is established by adding a markup to total variable costs the expectation is that the markup will contribute to meeting all or a part of the fixed costs and yield some level of profit variable cost plus pricing is particularly useful in competitive scenarios such as contract bidding but it is not suitable in situations where fixed costs are a major component of total costs | |
how variable cost plus pricing works | variable costs include direct labor direct materials and other expenses that change in proportion to production output a firm employing the variable cost plus pricing method would first calculate the variable costs per unit then add a mark up to cover fixed costs per unit and generate a targeted profit margin for example assume that total variable costs for manufacturing one unit of a product are 10 the firm estimates that fixed costs per unit are 4 to cover the fixed costs and leave a profit per unit of 1 the firm would price the unit at 15 this type of pricing method is purely inward looking it does not incorporate benchmarking with competitors prices or consider how the market views the price of an item | |
when to use variable cost plus pricing | this method of pricing can be suitable for a company when a high proportion of total costs are variable a company can be confident that its markup will cover fixed costs per unit if the ratio of variable costs to fixed costs is low meaning that there are considerable fixed costs that go up as more units are produced the pricing of a product may end up being inaccurate and unsustainable for the company to make a profit variable cost plus pricing may also be suitable for companies that have excess capacity in other words a company that would not incur additional fixed costs per unit by incrementally increasing production variable costs in this case would compose most of the total costs e g no additional factory space would need to be rented for extra production and adding a markup on the variable costs would provide a profit margin the major shortcoming of this pricing method is that it fails to take into account how the market views the product in terms of value or the prices of similar products sold by competitors advantages and disadvantages of variable cost plus pricingthe main advantage of variable cost plus pricing is its simplicity it allows sellers to easily set a price that covers their costs while allowing a reasonable margin for profit it also makes it easy to set contracts with suppliers who usually prefer to lock in a price that locks in set profits over a model that is less predictable it also makes it easier to justify price increases to consumers since a rise in prices can simply be attributed to rising production costs variable cost plus pricing is not suitable for a company that has significant fixed costs or fixed costs that increase if more units are produced any markup on the variable costs on top of the fixed costs per unit might result in an unsustainable price for the product on the other hand the variable cost plus pricing model does not factor in market conditions and may sometimes leave money on the table for example if a particular product line is in especially high demand among consumers the producers could earn greater profits by raising the prices on those products likewise the model does not account for competing products in some cases a company could increase its profit margins if its products are superior to the competitors conversely a company can sometimes increase revenues by lowering prices if doing so undercuts the prices of their competitors comparatively simple way to cover the cost of producing goodsallows suppliers to lock in prices that cover costsfacilitates contract negotiation with a comparatively simple means of calculating prices | |
does not account for competitors goods which can adversely affect sales | can result in inefficient pricing if the company s variable costs are comparatively lowvariable cost plus pricing vs cost plus pricingvariable cost plus pricing is distinct from cost plus pricing a more traditional model that sets costs based on the total cost of producing that good using cost plus pricing prices are set by taking the total cost of production and adding a markup variable cost plus pricing adds a markup only to the variable costs with the assumption that the markup will be sufficient to cover the fixed costs cost plus pricing has been criticized by some management specialists because it does not adequately incentivize cost containment and improvements in efficiency when prices are based on total costs the company earns more revenue by bloating their fixed costs than they do by reducing those inefficiencies 1 | |
what is rigid cost plus pricing | rigid cost plus pricing or simply cost plus pricing is a simple pricing model based solely on the total cost of producing and selling a product this model computes the per unit costs of delivering a product including production transportation sales and other services and adds a fixed markup to arrive at the final price | |
how do you calculate variable cost plus pricing | the variable cost plus pricing method is calculated by adding a markup to the per unit costs of producing each additional good for example if the materials labor and transportation for each bottle of pepsi add up to 1 00 the total price might be marked as 1 20 although this model does not include fixed costs such as facilities and utilities it is assumed that the markup is sufficiently high to cover these costs | |
what are examples of variable costs | variable costs are the production costs that increase when more units of a good are produced raw materials and labor are examples of variable costs because producing more units of a good requires more raw materials and labor fixed costs are those costs that do not change significantly when production is ramped up for example the costs of the facilities and machinery used to produce the good | |
what is variable cost transfer pricing | transfer pricing is the price for sales between entities that are related to one another such as different departments of the same company or between a parent company and its subsidiary although these bodies may be related they transact at arm s length so transfer prices rarely stray very far from market prices as with market pricing transfer prices can be determined through a variety of methods including cost based or profit seeking pricing models variable cost transfer pricing refers to a price where the purchaser pays the variable costs of production without a markup | |
what is the variable cost ratio | the variable cost ratio is a calculation of the costs of increasing production in comparison to the greater revenues that will result from the increase an estimate of the variable cost ratio allows a company to aim for the optimal balance between increased revenues and increased costs of production the production of goods involves both fixed costs and variable costs understanding variable cost ratio variable cost ratio variable costs net sales begin aligned text variable cost ratio frac text variable costs text net sales end aligned variable cost ratio net salesvariable costs as an alternative the ratio can be calculated as 1 contribution margin the result indicates whether a company is achieving or maintaining the desirable balance at which revenues are rising faster than expenses the variable cost ratio quantifies the relationship between a company s sales and the specific costs of production associated with those revenues it is a useful evaluation metric for a company s management in determining necessary break even or minimum profit margins making profit projections and identifying the optimal sales price for its products companies with high fixed costs must earn a substantial amount of revenue to cover these costs and remain in business for this type of company it helps to have a low variable cost ratio on the flip side companies with low fixed costs do not have to earn a substantial amount of revenue to cover them and remain in business this type of company can afford to operate with a higher variable cost ratio the variable cost calculation can be done on a per unit basis such as a 10 variable cost for one unit with a sales price of 100 giving a variable cost ratio of 0 1 or 10 or it can be done by using totals over a given time period such as total monthly variable costs of 1 000 with total monthly revenues of 10 000 also rendering a variable cost ratio of 0 1 or 10 variable costs and fixed coststhe variable cost ratio and its usefulness are easily understood once the basic concepts of variable costs and fixed expenses and their relationship to revenues and general profitability are understood variable costs are variable in the sense that they fluctuate in relation to the level of production examples are the costs of raw material packaging and shipping these costs increase as production increases and decline when production declines fixed expenses are general overhead or operational costs that are fixed in the sense they remain relatively unchanged regardless of levels of production examples of fixed expenses include facility rental or mortgage costs and executive salaries fixed expenses only change significantly as a result of decisions and actions by management the contribution margin is the difference expressed as a percentage between total sales revenue and total variable costs the term contribution margin refers to the fact that this number indicates how much revenue is left over to contribute toward fixed costs and potential profit | |
definition of variable coupon renewable note vcr | a variable coupon renewable note vcr is a renewable fixed income security with variable coupon rates that are periodically reset the renewable note is a type of debt security with a weekly maturity the principal of this security is reinvested automatically at new interest rates every week it matures understanding variable coupon renewable note vcr a variable coupon renewable note vcr is a debt security that matures every week with the principal reinvested at a new interest rate that is reset at a fixed spread over a reference rate usually the coupon is set on a weekly basis at a fixed spread over the treasury bill rate specifically the 91 day t bill the security is reinvested automatically and continuously until the owner of the security requests that the security is to be no longer reinvested t bills which the initial rate of the vcr is linked to are backed by the full faith and credit of the u s government and have a maturity of one year or less 1 the coupon on a vcr note is payable quarterly renewing continuously at the quarterly intervals so every 91 days the maturity of the note extends another 91 days it has an embedded put option that allows the note holder to exercise the put or put the notes to the issuer at par on coupon dates this means that an issuer served with a put notice is obligated to buy back the note from the debt holder but at a lower spread to the reference rate vcr notes are somewhat different from variable rate renewable notes vrr while coupon rates on vcrs vary weekly rates on vrrs vary monthly in addition the coupon rate on variable rate renewable notes equals a fixed spread over the 1 month commercial paper rate in effect variable rate renewable notes will bear interest at a specified rate that will be reset periodically based on the 1 month commercial paper rate and any spread and or spread multiplier subject to the minimum interest rate and the maximum interest rate if any | |
what is a variable death benefit | variable death benefit refers to the amount paid to a decedent s beneficiary that is based on the performance of an investment account within a variable universal life insurance policy a financial product that functions as both insurance and an investment this variable amount is in addition to a guaranteed death benefit which is constant a variable universal life policyholder can choose among several investment options their insurer offers including investments in equity and fixed income mutual funds the variable amount or the policy s cash value along with guaranteed death benefit known as its face value together form the total death benefit understanding variable death benefita variable death benefit is one of three main options available with variable universal life insurance policies the others being a level death benefit and a return of premium benefit each of these three benefit types is not taxable to the beneficiary and if the policyholder borrows against the policy the death benefit lowers 1 the variable death benefit is also sometimes called an increasing benefit this is somewhat of a misnomer because the cash value can either increase or decrease depending on investment performance pros and cons of variable death benefittypically investors are offered options of a set of securities and funds associated with the life insurance company these options can range from stocks to bonds to money market funds and each of them has associated management and administrative fees variable life insurance policies transfer a portion of the premium paid to cash value accounts that are used to invest in these equity instruments among variable universal life policies a variable death benefit that invests mainly in stocks or equity mutual funds may be attractive to younger investors who are seeking to also use the insurance as a long term investment vehicle for older investors bonds may be more appropriate of note most variable death benefits include the ability to change the underlying investments over time returns are not capped so policyholders receive the full return of the underlying investment minus fees a variable death benefit can cost less over time than a return of premium benefit they also offer tax benefits because the gains accruing from investments are eligible for deferred tax as long as they remain within the account until the death benefit is claimed 2however a variable death benefit typically is more expensive than a level death benefit and may include more embedded costs overall in general the higher the death benefit the greater the premiums there is also the danger that your policy may lapse if you do not maintain sufficient funds in your account to cover the administrative costs of such policies these cost differences can be important considerations as the total premiums associated with the three main types of variable universal life benefits can differ by thousands of dollars over the life of a policy consumers may also want to carefully evaluate the pros and cons of variable universal life in the first place this type of insurance has attractive features to some investors in that coverage does not expire as long as policyholders keep making the payments also as the name suggests variable universal life offers flexible premiums that said the total cost of variable universal life is usually notably higher than term insurance which does not offer an investment component and of course covers only a specific span of time while this is seemingly a drawback it also is possible to simply buy term at the lower price and invest the rest example of variable benefitshinzo has invested in a variable life insurance policy with an annual premium payment of 50 000 he specifies that he wants 30 000 of that amount invested in an equity mutual fund and the remaining in a bond fund in the next year the mutual fund and bond fund provide returns of 5 bringing the total value of his account to 32 500 the annual administrative fee for his account is 2 000 this means that his beneficiary is eligible for a total death benefit of 30 500 at the end of that year | |
what is a variable interest entity vie | a variable interest entity vie refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights this is because the controlling interest is arranged via a contractual relationship rather than direct ownership characteristics include a structure where equity investors do not have sufficient resources to support the ongoing operating needs of the business in most cases the vie is used to protect the business from creditors or legal action a business that is the primary beneficiary of a vie must disclose the holdings of that entity as part of its consolidated balance sheet | |
how a variable interest entity vie works | variable interest entities vies are often established as special purpose vehicles spvs to passively hold financial assets or to actively conduct research and development for example a company may establish a vie to finance a project without putting the whole enterprise at risk however just as other spvs have been misused in the past these structures are frequently used to keep securitized assets off corporate balance sheets vies are set up with a unique structure where investors do not have a direct ownership stake in the entity but rather have special contracts which specify the terms rules and pledge a percentage of profits therefore in a vie the investor does not participate in residual profits or losses that usually come with ownership the contracts don t provide for voting rights either reforms in the wake of the global financial crisis were meant to do away with some of the asset backed security industry s pre crisis practices but thanks to lobbying efforts by the banks which had warned of dire consequences should they have to bring subprime mortgage backed securities back onto their books the financial accounting standards board fasb relaxed the rules for vies enabling banks to continue stashing loans in off balance sheet entities regulating viesunder the federal securities laws public companies have to disclose their relationships to vies when they file their 10 k forms fasb interpretation number 46 which is the financial accounting standards board s interpretation of the accounting research bulletin arb 51 used to outline the accounting rules that corporations must follow with respect to vies in 2009 these documents were superceded when the fasb adopted the accounting standards codification asc topic 810 1in particular many of these regulations are set out to determine who the actual beneficiary of a vie is in order to improve transparency and financial reporting according to the most recent standards the beneficiary firm would meet both of the following additionally a beneficiary firm is required to assess whether it has an implicit financial responsibility to ensure that a vie operates as designed when determining whether it has the power to direct the activities of the vie that most significantly impact the entity s economic performance 2special considerationsif a company is the primary beneficiary of such an entity namely has a majority interest in the vie then the holdings of that entity must be disclosed on the company s consolidated balance sheet but if a company is not the primary beneficiary consolidation is not required however companies are required to disclose information concerning vies in which they have a significant interest this disclosure includes how the entity operates how much and what kind of financial support it receives contractual commitments as well as the potential losses the vie could incur | |
what are examples of variable interest entities vies | vies can come in many forms and will be organized depending on the needs of the beneficiary company some examples may include operating leases subcontracting arrangements and offshore companies among others | |
how does a vie work | vies are legally contractual obligations between a beneficiary firm and some third party because the nature of the association between the two entities is contractual is it not considered to be a form of ownership this allows the vie structure to circumvent various rules and regulations around reporting and in some cases taxation | |
what are chinese vies in the u s | more than 100 hong kong and chinese based corporations are structured as vies in the united states these include well known companies like alibaba tencent baidu jd and netease among others 3 the vie structure allows these firms to get around chinese regulations that prevent foreign capital investments in certain types of chinese companies e g those involved in telecommunications or media | |
what is a variable interest rate | a variable interest rate sometimes called an adjustable or a floating rate is an interest rate on a loan or security that fluctuates over time because it is based on an underlying benchmark interest rate or index that changes periodically the obvious advantage of a variable interest rate is that if the underlying interest rate or index declines the borrower s interest payments also fall conversely if the underlying index rises interest payments increase unlike variable interest rates fixed interest rates do not fluctuate understanding variable interest ratesa variable interest rate is a rate that moves up and down with the rest of the market or along with an index the underlying benchmark interest rate or index for a variable interest rate depends on the type of loan or security but it is often associated with either the london inter bank offered rate libor or the federal funds rate variable interest rates for mortgages automobiles and credit cards may be based on a benchmark rate such as the prime rate in a country banks and financial institutions charge consumers a spread over this benchmark rate with the spread depending on several factors such as the type of asset and the consumer s credit rating thus a variable rate may bill itself as the libor plus 200 basis points plus 2 residential mortgages for instance can be obtained with fixed interest rates which are static and cannot change for the duration of the mortgage agreement or with a floating or adjustable interest rate which is variable and changes periodically with the market variable interest rates can also be found in credit cards corporate bond issues swap contracts and other securities 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 december 31 2021 variable interest rate credit cardsvariable interest rate credit cards have an annual percentage rate apr tied to a particular index such as the prime rate the prime rate most commonly changes when the federal reserve adjusts the federal funds rate resulting in a change in the rate of the associated credit card the rates on variable interest rate credit cards can change without advance notice to the cardholder variable interest rate credit cards can change rates without telling their customers within the terms and conditions document associated with the credit card the interest rate is most commonly expressed as the prime rate plus a particular percentage with the listed percentage being tied to the creditworthiness of the cardholder an example of the format is the prime rate plus 11 9 variable interest rate loans and mortgagesvariable interest rate loans function similarly to credit cards except for the payment schedule while a credit card is considered a revolving line of credit most loans are installment loans with a specified number of payments leading to the loan being paid off by a particular date as interest rates vary the required payment will go up or down according to the change in rate and the number of payments remaining before completion | |
when a mortgage has a variable interest rate it is more commonly referred to as an adjustable rate mortgage arm many arms start with a low fixed interest rate for the first few years of the loan only adjusting after that period has expired common fixed interest rate periods on an arm are three five or seven years expressed as a 3 1 5 1 or 7 1 arm respectively there are also usually adjustment caps that put a limit on how much the interest rate can go up or down when it adjusts you can use an online calculator to get an estimate of current interest rates on adjustable rate mortgages | in most cases arms have rates that adjust based on a preset margin and a major mortgage index such as the libor the 11th district cost of funds index cofi or the monthly treasury average index mta index if for example someone takes out an arm with a 2 margin based on the libor and the libor is at 3 when the mortgage s rate adjusts the rate resets at 5 the margin plus the index variable interest rate bonds and securitiesfor variable interest rate bonds the benchmark rate may be the libor some variable rate bonds also use the five year 10 year or 30 year u s treasury bond yield as the benchmark interest rate offering a coupon rate that is set at a certain spread above the yield on u s treasuries fixed income derivatives also can carry variable rates an interest rate swap for example is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate or vice versa to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap a swap can also involve the exchange of one type of floating rate for another which is called a basis swap pros and cons of variable interest ratesvariable interest rates are generally lower than fixed interest rates if interest rates go down the borrower will benefit if interest rates go up the lender will benefit variable interest rates can go up to the point where the borrower may have difficulty paying the loan the unpredictability of variable interest rates makes it harder for a borrower to budget it also makes it harder for a lender to predict future cash flows | |
what is variable life insurance | variable life insurance is a permanent life insurance product with separate accounts comprised of various instruments and investment funds such as stocks bonds equity funds money market funds and bond funds | |
how variable life insurance works | in some ways variable life insurance can be described as a form of securities why because of investment risks variable policies are considered securities contracts 1 they are regulated under the federal securities laws following the federal regulations sales professionals must provide a prospectus of available investment products to potential buyers 2variable life insurance policies have specific tax benefits such as the tax deferred accumulation of earnings provided the policy remains in force policyholders may access the cash value via a tax free loan however unpaid loans including principal and interest reduce the death benefit additionally interest or earnings included in partial and full surrenders of the policy are taxable at the time of distribution 1variable life insurance advantagesan attractive feature of the variable life insurance product is its flexibility regarding premium remittance and cash value accumulation premiums are not fixed as with traditional whole life insurance or term insurance policies within limits policyholders may adjust their premium payments based on their needs and investment goals loan interest may become taxable upon surrender of the policy 1for example if the policyholder remits a premium less than what is needed to sustain the policy the accumulated cash value compensates for the difference although variable life insurance offers this flexibility it is essential to understand that long term remittance of reduced premiums can compromise the cash value and the overall status of the policy alternatively policyholders may remit greater premium payments to increase their cash value and investment holdings unlike whole life insurance the death benefit is linked to the performance of the separate account funds a positive aggregate performance could offer increased financial protection to the beneficiary upon the death of the insured in addition to the policy s flexibility the potential for significant investment earnings is another attractive feature many policies offer a wide array of investment options ranging from a conservative approach to an aggressive strategy to suit the needs of most investors as an added bonus a few of the best life insurance companies such as prudential and new york life offer variable life insurance plans variable life insurance disadvantagescompared to other life insurance policies variable life insurance is typically more expensive premiums paid help cover administrative fees and the management of the plan s investments the policyholder may need to increase payments to keep the policy active or to maintain a specific death benefit according to the performance of investment products and the premiums remitted as a proactive measure some policyholders submit premiums exceeding the cost of the insurance policy to ensure the guarantees of their policies additionally the policyholder solely assumes all investment risks the insurer offers no guarantees of performance nor protects against investment losses the policyholder must exercise due diligence by remaining educated about investments and attentive to the separate account performance like most life insurance policies individuals are required to undergo full medical underwriting to obtain a variable life insurance policy those people with compromised health or those who have other unfavorable underwriting factors may not qualify for coverage or may realize higher premiums | |
how is variable life insurance closer to a security than insurance policy | it has separate accounts comprised of different instruments and investment funds such as stocks bonds equity funds money market funds and bond funds because of investment risks variable policies are considered securities contracts they are regulated under the federal securities laws following the federal regulations sales professionals must provide a prospectus of available investment products to potential buyers 2 | |
what s a main advantage of the variable life insurance policy | the policy owner chooses how to invest their cash value many policies offer a wide array of investment options ranging from a conservative approach to an aggressive strategy to suit the needs of most investors this might mean returns that surpass those of other insurance policies | |
what is variable overhead | variable overhead is a term used to describe the fluctuating manufacturing costs associated with operating businesses as production output increases or decreases variable overhead expenses move in kind variable overhead differs from the general overhead expenditures associated with administrative tasks and other functions that have fixed budgetary requirements holding a firm grasp on variable overhead is useful in helping businesses correctly set their future product prices in order to avoid overspending which can cannibalize profit margins understanding variable overhead costsfor companies to operate continuously they need to spend money on producing and selling their goods and services the overall operation costs managers sales staff marketing staff for the production facilities as well as the corporate office are known as overhead there are two types of overhead costs fixed and variable fixed overhead doesn t change with increases in levels of production examples include variable overhead as alluded to earlier fluctuates according to levels of production it may be tougher to pin down and keep within a budget the key difference between variable and fixed overhead costs is that if production stopped for a period there would be no variable overhead while fixed overhead remains variable overhead costsexamples of variable overhead include variable overhead costs can include pay for workers added when production is increased extra hours paid for production increases would be a variable cost costs of utilities for the equipment electric power gas and water tend to fluctuate depending on production output the rollout of new products manufacturing cycles for existing products and seasonal patterns additional factors that may be included in variable overhead expenses are materials and equipment maintenance variable overhead and pricingmanufacturers must include variable overhead expenses to calculate the total cost of production at current levels as well as the total overhead required to increase manufacturing output in the future the calculations are applied to determine the minimum price levels for products to ensure profitability a manufacturing facility s monthly expense for electricity for example will vary depending on production output if shifts were added to meet product demand the facility and equipment would undoubtedly use more electricity as a result the variable overhead expenses must be included in the calculation of the cost per unit to ensure accurate pricing although increasing production usually boosts variable overhead efficiencies can occur as output increases also price discounts on larger orders of raw materials due to the ramp up in production can lower the direct cost per unit a company that has production runs of 10 000 units and a cost per unit of 1 might see a decline in the direct cost to 75 cents if the manufacturing rate is increased to 30 000 units if the manufacturer maintains selling prices at the existing level the cost reduction of 25 cents per unit represents 2 500 in savings on each production run in this example as long as the total increase in indirect costs such as utilities and supplemental labor is less than 2 500 the company can maintain its prices increase sales and expand its profit margin example of variable overheadlet s say for example a mobile phone manufacturer has total variable overhead costs of 20 000 when producing 10 000 phones per month as a result the variable cost per unit would be 2 20 000 10 000 units let s say the company increases its sales of phones and in the following month the company must produce 15 000 phones at 2 per unit the total variable overhead costs increased to 30 000 for the month | |
what does overhead mean | overhead refers to the costs and expenses associated with production but which are not directly related to that production itself for instance paying utilities rent administrator salaries supplies raw materials etc | |
what is fixed vs variable overhead | fixed overhead costs are stable regardless of how much is being produced for instance rent and insurance on a factory building will be the same regardless if the factory is churning out a lot or a little in terms of quantity variable overhead however will increase along with the amount produced such as raw materials or electricity | |
are salaries or wages variable overhead costs | it depends usual pay is an operating cost and not an overhead cost if however a company must pay overtime or extra hours for workers as production is ramped up it may be included as a variable cost | |
what is variable overhead efficiency variance | variable overhead efficiency variance refers to the difference between the true time it takes to manufacture a product and the time budgeted for it as well as the impact of that difference it arises from variance in productive efficiency for example the number of labor hours taken to manufacture a certain amount of product may differ significantly from the standard or budgeted number of hours variable overhead efficiency variance is one of the two components of total variable overhead variance the other being variable overhead spending variance understanding variable overhead efficiency variancein numerical terms variable overhead efficiency variance is defined as voev alh blh hourly rate where voev variable overhead efficiency variance alh actual labor hours blh budgeted labor hours hourly rate rate for standard variable overhead begin aligned text voev text alh text blh times text hourly rate textbf where text voev text variable overhead efficiency variance text alh text actual labor hours text blh text budgeted labor hours text hourly rate text rate for standard variable overhead end aligned voev alh blh hourly ratewhere voev variable overhead efficiency variancealh actual labor hoursblh budgeted labor hourshourly rate rate for standard variable overhead the hourly rate in this formula includes such indirect labor costs as shop foreman and security if actual labor hours are less than the budgeted or standard amount the variable overhead efficiency variance is favorable if actual labor hours are more than the budgeted or standard amount the variance is unfavorable example of variable overhead efficiency varianceconsider an example of a widget manufacturing plant where the rate for standard variable overhead to account for indirect labor costs is estimated at 20 per hour assume that the standard number of hours required to manufacture 1 000 widgets is 2 000 hours however the company actually took 2 200 hours to manufacture 1 000 widgets in this case the unfavorable variable overhead efficiency variance is 2 200 2 000 x 20 4 000 the variance is unfavorable because the company took more time than budgeted to produce the 1 000 widgets if the company had instead taken 1 900 hours to manufacture 1 000 widgets the variance would be favorable 2 000 | |
what is variable overhead efficiency variance | variable overhead efficiency variance refers to the difference between the true time it takes to manufacture a product and the time budgeted for it as well as the impact of that difference it arises from variance in productive efficiency for example the number of labor hours taken to manufacture a certain amount of product may differ significantly from the standard or budgeted number of hours variable overhead efficiency variance is one of the two components of total variable overhead variance the other being variable overhead spending variance understanding variable overhead efficiency variancein numerical terms variable overhead efficiency variance is defined as voev alh blh hourly rate where voev variable overhead efficiency variance alh actual labor hours blh budgeted labor hours hourly rate rate for standard variable overhead begin aligned text voev text alh text blh times text hourly rate textbf where text voev text variable overhead efficiency variance text alh text actual labor hours text blh text budgeted labor hours text hourly rate text rate for standard variable overhead end aligned voev alh blh hourly ratewhere voev variable overhead efficiency variancealh actual labor hoursblh budgeted labor hourshourly rate rate for standard variable overhead the hourly rate in this formula includes such indirect labor costs as shop foreman and security if actual labor hours are less than the budgeted or standard amount the variable overhead efficiency variance is favorable if actual labor hours are more than the budgeted or standard amount the variance is unfavorable example of variable overhead efficiency varianceconsider an example of a widget manufacturing plant where the rate for standard variable overhead to account for indirect labor costs is estimated at 20 per hour assume that the standard number of hours required to manufacture 1 000 widgets is 2 000 hours however the company actually took 2 200 hours to manufacture 1 000 widgets in this case the unfavorable variable overhead efficiency variance is 2 200 2 000 x 20 4 000 the variance is unfavorable because the company took more time than budgeted to produce the 1 000 widgets if the company had instead taken 1 900 hours to manufacture 1 000 widgets the variance would be favorable 2 000 | |
the variable prepaid forward contract an overview | a variable prepaid forward contract is a strategy used by stockholders to cash in some or all of their shares while deferring the taxes owed on the capital gains the sale agreement is not immediately finalized but the stockholder collects the money this strategy is typically used by investors who own a large number of shares in a single company and want to raise cash while postponing taxes understanding the variable prepaid forward contracta typical user of a variable prepaid forward contract might be a founder or top executive of a corporation who has accumulated a large amount of company stock that person might want to diversify their concentrated investments lock in profits in the stock or at the very least raise a large amount of cash the use of a variable prepaid forward contract allows that person to sell the stock to a brokerage company the investor is immediately paid between 75 and 90 of the current value of the stock but the transaction is not finalized until it is finalized the taxes on the capital gains are not due at that time the stockholder turns over the shares or the cash equivalent with a price range set in advance to protect against a substantial loss the practice is particularly useful under certain circumstances for instance some executives who are granted stock options are prohibited from selling them for a certain period of time also a large stock transaction by a company insider at any time makes investors nervous the variable prepaid forward contract neatly circumvents these obstacles since the contract establishes a floor and ceiling price on the final transaction it also protects the investor from a heavy loss if the stock gains dramatically in value before the transaction is finalized needless to say this practice is controversial and some think it should not be allowed technically a prepaid variable forward contract is a collar strategy which is a bundled long put option and short call option on a security however it has a third element the monetization of the transaction in the form of a loan against the underlying security while once fairly sophisticated these types of strategies have become more commonplace thanks to advancements in financial engineering naturally they also tend to draw the attention of the irs and financial journalists in 2011 the new york times ran a front page feature highlighting how ronald lauder the est e lauder cosmetics heir was artfully sheltering his compensation through a prepaid variable forward contract with executive pay at many multiples of the average employees compensation levels these types of strategies are popular targets for scrutiny 1 | |
what is a variable price limit | a variable price limit is a type of circuit breaker used to maintain orderly trading conditions it is associated with the commodities futures markets which are known for their occasionally high levels of volatility once a given futures contract has reached its limit price the exchange may allow its trading to resume within an expanded upper and lower bound of prices those new minimum and maximum prices are known as its variable price limits | |
how variable price limits work | commodities futures exchange operators such as the chicago mercantile exchange cme use price limits to control the maximum amount of volatility permitted within a given trading day if a particular commodity rises or falls by more than the maximum permitted amount the exchange operator can either freeze trading in that commodity or else allow it to continue trading within its variable price limits 1oftentimes the exchange will first freeze trading and then resume trading the following day within the variable price limits this approach allows a cooling off period and also permits traders to more easily unwind their positions the following day if successful these measures will first prevent any potential panic or speculative mania from taking hold of the market and then allow prices to gradually recover their fair value each exchange will set its own initial price limits and variable price limits these limits are subject to change and in fact some commodities may lack variable price limits altogether before trading a particular commodity traders should carefully review that contract s specifications to make sure they understand how the exchange would handle periods of heightened volatility depending on the exchange s guidelines certain trading strategies that rely on rare but extreme volatility may be difficult or impossible to execute real world example of a variable price limitthe chicago mercantile exchange cme is the largest commodities futures exchange in the world facilitating trading in a wide range of futures contracts for agricultural products equity indexes energy commodities and other assets to illustrate the concept of a variable price limit consider the case of the cme s rough rice contracts as of march 2021 the price of its rough rice contracts was subject to a fixed limit price of 0 85 meaning that trading would be halted if the price of rough rice rose or fell by that amount or greater within any single trading day at the same time the variable price limit for rough rice was set to 1 30 1 this larger band is designed to give traders ample move to enter or exit their positions the following day so that the market price of rough rice could regain its equilibrium reasonably quickly | |
what is a variable rate certificate of deposit cd | a variable rate certificate of deposit cd is a type of savings account offered by banks and credit unions also sometimes called a flex cd this certificate locks up your money for a fixed length of time term but provides a fluctuating interest rate based on different factors such as the prime rate the consumer price index cpi treasury bills or a market index the federal deposit insurance corp fdic protects variable rate and other cds 1understanding a variable rate cda variable rate cd allows investors to put their money into a secure protected account where it will earn interest over the life of its term the earned interest is usually inaccessible to the account holder until the cd matures 2 variable rate cds tend to have both limited choices of terms and longer terms such as a 12 24 or 36 month term finding a variable rate cd can also be more challenging compared to other cd types you may need to research options at smaller or community banks and credit unions a variable rate cd pays an interest rate that can go up and down throughout the life of the security the exact factors determining the interest rate of a variable rate cd will vary depending on the institution a bump up cd could be considered a type of variable rate cd and is offered by more banks and credit unions with a bump up or step up cd rates only go up not down but typically you must initiate the change and there are limits on how many times the rate can change usually only once or twice in contrast to either a variable or step up cd the widely available fixed rate cd has a locked in interest rate so the rate remains the same throughout the entire term fixed rated cds tend to offer more terms to choose from such as 3 month to 5 year cds a cd is generally considered one of the safer ways to invest your money especially as your money is insured by the fdic up to 250 000 1 cds overall are among the most reliable low risk investment options available they appeal to conservative risk averse savers and investors investing in cds is also an excellent way to diversify the risk of your portfolio for new or cautious investors a fixed rate cd may be preferable but consumers comfortable with increasing the risk just a little bit may want to consider a variable rate cd if rates are predicted to rise variable rate cds typically require a minimum of 500 or more special considerations of a variable rate cd | |
when considering a cd with a variable interest rate remember a few things first these cds generally have the most significant profit potential if interest rates are low with a good chance rates will rise over the term by contrast if interest rates are high when the cd is opened it s possible that they could go down soon after and take your returns lower too | also consider what features are most important to you a variable rate cd with a steep penalty for early withdrawal may not be as appealing as a no penalty cd with a more relaxed early withdrawal policy 3as attractive as they sound variable rate cds also come with certain pitfalls prolonged low interest rates for example can adversely affect your returns even if the rates increase later in contrast fixed rate cds may be more profitable during such times variable rate cd returns are also susceptible to inflation this is especially the case during times of high inflation a cd essentially locks in your funds for a certain period of time if inflation shoots up during that period and your returns do not keep pace with it the real value of your holdings declines example of a variable rate cdmeilee wants to park her money in a variable rate cd and spends time researching where it s possible to do so at a higher rate she finds a 12 month cd that offers a variable competitive rate based on the federal reserve s federal funds rate minus 0 25 the federal funds rate is 2 50 when she opens the account so she will earn 2 25 apy to begin with meilee thinks rates will go up and so puts 1 000 into the variable rate cd meilee s friend amy puts 1 000 into a traditional 12 month cd at the same time as meilee the cd offers a 3 interest rate after only one month the federal funds rate increases to 3 25 meilee s variable rate cd now earns 3 the same as amy s the fed rate continues to increase over the next six months until it is at 4 75 in september meilee earns 4 5 in interest in september amy is still earning 3 in september but imagine if meilee was wrong and the federal funds rate declined to 2 after six months meilee would only earn 1 75 on her cd while amy would still be earning 3 | |
are variable rate certificates of deposit cds insured by the government | certificates of deposit cds are one of the safer ways to invest especially as federal deposit insurance corp fdic protection backs most of them the fdic protects cds up to 250 000 per depositor at fdic insured banks and savings associations | |
what happens if i redeem a cd before it matures | typically early withdrawal results in a financial penalty of months of interest already earned the earned interest is usually inaccessible to the account holder until the cd matures some issuers do offer a penalty free cd that allows for the early withdrawal of funds however the interest rate is likely to be lower than cds that do not provide this option | |
what determines the rate on a variable rate cd | the financial institution decides which benchmark rate it will use to set the cd s rate the frequency of change and any other factors for example institutions could use the federal reserve bank s federal funds target rate the bank s prime rate the federal funds rate upper limit or the wall street journal prime rate wsjp the interest rate is expressed as an annual percentage yield could even change daily at the institution s discretion the bottom linevariable rate cds provide a variety of benefits to people looking for a secure protected investment that will earn a relatively modest amount of interest if rates are rising remember that the earned interest is usually inaccessible to the account holder until the cd matures as attractive as they sound variable rate cds also come with certain pitfalls for example prolonged low interest rates can adversely affect your returns even if the rates increase later your rate and returns could also fall if benchmark rates decline in contrast fixed rate cds are more profitable during such times | |
what is a variable rate demand bond | a variable rate demand bond is a type of municipal bond muni with floating coupon payments that are adjusted at specific intervals the bond is payable to the bondholder upon demand following an interest rate change generally the current money market rate is used to set the interest rate plus or minus a set percentage which may result in a change in coupon payments over time understanding variable rate demand bondsalthough bondholders may redeem a demand bond at any time they are often encouraged to keep these bonds in order to continue receiving coupon payments the floating rate of the coupon payment contributes to greater uncertainty in coupon cash flows compared to generic municipal bonds although some of this risk may be mitigated by a redemption option municipal bonds are issued by state and local governments to raise capital to finance public projects such as building hospitals highways and schools 1 in return for lending the municipalities money investors are paid periodic interest in the form of coupons for the duration of the bond s term at maturity the governmental issuer repays the face value of the bond to the bondholders some muni bonds have fixed coupons while others are variable muni bonds with floating coupon rates are called variable rate demand bonds the interest rates on these bonds generally are reset daily weekly or monthly the bonds are issued for long term financing with maturities ranging from 20 to 30 years in addition variable rate demand bonds require a form of liquidity in the event of a failed remarketing the liquidity facility used to enhance the issuer s credit could be a letter of credit standby bond purchase agreement bpa or self liquidity all of which assist in making these securities eligible for money market funds for instance a letter of credit provides an unconditional commitment by a bank to pay investors the principal and interest on the variable rate demand bonds in the event of default bankruptcy or a downgrade of the issuer as long as the financial institution providing the letter of credit is solvent the investor will receive payment the early redemption optionvariable rate demand bonds are often issued with an embedded put feature that allows bondholders to tender the issues back to the issuing entity on the interest reset date the put price is par plus accrued interest the bondholders must provide notice to the tender agent by a specified number of days prior to the date that the debt securities will be tendered a variable rate demand bond would normally be put or exercised if the holder wants immediate access to their funds or if market interest rates in the economy have increased to a level at which the current coupon rate on the bond is not attractive if the bond is tendered prior to maturity because of an increase in rates the remarketing agent will set a new higher rate for the bond if market rates fall below the coupon rate the agent will reset the rate at the lowest rate that would avoid having a put exercised on the bond | |
what is a variable rate demand note | a variable rate demand note vrdn is a debt instrument that represents borrowed funds that are payable on demand and accrue interest based on a prevailing money market rate such as the prime rate the interest rate applicable to the borrowed funds is specified from the outset of the debt and is typically equal to the specified money market rate plus an extra margin a vrdn is also referred to as a variable rate demand obligation vrdo understanding variable rate demand note vrdn a variable rate demand note vrdn is a long term municipal bond which is offered to investors through money market funds the notes allow a municipal government to borrow money for long periods of time while paying short term interest rates to investors as vrdns are issued in a minimum of 100 000 denominations smaller investors can only invest in vrdos indirectly through money market funds because money market interest rates such as the bank prime rate are variable over time the interest rate applicable to a variable rate demand note is variable as well every time the prevailing money market rate changes a variable rate demand note s interest rate is adjusted accordingly typically the interest rate on vrdn is adjusted daily weekly or monthly to reflect the current interest rate environment as the name implies variable rate demand notes are payable on demand as they have an embedded put option this means that the investor or lender of the funds can request a repayment of the entire debt amount at his or her discretion and the funds must be repaid once the demand has been made depending on the demand feature affixed to these debt instruments the investor may be required to provide a one day or seven day notification to tender the securities to a financial intermediary such as a trustee or remarketing agent because of the demand feature the maturity date of a vrdn is considered to be the next put date rather than its final maturity date another feature of the vrdn that makes it an attractive investment option for money market investors is the credit enhancement that supports the demand note a credit enhancement is a feature added to a security to improve its credit profile and mitigate default risk of the underlying assets vrdn issuers employ credit enhancements through letters of credit locs from a highly rated financial institution which serves as the liquidity provider of last resort committed to supporting the timely payment of interest and repayment of principal on tendered securities as long as the financial institution providing the letter of credit is solvent the investor will receive payment for this reason the interest rate on vrdns tends to reflect the short term credit rating of the bank providing the letter of credit rather than the municipality issuing the vrdn another form of credit enhancement that may be used to reduce default risk is a standby bond purchase agreement which is typically provided by a reputable bank variable rate demand notes produce returns that have low correlations with stocks and bonds thus making them good investments for portfolio diversification in addition vrdns issued by municipalities are generally exempt from federal taxes many issues are also exempt from state taxes in the state of issue | |
what is a variable rate mortgage | a variable rate mortgage is a type of home loan in which the interest rate is not fixed instead interest payments will be adjusted at a level above a specific benchmark or reference rate such as the prime rate 2 points lenders can offer borrowers variable rate interest over the life of a mortgage loan they can also offer a hybrid adjustable rate mortgage arm which includes both an initial fixed period followed by a variable rate that resets periodically thereafter common varieties of hybrid arm include the 5 1 arm having a 5 year fixed term followed by a variable rate on the remainder of the loan typically 25 more years | |
how a variable rate mortgage works | a variable rate mortgage differs from a fixed rate mortgage in that rates during some portion of the loan s duration are structured as floating and not fixed 2 lenders offer both variable rate and adjustable rate mortgage loan products with differing variable rate structures generally lenders can offer borrowers either fully amortizing or non amortizing loans that incorporate different variable rate interest structures variable rate loans are typically favored by borrowers who believe rates will fall over time in falling rate environments borrowers can take advantage of decreasing rates without refinancing since their interest rates decrease with the market rate full term variable rate loans will charge borrowers variable rate interest throughout the entire life of the loan in a variable rate loan the borrower s interest rate will be based on the indexed rate and any margin that is required the interest rate on the loan may fluctuate at any time during the life of the loan variable ratesvariable rates are structured to include an indexed rate to which a variable rate margin is added if a borrower is charged a variable rate they will be assigned a margin in the underwriting process most variable rate mortgages will thus include a fully indexed rate that is based on the indexed rate plus margin the indexed rate on an adjustable rate mortgage is what causes the fully indexed rate to fluctuate for the borrower in variable rate products such as an arm the lender chooses a specific benchmark to which to index the base interest rate indexes can include the lender s prime rate and various different types of u s treasuries 3 a variable rate product s indexed rate will be disclosed in the credit agreement any changes to the indexed rate will cause a change for the borrower s fully indexed interest rate the arm margin is the second component involved in a borrower s fully indexed rate on an adjustable rate mortgage in an arm the underwriter determines an arm margin level which is added to the indexed rate to create the fully indexed interest rate that the borrower is expected to pay high credit quality borrowers can expect to have a lower arm margin which results in a lower interest rate overall on the loan lower credit quality borrowers will have a higher arm margin which requires them to pay higher rates of interest on their loan some borrowers may qualify to pay just the indexed rate which can be charged to high credit quality borrowers in a variable rate loan the indexed rates are usually benchmarked to the lender s prime rate however it can also be benchmarked to treasury rates a variable rate loan will charge the borrower interest that fluctuates with changes in the indexed rate example of variable rate mortgages adjustable rate mortgage loans arms adjustable rate mortgage loans arms are a common type of variable rate mortgage loan product offered by mortgage lenders these loans charge a borrower a fixed interest rate in the first few years of the loan followed by a variable interest rate after that 2the terms of the loan will vary by particular product offering for example in a 2 28 arm loan a borrower would pay two years of fixed rate interest followed by 28 years of variable interest that can change at any time in a 5 1 arm loan the borrower would pay fixed rate interest for the first five years with variable rate interest after that while in a 5 1 variable rate loan the borrower s variable rate interest would reset every year based on the fully indexed rate at the time of the reset date | |
why are arm mortgages called hybrid loans | arms have an initial fixed rate period followed by the remainder of the loan using a variable interest rate for instance in a 7 1 arm the first seven years would be fixed then from the 8th year onwards the rate would adjust on an annual basis depending on prevailing rates | |
what are some pros and cons of variable rate mortgages | pros of variable rate mortgages can include lower initial payments than a fixed rate loan and lower payments if interest rates drop the downsides are that the mortgage payments can increase if interest rates rise this could lead to homeowners being trapped in an increasingly unaffordable home as interest rate hikes occur | |
what is a variable ratio write | a variable ratio write is a strategy in options investing that requires holding a long position in the underlying asset while simultaneously writing multiple call options at varying strike prices it is essentially a ratio buy write strategy the trader s goal is to capture the premiums paid for the call options variable ratio writes have limited profit potential the strategy is best used on stocks with little expected volatility particularly in the near term understanding variable ratio writesin ratio call writing the word ratio represents the number of options sold for every 100 shares owned in the underlying stock for example in a 2 1 variable ratio write the trader might own 100 shares of the underlying stock and sell 200 options two calls are written one is out of the money that is the strike price is higher than the current value of the underlying stock on the other the strike price is in the money or lower than the price of the underlying stock the payoff in a variable ratio write resembles that of a reverse strangle in the options trade any strangle strategy involves buying both a call and a put on the same underlying asset the variable ratio write is aptly described as having limited profit potential and unlimited risk 1variable ratio writes have limited upside and unlimited downside as an investment strategy the variable ratio write should be avoided by inexperienced options traders as it is a strategy with unlimited risk potential the losses begin if the stock s price makes a strong move to the upside or downside beyond the upper and lower breakeven points set by the trader there is no limit to the maximum possible loss on a variable ratio write position despite its significant risks the variable ratio write technique can bring the experienced trader a fair amount of flexibility with managed market risk while providing attractive income there are two breakeven points for a variable ratio write position these breakeven points can be found as follows upper breakeven point sph pmplower breakeven point spl pmpwhere sph strike price of higher strike short callpmp points of maximum profitspl strike price of lower strike short call begin aligned text upper breakeven point sph pmp text lower breakeven point spl pmp textbf where sph text strike price of higher strike short call pmp text points of maximum profit spl text strike price of lower strike short call end aligned upper breakeven point sph pmplower breakeven point spl pmpwhere sph strike price of higher strike short callpmp points of maximum profitspl strike price of lower strike short call real world example of a variable ratio writeconsider an investor who owns 1 000 shares of the company xyz currently trading at 100 per share the investor believes that the stock is unlikely to move much over the next two months the investor can hold onto the stock and still earn a positive return on it while it remains static in price this is achieved by initiating a variable ratio write position selling 30 of the 110 strike calls on xyz that are due to expire in two month s time the options premium on the 110 calls is 0 25 so our investor will collect 750 from selling the options that is if the investor is correct in predicting that the stock s price will remain flat after two months if xyz shares remain below 110 the investor will book the entire 750 premium as profit since the calls will be worthless when they expire if the shares rise above the breakeven 110 25 however the gains on the long stock position will be more than offset by losses by the short calls the options represented 3 000 shares of xyz triple the number that the trader owns | |
what is variable survivorship life insurance | variable survivorship life insurance is a type of variable life insurance policy that covers two individuals and pays a death benefit to a beneficiary only after both people have died it may pay out a benefit prior to the first policyholder s death if the policy has a living benefit rider the living benefit rider is often automatically included in life insurance policies at no cost this rider allows access to a certain amount of policy death benefit in the case of terminal illness as defined in the policy variable survivorship life insurance is also called survivorship variable life insurance or last survivor life insurance understanding variable survivorship life insurancelike any variable life policy variable survivorship life insurance has a cash value component in which a portion of each premium payment is set aside to be invested by the policyholder who bears all investment risk the insurer selects several dozen investment options from which the policyholder may choose the other portion of the premium goes toward administrative expenses and the policy s death benefit also called face value this type of policy is legally considered a security because of its investment component and is subject to regulation by the securities and exchange commission 1a more flexible version of variable survivorship life insurance called variable universal survivorship life insurance allows the policyholder to adjust the policy s premiums and death benefit during the policy s life benefits of variable survivorship life insurancevariable survivorship life insurance policies let policyholders invest premiums in a separate account whose value will fluctuate based on the performance of the market variable survivorship life insurance is typically thousands of dollars cheaper than regular single insured life insurance because the premiums associated with survivorship policies are determined by the joint life expectancy of the insured parties as such premiums are cheaper than purchasing individual policies for both individuals because the insurance company is not obligated to pay benefits until the deaths of both policyholders occur it is significantly easier to qualify for a survivorship life policy than is it to qualify for single insured life insurance this is mainly due to the fact that variable survivorship life insurance companies are less worried about the health statuses of the individual policyholders who must both die before the benefit is paid consequently underwriting is less stringent and acceptance is more likely survivorship life insurance is sometimes touted as a means to grow an estate and not just shield the estate from tax liabilities the death benefit of a survivorship life policy is similar to traditional life insurance in that it can ensure beneficiaries receive at least a moderate payout even if a policyholder burns through his entire estate during the beneficiary s lifetime individuals interested in bequeathing their assets to their loved ones tend to favor survivorship life insurance policies because they provide liquidity for an estate to cover various taxes | |
what is variable universal life vul insurance | variable universal life vul combines lifelong insurance protection with flexible premiums and cash value you can access while alive vul insurance lets you invest and grow the cash value through subaccounts that operate like mutual funds exposure to market fluctuations can generate high returns but may also result in substantial losses vul is similar to variable life insurance but unlike variable life it allows you to change your premium payment amount while vul insurance offers increased flexibility and growth potential over other life insurance options you should carefully assess the risks before purchasing it | |
how variable universal life vul insurance works | variable universal life is a type of permanent life insurance policy it combines a death benefit with a savings component called cash value this coverage can last your entire life so long as you continue paying for the insurance costs a vul lets you adjust how much you pay into the policy each year the same as traditional universal life insurance you must pay enough each year to cover the ongoing insurance costs of your policy the insurer will deduct this amount from your premiums the remainder of your premiums will go toward your policy s cash value 1in a vul you pick how to invest your cash value between a variety of subaccounts your interest and future growth depends on the investment performance if the investments do well your cash value will grow more quickly the growth of the vul insurance policy s cash value is tax deferred 2 policyholders may access their cash value by taking a withdrawal or borrowing funds if your investments do poorly your cash value will not grow as quickly it is possible to lose money with a vul if you face significant losses you may need to make larger premium payments to cover the cost of your life insurance and rebuild your cash value otherwise your policy would lapse and you would lose insurance protection 3unlike whole life insurance the life insurer transfers the investment risk of the vul cash value to you the separate subaccount for a vul is structured like a family of mutual funds each has an array of stock and bond accounts along with a money market option some policies restrict the number of transfers into and out of the funds if a policyholder has exceeded the number of transfers in a year they would need to pay a fee for additional transfers and changes to their investment strategy in addition to the standard administration and mortality fees paid by the policyholder each year the subaccounts deduct management fees that can range from 0 5 to 2 4 because the subaccounts are securities the life insurance representative must be a licensed producer and registered with the financial industry regulatory authority finra to sell a vul 5pros and cons of variable universal life insurancea vul gives you control over how to invest your cash value you can pick the subaccounts that best fit your risk tolerance and investment objectives if your investments do well you can grow your cash value more quickly with a vul versus other types of permanent life insurance since a vul is a form of universal life you can also adjust how much you pay into the policy each year to fit your budget a vul does have risks and drawbacks your cash value return is not guaranteed if your investments perform badly your cash value will not grow as quickly and you could even lose money some years if you don t have enough in cash value to cover the cost of your life insurance you would need to increase your premium payments otherwise you lose your insurance protection lastly vuls can charge high fees because you re paying both for life insurance and investments in addition a vul could include a surrender charge where you owe a penalty if you cancel within 15 years of your purchase depending on the insurance company 4 the surrender charge could be 10 or more of your cash value balance 6suitability and alternativesa vul could make sense if you want permanent life insurance protection have a higher risk tolerance for investing and prefer managing investments yourself it could be worth considering if you ve maxed out your other retirement accounts you could then use a vul for more tax deferred investment growth these products have higher growth potential than other types of life insurance but are more complicated and riskier some other alternatives to consider include variable life variable life also lets you invest in the market through subaccounts however you cannot change the monthly premium in exchange these policies usually promise a minimum death benefit as long as you keep paying even if you lose money with your investments 5universal life universal life lets you adjust the premiums the cash value grows based on market interest rates while the return changes each year there is usually a guaranteed minimum growth rate and no risk of losses whole life whole life is the safest option it charges the same fixed premium and has a guaranteed death benefit and a fixed cash value return in exchange for safety it has the lowest growth potential term life term life is temporary life insurance protection these policies charge a much lower premium than permanent life term life policies do not build cash value you could use the money you save on insurance costs to invest through a brokerage account 5 | |
what is vul in insurance | vul stands for variable universal life it is a variation on a standard universal life policy that allows for some of the cash value accumulated to be invested into the market and earn a return | |
is vul a good investment | as an insurance product vul may be able to boost returns in the policy during bull markets however as a standalone investment vul will not be able to match the performance of investing directly in the market this is because the fees and the cost of the insurance component will drag down the total return 4 | |
what can vul policies invest in | the exact investment options will vary among insurance companies but almost all vul policies allow investments in stocks bonds money market securities etfs and mutual funds as well as a guaranteed fixed interest option bottom linevariable universal life insurance combines permanent insurance protection with an investment account these policies could make sense for those comfortable taking on more risk for the chance to earn higher cash value growth vuls can have high fees and are more complicated to manage so they are not appropriate for everyone before signing up be sure to compare against your other life insurance and investment options | |
what is variance | variance is a statistical measurement of the spread between numbers in a data set more specifically variance measures how far each number in the set is from the mean average and thus from every other number in the set variance is often depicted by this symbol 2 it is used by both analysts and traders to determine volatility and market security the square root of the variance is the standard deviation sd or which helps determine the consistency of an investment s returns over a period of time investopedia alex dos diazunderstanding variancein statistics variance measures variability from the average or mean it is calculated by taking the differences between each number in the data set and the mean squaring the differences to make them positive and then dividing the sum of the squares by the number of values in the data set software like excel can make this calculation easier variance is calculated by using the following formula 2 i 1 n x i x 2 n where x i each value in the data set x mean of all values in the data set n number of values in the data set begin aligned sigma 2 frac sum i 1 n big x i overline x big 2 n textbf where x i text each value in the data set overline x text mean of all values in the data set n text number of values in the data set end aligned 2 n i 1n xi x 2 where xi each value in the data setx mean of all values in the data setn number of values in the data set you can also use the formula above to calculate the variance in areas other than investments and trading with some slight alterations for instance when calculating a sample variance to estimate a population variance the denominator of the variance equation becomes n 1 so that the estimation is unbiased and does not underestimate the population variance advantages and disadvantages of variancestatisticians use variance to see how individual numbers relate to each other within a data set rather than using broader mathematical techniques such as arranging numbers into quartiles the advantage of variance is that it treats all deviations from the mean as the same regardless of their direction the squared deviations cannot sum to zero and give the appearance of no variability at all in the data one drawback to variance though is that it gives added weight to outliers these are the numbers far from the mean squaring these numbers can skew the data another pitfall of using variance is that it is not easily interpreted users often employ it primarily to take the square root of its value which indicates the standard deviation of the data as noted above investors can use standard deviation to assess how consistent returns are over time in some cases risk or volatility may be expressed as a standard deviation rather than a variance because the former is often more easily interpreted example of variance in financehere s a hypothetical example to demonstrate how variance works let s say returns for stock in company abc are 10 in year 1 20 in year 2 and 15 in year 3 the average of these three returns is 5 the differences between each return and the average are 5 15 and 20 for each consecutive year squaring these deviations yields 0 25 2 25 and 4 00 respectively if we add these squared deviations we get a total of 6 5 when you divide the sum of 6 5 by one less the number of returns in the data set as this is a sample 2 3 1 it gives us a variance of 3 25 0 0325 taking the square root of the variance yields a standard deviation of 18 0 0325 0 180 for the returns | |
how do i calculate variance | follow these steps to compute variance | |
what is variance used for | variance is essentially the degree of spread in a data set from its mean value it shows the amount of variation that exists among the data points visually the larger the variance the fatter a probability distribution will be in finance if something like an investment has a greater variance it may be interpreted as more risky or volatile | |
why is standard deviation often used more than variance | standard deviation is the square root of variance it is sometimes more useful since taking the square root removes the units from the analysis this allows for direct comparisons between different things that may have different units or different magnitudes for instance to say that increasing x by one unit increases y by two standard deviations allows you to understand the relationship between x and y regardless of what units they are expressed in the bottom linevariance measures variability or how far numbers in a data set diverge from the mean it is used by various professionals including data analysts mathematicians scientists statisticians and investors the latter two use variance to determine whether to buy sell or hold securities for example if an investment has a greater variance it could be considered more volatile and risky | |
what is a variance inflation factor vif | a variance inflation factor vif is a measure of the amount of multicollinearity in regression analysis multicollinearity exists when there is a correlation between multiple independent variables in a multiple regression model this can adversely affect the regression results thus the variance inflation factor can estimate how much the variance of a regression coefficient is inflated due to multicollinearity understanding a variance inflation factor vif a variance inflation factor is a tool to help identify the degree of multicollinearity multiple regression is used when a person wants to test the effect of multiple variables on a particular outcome the dependent variable is the outcome that is being acted upon by the independent variables the inputs into the model multicollinearity exists when there is a linear relationship or correlation between one or more of the independent variables or inputs multicollinearity creates a problem in the multiple regression model because the inputs are all influencing each other therefore they are not actually independent and it is difficult to test how much the combination of the independent variables affects the dependent variable or outcome within the regression model while multicollinearity does not reduce a model s overall predictive power it can produce estimates of the regression coefficients that are not statistically significant in a sense it can be thought of as a kind of double counting in the model in statistical terms a multiple regression model where there is high multicollinearity will make it more difficult to estimate the relationship between each of the independent variables and the dependent variable in other words when two or more independent variables are closely related or measure almost the same thing then the underlying effect that they measure is being accounted for twice or more across the variables when the independent variables are closely related it becomes difficult to say which variable is influencing the dependent variables small changes in the data used or in the structure of the model equation can produce large and erratic changes in the estimated coefficients on the independent variables this is a problem because the goal of many econometric models is to test exactly this sort of statistical relationship between the independent variables and the dependent variable to ensure the model is properly specified and functioning correctly there are tests that can be run for multicollinearity the variance inflation factor is one such measuring tool using variance inflation factors helps to identify the severity of any multicollinearity issues so that the model can be adjusted variance inflation factor measures how much the behavior variance of an independent variable is influenced or inflated by its interaction correlation with the other independent variables variance inflation factors allow a quick measure of how much a variable is contributing to the standard error in the regression when significant multicollinearity issues exist the variance inflation factor will be very large for the variables involved after these variables are identified several approaches can be used to eliminate or combine collinear variables resolving the multicollinearity issue formula and calculation of vifthe formula for vif is vif i 1 1 r i 2 where r i 2 unadjusted coefficient of determination for regressing the ith independent variable on the remaining ones begin aligned text vif i frac 1 1 r i 2 textbf where r i 2 text unadjusted coefficient of determination for text regressing the ith independent variable on the text remaining ones end aligned vifi 1 ri2 1 where ri2 unadjusted coefficient of determination forregressing the ith independent variable on theremaining ones | |
when ri2 is equal to 0 and therefore when vif or tolerance is equal to 1 the ith independent variable is not correlated to the remaining ones meaning that multicollinearity does not exist 1 | in general terms the higher the vif the higher the possibility that multicollinearity exists and further research is required when vif is higher than 10 there is significant multicollinearity that needs to be corrected 1example of using viffor example suppose that an economist wants to test whether there is a statistically significant relationship between the unemployment rate independent variable and the inflation rate dependent variable including additional independent variables that are related to the unemployment rate such as new initial jobless claims would be likely to introduce multicollinearity into the model the overall model might show strong statistically sufficient explanatory power but be unable to identify if the effect is mostly due to the unemployment rate or to the new initial jobless claims this is what the vif would detect and it would suggest possibly dropping one of the variables out of the model or finding some way to consolidate them to capture their joint effect depending on what specific hypothesis the researcher is interested in testing | |
what is a good vif value | as a rule of thumb a vif of three or below is not a cause for concern as vif increases the less reliable your regression results are going to be | |
what does a vif of 1 mean | a vif equal to one means variables are not correlated and multicollinearity does not exist in the regression model | |
what is vif used for | vif measures the strength of the correlation between the independent variables in regression analysis this correlation is known as multicollinearity which can cause problems for regression models the bottom linewhile a moderate amount of multicollinearity is acceptable in a regression model a higher multicollinearity can be a cause for concern two measures can be taken to correct high multicollinearity first one or more of the highly correlated variables can be removed as the information provided by these variables is redundant the second method is to use principal components analysis or partial least square regression instead of ols regression which can respectively reduce the variables to a smaller set with no correlation or create new uncorrelated variables this will improve the predictability of a model 1 | |
what is a variance swap | a variance swap is a financial derivative used to hedge or speculate on the magnitude of a price movement of an underlying asset these assets include exchange rates interest rates or the price of an index in plain language the variance is the difference between an expected result and the actual result a variance swap is quite similar to a volatility swap which utilizes realized volatility instead of variance | |
how a variance swap works | similar to a plain vanilla swap one of the two parties involved in a var swap transaction will pay an amount based upon the actual variance of price changes of the underlying asset the other party will pay a fixed amount called the strike specified at the start of the contract the strike is typically set at the onset to make the net present value npv of the payoff zero at the end of the contract the net payoff to the counterparties will be a theoretical amount multiplied by the difference between the variance and a fixed amount of volatility settled in cash due to any margin requirements specified in the contract some payments may occur during the life of the contract should the contract s value move beyond agreed limits the variance swap in mathematical terms is the arithmetic average of the squared differences from the mean value the square root of the variance is the standard deviation because of this a variance swap s payout will be larger than that of a volatility swap as the basis of these products is at variance rather than the standard deviation a variance swap is a pure play on an underlying asset s volatility options also give an investor the possibility to speculate on an asset s volatility but options carry directional risk and their prices depend on many factors including time expiration and implied volatility therefore the equivalent options strategy requires additional risk hedging to complete variance swaps are also cheaper to put on since the equivalent of an option involves a strip of options there are three main classes of users for variance swaps additional variance swap characteristicsvariance swaps are well suited for speculation or hedging on volatility unlike options variance swaps do not require additional hedging options may require delta hedging also the payoff at maturity to the long holder of the variance swap is always positive when realized volatility is more significant than the strike buyers and sellers of volatility swaps should know that any significant jumps in the price of the underlying asset can skew the variance and produce unexpected results | |
the variation margin is a variable margin payment made by clearing members such as a futures broker to their respective clearing houses based on adverse price movements of the futures contracts these members hold variation margin is paid by clearing members on a daily or intraday basis to reduce the exposure created by carrying high risk positions by demanding variation margin from their members clearing houses are able to maintain a suitable level of risk which allows for the orderly payment and receipt of funds for all traders using that clearing house | basics of variation marginvariation margin is used to bring the capital in an account up to the margin level this margin and the associated initial and maintenance margin must be sustained by liquid funds allowing it to function as collateral against any losses that may result from trades underway for example if a trader buys one futures contract the initial margin on that contract may be 3 000 this is the amount of capital they need to have in their account to take the trade the maintenance margin may be 2 500 this means if the money in the account drops below 2 500 the trader is required to top up the account to 3 000 again as they have lost 500 on their position s which reduces the buffer in their account to an unacceptable level the amount needed to bring the account to an acceptable level in order to ensure future trades is known as variation margin now imagine that a broker has thousands of traders all in different positions and both making and losing money the broker or clearing member must take all these positions into account and then submit funds to the clearing houses which covers the risk taken by all their trades the amount of variation margin varies depending on the exact market conditions and price movement experienced over the course of the day the variation margin payment of additional funds may be deemed necessary by a broker when the equity account balance falls below the maintenance margin or initial margin requirement this request for funds is referred to as a margin call margin calla margin call is when a broker requires an investor to contribute additional funds to meet the required minimum margin amount it is enacted when the account losses money or additional positions are taken causing the equity balance to fall below the required minimum for holding those positions if the investor is not able to meet the margin call the brokerage can then sell the securities in the account until the amount is met or risk is reduced to an acceptable level maintenance margin requirementmaintenance margin is an important factor to consider while calculating variation margin it refers to the amount of money an investor must keep in his margin account when trading stocks it is generally less than the initial margin required to make trades this requirement gives the investor the ability to borrow from a brokerage this margin functions as collateral against the amount borrowed by the investor the financial industry regulatory authority finra requires the maintenance margin to be set at a minimum of 25 for stocks other brokerages can set higher minimums such as 50 depending on the level of risk and the investor involved | |
when trading futures maintenance margin means something different it is the level at which an investor is required to top up their account to the initial margin amount | example of variation marginlet s say a trader buys 100 shares of stock abc for 10 each the initial margin set by the broker for purchase is 50 this means that the broker must have 500 in his account at all times to make trades also assume that the maintenance margin is 300 if the price of abc falls to 7 then the 300 in losses in the trade are deducted from the initial margin account this means that initial margin account balance is now 200 which is below the 300 maintenance margin amount specified earlier the new initial margin amount is 350 50 of 700 the trader would need to top up their account with 150 in order to continue trading |
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