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do this for all of your credit cards and loans or at least get on the email or text reminder lists provided by the lenders this will help ensure that you remember to pay at least the minimum on time every month | beware of advertised quick fixes to your credit score experts warn that there s no such thing make payments above the minimum amount due whenever possible set a realistic repayment goal and work toward it gradually having high total credit card debt damages your credit score and paying more than the minimum due can help raise it credit card accounts provide these disclosures focus on paying off the highest interest debt fastest this will free up the most cash which you can then begin to apply to other lower interest debts don t close credit card accounts that you no longer use also don t open new accounts that you don t need either move can damage your credit score if bad credit has made it difficult for you to get a regular credit card consider applying for a secured credit card it is similar to a bank debit card in that it allows you to spend only the amount you have on deposit having a secured card and making timely payments on it can help you rebuild a bad credit score and eventually qualify for a regular card it also is a good way for young adults to begin to establish a credit history | |
how long does it take to repair bad credit | this depends on how bad your credit score is to start if you re recovering from a bankruptcy it can take years to build up a good credit score however paying down debt to decrease your credit utilization ratio can have an impact in as little as a couple of months and be sure to keep paying your credit bills on time 5can i open too many credit cards there s no set limit on how many lines of credit you can have open at one time however applying for too many cards in a short period can hurt your credit score consider how much credit you actually need before opening a new card account | |
what is the most important factor in my credit score | your payment history is the single most important factor in your credit score paying on time every month will have the biggest impact on your credit history missing payments can lower your score quickly and significantly the bottom linebad credit can be a major roadblock especially if you hope to borrow money to purchase a home or a car but it doesn t have to be permanent if you have bad credit paying your debts on time and paying down high balances can improve your credit score and make you more attractive to lenders if you feel like you re drowning in debt a nonprofit credit counselor may be able to help | |
what is bad debt | bad debt is an amount of money that a creditor must write off if a borrower defaults on the loans if a creditor has a bad debt on the books it becomes uncollectible and is recorded as a charge off bad debt is a contingency that must be accounted for by all businesses that extend credit to customers as there is always a risk that payment won t be collected these entities can estimate how much of their receivables may become uncollectible by using either the accounts receivable ar aging method or the percentage of sales method investopedia dennis madambaunderstanding bad debtbad debt is any credit advanced by any lender to a debtor that shows no promise of ever being collected either partially or in full any lender can have bad debt on their books whether that s a bank or other financial institution a supplier or a vendor bad debts end up as such because the debtor can t or refuses to pay because of bankruptcy financial difficulty or negligence these entities may exhaust every possible avenue to collect on bad debts before deeming them uncollectible including collection activity and legal action businesses must account for bad debt expenses using one of two methods the first is the direct write off method which involves writing off accounts when they are identified as uncollectible while this method records the precise figure for accounts determined to be uncollectible it fails to adhere to the matching principle used in accrual accounting and generally accepted accounting principles gaap the second is the matching principle which requires that expenses be matched to related revenues in the same accounting period they are generated bad debt expense must be estimated using the allowance method in the same period and appears on the income statement under the sales and general administrative expense section since a company can t predict which accounts will end up in default it establishes an amount based on an anticipated figure in this case historical experience helps estimate the percentage of money expected to become bad debt the direct write off method is used in the united states for income tax purposes special considerationsthe internal revenue service irs allows businesses to write off bad debt on schedule c of tax form 1040 if they previously reported it as income bad debt may include loans to clients and suppliers credit sales to customers and business loan guarantees however deductible bad debt does not typically include unpaid rents salaries or fees 1for example a food distributor that delivers a shipment to a restaurant on credit in december will record the sale as income on its tax return for that year but if the restaurant goes out of business in january and does not pay the invoice the food distributor can write off the unpaid bill as a bad debt on its tax return in the following year individuals are also able to deduct a bad debt from their taxable income if they previously included the amount in their income or loaned out cash and can prove that they intended to make a loan at the time of the transaction and not a gift the irs classifies non business bad debt as short term capital losses 1the term bad debt can also be used to describe debts that are taken to pay for goods that don t appreciate in other words bad debt is a form of borrowing that doesn t help your bottom line in this sense bad debt is in contrast to good debt which an individual or company takes out to help generate income or increase their overall net worth | |
how to record bad debts | recording bad debt involves a debit and a credit entry here s how it s done the allowance for doubtful accounts nets against the total ar presented on the balance sheet to reflect only the amount estimated to be collectible this allowance accumulates across accounting periods and may be adjusted based on the balance in the account payments received later for bad debts that have already been written off are booked as bad debt recovery methods of estimating bad debtwe ve established that bad debts must be recorded but what amounts are listed on corporate financial statements this involves estimating uncollectible balances using one of two methods this can be done through statistical modeling using an ar aging method or through a percentage of net sales we ve highlighted the basics of each below the ar aging method groups all outstanding accounts receivable by age and specific percentages are applied to each group the aggregate of all groups results is the estimated uncollectible amount this method determines the expected losses to delinquent and bad debt by using a company s historical data and data from the industry as a whole the specific percentage typically increases as the age of the receivable increases to reflect rising default risk and decreasing collectibility let s say a company has 70 000 of accounts receivable less than 30 days outstanding and 30 000 of accounts receivable more than 30 days outstanding based on previous experience 1 of ar less than 30 days old will not be collectible and 4 of ar at least 30 days old will be uncollectible this means the company must report an allowance and bad debt expense of 1 900 this is calculated as if the next accounting period results in an estimated allowance of 2 500 based on outstanding accounts receivable only 600 2 500 1 900 will be the bad debt expense in the second period a bad debt expense can be estimated by taking a percentage of net sales based on the company s historical experience with bad debt this method applies a flat percentage to the total dollar amount of sales for the period companies regularly make changes to the allowance for doubtful accounts so that they correspond with the current statistical modeling allowances using the example above let s say a company expects that 3 of net sales are not collectible if the total net sales for the period is 100 000 the company establishes an allowance for doubtful accounts for 3 000 while simultaneously reporting 3 000 in bad debt expense if the following accounting period results in net sales of 80 000 an additional 2 400 is reported in the allowance for doubtful accounts and 2 400 is recorded in the second period in bad debt expense the aggregate balance in the allowance for doubtful accounts after these two periods is 5 400 | |
what is bad debt in accounting | bad debt is debt that creditor companies and individuals can write off as uncollectible | |
what is bad debt considered | bad debt is considered a normal part of operating a business that extends credit to customers or clients companies should estimate a total amount of bad debt at the beginning of every year to help them budget for that year and account for non collectible receivables | |
what type of asset is bad debt | bad debt is a contra asset which reduces a business s accounts receivable the bottom linebad debt is debt that cannot be collected it is a part of operating a business if that company allows customers to use credit for purchases bad debt is accounted for by crediting a contra asset account and debiting a bad expense account which reduces the accounts receivable | |
what is a bad debt expense | a bad debt expense is recognized when a receivable is no longer collectible because a customer is unable to fulfill their obligation to pay an outstanding debt due to bankruptcy or other financial problems companies that extend credit to their customers report bad debts as an allowance for doubtful accounts on the balance sheet which is also known as a provision for credit losses investopedia nez riazunderstanding bad debt expense | |
when a company makes a credit sale it books a credit to revenue and a debit to an account receivable the problem with this accounts receivable balance is there is no guarantee the company will collect the payment for many different reasons a company may be entitled to receiving money for a credit sale but may never actually receive those funds | because the company may not actually receive all accounts receivable amounts accounting rules requires a company to estimate the amount it may not be able to collect this amount must then be recorded as a reduction against net income because even though revenue had been booked it never materialized into cash this expense is called bad debt expenses and they are generally classified as sales and general administrative expense though part of an entry for bad debt expense resides on the balance sheet bad debt expense is posted to the income statement recognizing bad debts leads to an offsetting reduction to accounts receivable on the balance sheet though businesses retain the right to collect funds should the circumstances change | |
how to calculate bad debt expense | there are two different methods used to recognize bad debt expense using the direct write off method uncollectible accounts are written off directly to expense as they become uncollectible on the other hand the allowance method accrues an estimate that gets continually revised the direct write off method is used in the u s for income tax purposes however while the direct write off method records the exact amount of uncollectible accounts it fails to uphold the matching principle used in accrual accounting and generally accepted accounting principles gaap the matching principle requires that expenses be matched to related revenues in the same accounting period in which the revenue transaction occurs the major problem with the direct write off is the unpredictability of when the expense may occur consider a company that has a single customer that has a material amount of pending accounts receivable under the direct write off method 100 of the expense would be recognized not only during a period that can t be predicted but also not during the period of the sale the entries to post bad debt using the direct write off method result in a debit to bad debt expense and a credit to accounts receivable there is no allowance and only one entry needs to be posted for the entry receivable to be written off the allowance method is an accounting technique that enables companies to take anticipated losses into consideration in its financial statements to limit overstatement of potential income to avoid an account overstatement a company will estimate how much of its receivables from current period sales that it expects will be delinquent because no significant period of time has passed since the sale a company does not know which exact accounts receivable will be paid and which will default so an allowance for doubtful accounts is established based on an anticipated estimated figure a company will debit bad debts expense and credit this allowance account the allowance for doubtful accounts is a contra asset account that nets against accounts receivable which means that it reduces the total value of receivables when both balances are listed on the balance sheet this allowance can accumulate across accounting periods and may be adjusted based on the balance in the account | |
how to estimate bad debt expense | two primary methods exist for estimating the dollar amount of accounts receivables not expected to be collected bad debt expense can be estimated using statistical modeling such as default probability to determine its expected losses to delinquent and bad debt the statistical calculations can utilize historical data from the business as well as from the industry as a whole the specific percentage will typically increase as the age of the receivable increases to reflect increasing default risk and decreasing collectibility alternatively a bad debt expense can be estimated by taking a percentage of net sales based on the company s historical experience with bad debt companies regularly make changes to the allowance for credit losses entry so that they correspond with the current statistical modeling allowances the aging method groups all outstanding accounts receivable by age and specific percentages are applied to each group the aggregate of all groups results is the estimated uncollectible amount for example a company has 70 000 of accounts receivable less than 30 days outstanding and 30 000 of accounts receivable more than 30 days outstanding based on previous experience 1 of accounts receivable less than 30 days old will not be collectible and 4 of accounts receivable at least 30 days old will be uncollectible therefore the company will report an allowance and bad debt expense of 1 900 70 000 1 30 000 4 if the next accounting period results in an estimated allowance of 2 500 based on outstanding accounts receivable only 600 2 500 1 900 will be the bad debt expense in the second period the sales method applies a flat percentage to the total dollar amount of sales for the period for example based on previous experience a company may expect that 3 of net sales are not collectible if the total net sales for the period is 100 000 the company establishes an allowance for doubtful accounts for 3 000 while simultaneously reporting 3 000 in bad debt expense if the following accounting period results in net sales of 80 000 an additional 2 400 is reported in the allowance for doubtful accounts and 2 400 is recorded in the second period in bad debt expense the aggregate balance in the allowance for doubtful accounts after these two periods is 5 400 example of bad debt expenseas part of its 2021 annual report amazon reported details in its notes to the financial statements regarding accounts receivables allowance for doubtful accounts and bad debt expense although bad debt expense is not explicitly called out in its financial statements assumptions can be made based on footnote disclosures about their allowance estimates 1from the financial statement snippet above the important words to note is net and other this means that the gross amount of accounts receivable have been reduced instead of showing the gross accounts receivable and an offsetting allowance for doubtful accounts amazon has combined these two amounts at the end of 2021 amazon reported 32 89 billion of accounts receivable 1more information about this balance is disclosed in the notes below based on the note disclosure amazon s allowance for doubtful accounts is 1 1 billion this means the gross amount of accounts receivable is actually over 1 billion higher than what the company is showing on its financial statements 2 however due to conservatism this balance has been reduced in addition it s important to note the change in the allowance from one year to the next because the allowance went relatively unchanged at 1 1 billion in both 2020 and 2021 the entry to bad debt expense would not have been material however the jump from 718 million in 2019 to 1 1 billion in 2022 would have resulted in a roughly 400 million bad debt expense to reconcile the allowance to its new estimate 2 | |
what are examples of bad debt expense | consider a company going bankrupt that can not pay for all of its bills some of the people it owes money to will not be made whole meaning those people must recognize a loss this situation represents bad debt expense on the side that is not going to collect the funds they are owed | |
is bad debt an expense or a loss | technically bad debt is classified as an expense it is reported along with other selling general and administrative costs in either case bad debt represents a reduction in net income so in many ways bad debt has characteristics of both an expense and a loss account | |
where is bad debt expense reported | bad debt expense is reported within the selling general and administrative expense section of the income statement however the entries to record this bad debt expense may be spread throughout a set of financial statements the allowance for doubtful accounts resides on the balance sheet as a contra asset meanwhile any bad debts that are directly written off reduce the accounts receivable balance on the balance sheet the bottom linebad debt expense is a natural part of any business that extends credit to its customers because a small portion of customers will likely end up not being able to pay their bills a portion of sales or accounts receivable must be ear marked as bad debt this small balance is most often estimated and accrued using an allowance account that reduces accounts receivable though a direct write off method which is not allowed under gaap may also be used | |
what is a bag holder | a bag holder is an informal term used to describe an investor who holds a position in a security that decreases in value until it descends into worthlessness in most cases the bag holder stubbornly retains their holding for an extended period during which time the value of the investment goes to zero understanding bag holdersaccording to the website urban dictionary the term bag holder hails from the great depression where people on soup lines held potato bags filled with their only possessions since then the term has emerged as part of modern day investment lexicon a blogger who writes on the subject of penny stock investing once quipped about starting a support group called bag holders anonymous a bag holder refers to an investor who symbolically holds a bag of stock that has become worthless over time suppose an investor purchases 100 shares of a newly public technology start up although the share price preliminarily rises during the initial public offering ipo it quickly starts dropping after analysts begin questioning the veracity of the business model subsequent poor earnings reports signal that the company is struggling and the stock price consequently plummets further an investor who is determined to hang onto the stock despite this ominous sequence of events is a bag holder bag holders often succumb to the disposition effect or sunk cost fallacy which causes them to cling to their positions for irrationally long periods loss aversion and the disposition effectthere are several reasons why an investor might hold on to underperforming securities for one the investor may entirely neglect their portfolio and only be unaware of a stock s declining value it is more likely that an investor will hold onto a position because selling it means acknowledging a poor investment decision in the first place and then there is the phenomenon known as the disposition effect where investors tend to prematurely sell shares of a security whose price increases while stubbornly retaining investments that drop in value simply stated investors psychologically hate losing more than they enjoy winning so they consequently cling to the hope that their losing positions will bounce back this phenomenon relates to the prospect theory where individuals make decisions based on perceived gains rather than perceived losses this theory is illustrated by the example that people prefer to receive 50 rather than be given 100 and lose half of that amount even though both cases ultimately net them 50 in another example individuals decline to work overtime hours because they may incur higher taxes although they eventually stand to gain the outgoing funds loom larger in their minds sunk cost fallacythe sunk cost fallacy is another reason why an investor may become a bag holder sunk costs are unrecoverable expenses that have already occurred suppose an investor purchased 100 shares of stock at 10 per share in a transaction valued at 1 000 if the stock falls to 3 per share the market value of the holding is now just 300 therefore the 700 loss is considered a sunk cost many investors are tempted to wait until the stock slingshots back up to 1 000 to recoup their investment but the losses have already become a sunk cost and should be considered permanent finally many investors hold on to a stock for too long because the drop in value is an unrealized loss that is not reflected in their actual accounting until the sale is complete this holding on essentially delays the inevitable from happening special considerationspractically speaking there are a few ways of determining whether a stock is a likely bag holder candidate for example if a company is cyclical where its share price tends to fluctuate along with disruptions in the economy then there is a decent chance that riding out rough patches may result in a share price turnaround but if a company s fundamentals are crippled the share price may never recover consequently a stock s sector may signal its chances for outperforming in the long run | |
what is a bail bond | a bail bond is an agreement by a criminal defendant to appear for trial or pay a sum of money set by the court the bail bond is co signed by a bail bondsman who charges the defendant a fee in return for guaranteeing the payment the bail bond is a type of surety bond the commercial bail bond system exists only in the united states and the philippines in other countries bail may entail a set of restrictions and conditions placed on criminal defendants in return for their release until their trial dates | |
how a bail bond works | a person who is charged with a crime is typically given a bail hearing before a judge the amount of the bail is at the judge s discretion a judge may deny bail altogether or set it at an astronomical level if the defendant is charged with a violent crime or appears likely to be a flight risk judges generally have wide latitude in setting bail amounts and typical amounts vary by jurisdiction a defendant charged with a nonviolent misdemeanor could see bail set at 500 felony crime charges have correspondingly high bail with 20 000 or more not uncommon the commercial bail bond system exists only in the united states and the philippines once the amount of the bail is set the defendant s choices are to in the last instance courts in some jurisdictions accept title to a home or other collateral of value in lieu of cash | |
what a bail bondsman does | bail bondsmen also called bail bond agents provide written agreements to criminal courts to pay the bail in full if the defendants whose appearances they have guaranteed fail to appear on their trial dates bail bondsmen generally charge 10 of the bail amount upfront in return for their service and may charge additional fees some states have put a cap of 8 on the amount charged the agent may also require a statement of creditworthiness or may demand that the defendant turn over collateral in the form of property or securities bail bondsmen generally accept most property of value including cars jewelry and houses as well as stocks and bonds once the bail or bail bond is delivered the defendant is released until trial disadvantages of the bail bond systemthe bail bond system has become part of the larger debate over mass incarceration especially of young black men in the u s the bail bond system is considered by many even in the legal profession to be discriminatory as it requires low income defendants to stay in jail or scrape together a 10 cash fee and the rest of the bail in collateral even before they stand trial for any crime the prison policy initiative reports that about 536 000 people are being held in jails in the u s because they cannot afford bail or a bail bondsman s services four states illinois kentucky oregon and wisconsin have outlawed bail bondsmen and instead require a 10 deposit on the bail amount to be lodged with the court in 2018 california voted to eliminate cash bail requirements from its court system bail bond examplesuppose that new york resident melissa has broken the law and the court has set her bail at 25 000 although melissa doesn t want to stay in jail while her court case is being reviewed she doesn t have the 25 000 in cash as such melissa decides to reach out to a bail bondsman to post a bail bond in return for their services the bondsman is paid 10 of the bond or 2 500 for the remaining 22 500 the bondsman secures an equivalent amount in collateral from melissa or someone in her family melissa complies with the court s requirements and shows up to her court dates so she receives the 22 500 in collateral back at the end of the trial 2 500 less than what she would have received had she paid the bail herself | |
what can be used as collateral for a bail bond | bail bondsmen accept various forms of collateral including real estate cars credit cards stocks bonds and jewelry | |
what happens if i cannot post bail | unfortunately if you are unable to pose bail you will likely remain in jail until after your case is resolved will i get my bail money back that depends in new york for example the bail money will be returned at the end of your case if you make all of your court appearances if you are found not guilty or if your case is dismissed you will get 100 of the bail money back however if you are convicted it will be returned less a 3 fee 1 additionally you must make all of your court appearances or else you may forfeit your bail the bottom linea criminal defendant agrees via a bail bond to appear for trial or pay a sum of money set by the court the bail bond which is a type of surety bond is co signed by a bail bondsman who charges the defendant a fee in return for guaranteeing the payment only two countries in the world have a commercial bail bond system the united states and the philippines the system which has been outlawed in four u s states is widely considered discriminatory to low income defendants and a contributor to the mass incarceration of young black men | |
what is a bail in | a bail in provides relief to a financial institution on the brink of failure by requiring the cancellation of debts owed to creditors and depositors a bail in is the opposite of a bailout which involves the rescue of a financial institution by external parties typically governments using taxpayers money for funding bailouts help to prevent creditors from taking on losses while bail ins mandate creditors to take losses understanding bail inbail ins and bailouts arise out of necessity rather than choice both offer options for helping institutions in a crisis bailouts were a powerful tool in the 2008 financial crisis but bail ins have their place as well investors and deposit holders in a troubled financial institution would prefer to keep the organization solvent rather than face the alternative of losing the full value of their investments or deposits in a crisis governments also would prefer not to let a financial institution fail because large scale bankruptcy could increase the likelihood of systemic problems for the market these risks are why bailouts were used in the 2008 financial crisis and the concept of too big to fail led to widespread reform requirements for a bail inwhile most investors are familiar with bailouts and their uses bail ins are also a stratagem of economists europe has incorporated them to solve many of its greatest challenges the bank of international settlement bis has also spoken openly about how bail ins can be used with a focus on integrations in the european union in these scenarios bail ins can be used in cases wherein a full government bailout is unlikely typically bail ins are instituted for one of three reasons depositors in the u s are protected by the federal deposit insurance corporation fdic which insures each bank account for up to 250 000 in a bail in scenario financial institutions would only use the amount of deposits that are in excess of a customer s 250 000 balance real world examples of bail incyprus and european union resolutions provide two examples of bail ins in action while the public became familiar with the subject of bailouts in the aftermath of the great recession of 2008 bail ins attracted attention in 2013 after government officials resorted to the strategy in cyprus a popular offshore tax haven as discussed in the national herald the consequences were that uninsured depositors defined in the european union as people with deposits larger than 100 000 euros in the bank of cyprus lost a substantial portion of their deposits in return the depositors received bank stock however the value of these stocks did not equate to most depositors losses in 2018 the european union began looking at more broadly incorporating bail ins into its resolution framework in a speech at the iadi erc international conference fernando restoy from the bank for international settlements discussed the bail in plans in the european union a new resolution framework is being considered that would potentially incorporate both bail ins and bailouts bail ins would be involved in the first phase of a resolution requiring a specified amount of funds to be written off before bailout funds would become available | |
what is a bailout | a bailout is when a business an individual or a government provides money and or resources also known as a capital injection to a failing company these actions help to prevent the consequences of that business s potential downfall which may include bankruptcy and default on its financial obligations businesses and governments may receive a bailout which may take the form of a loan the purchasing of bonds stocks or cash infusions and may require the recused party to reimburse the support depending upon the terms bailout explainedbailouts are typically only for companies or industries whose bankruptcies may have a severe adverse impact on the economy not just a particular market sector for example a company that has a considerable workforce may receive a bailout because the economy could not sustain the substantial jump in unemployment that would occur if the business failed often other companies will step in and acquire the failing business known as a bailout takeover allowing a company to fail can have significant consequences both for the company itself and for the wider economy as in the case of contagion below are some other reasons why letting a company fail may not always be the best option and why bailouts may be warranted overall while allowing a company to fail may be a necessary and unavoidable outcome in some cases it is generally seen as a last resort and is often avoided through bailouts or other forms of financial support examples of bailoutsthe u s government has a long history of bailouts going back to the panic of 1792 since that time the government has assisted financial institutions during the 1989 savings and loan bailout rescued insurance giant american international group aig funded the government sponsored home lenders freddie mac and fannie mae and stabilized banks during the 2008 too big to fail bailout officially known as the emergency economic stabilization act of 2008 eesa 1 further the financial industry is not the only one to receive rescue funds throughout the years lockheed aircraft corporation lmt chrysler general motors gm and the airline industry also received government and other bailout support in 2010 ireland bailed out the anglo irish bank corporation to the tune of 29 3 billion 2 greece received european union eu bailouts which topped the scale at around 326 billion 3 however greece is not alone in needing outside help to manage debts other rescues include south korea in 1997 indonesia in 1999 brazil in 1998 2001 and 2002 and argentina in 2000 and 2001 also it is essential to understand many of the businesses which receive rescue funding will eventually go on to pay back the loans chrysler and gm repaid their treasury obligations as did aig however aig also received aid in ways other than merely financial which is harder to track as you can see bailouts take many shapes and forms also with each new bailout the record books are reopened and a new biggest recipient award is updated consider some of these other historical financial rescues during the panic of 1792 debt from the revolutionary war led the government to bail out the 13 united states 4the u s government offered one of the most massive bailouts in history in 2008 in the wake of the global financial crisis the rescue targeted the largest financial institutions in the world who experienced severe losses from the collapse of the subprime mortgage market and the resulting credit crisis banks which had been providing an increasing number of mortgages to borrowers with low credit scores experienced massive loan losses as many people defaulted on their mortgages financial institutions such as countrywide lehman brothers and bear stearns failed and the government responded with a massive assistance package on oct 3 2008 president george w bush signed into law the emergency economic stabilization act of 2008 which led to the creation of the troubled asset relief program tarp tarp allowed for the united states department of the treasury to spend up to 700 billion to purchase toxic assets from the balance sheets of dozens of financial institutions 1 by its end tarp disbursed over 443 billion to financial institutions 5 this figure represents the biggest bailout in financial history to date bear stearns which became one of the largest investment banks with 2 billion in profits in 2006 was acquired by jp morgan chase in 2008 6automakers such as chrysler and general motors gm were also knocked down during the 2008 financial crisis the automakers sought a taxpayer bailout as well arguing that without one they would not be able to stay solvent automakers were under pressure as slumping sales plunged amid the dual impacts of surging gas prices and an inability for many consumers to get auto loans more specifically the high prices at the pump caused sales of the manufacturers suvs and larger vehicles to plummet simultaneously the public found it difficult to get financing including auto loans during the financial crisis as banks tightened their lending requirements further hampering auto sales while intended for financial companies the two automakers ended up drawing roughly 63 5 billion from tarp to stay afloat in june 2009 chrysler now fiat chrysler fcau and gm emerged from bankruptcy and remain among the larger auto producers today 7as of april 2021 the u s treasury has recouped 377 billion of the 443 billion it dispersed and gm and chrysler paid back their tarp loans years ahead of schedule the u s treasury ultimately wrote off approximately 66 billion including stock losses 5 | |
why bailout a company | a company may need a bailout if it is facing severe financial difficulties that threaten its survival such as mounting debts declining revenue or a sudden downturn in the market a bailout can provide the company with the necessary funds to continue operating restructure its operations and pay off its debts usually a company would be bailed out only if allowing it to fail would have significant consequences for the wider economy the benefits of a bailout are that it can prevent the collapse of a company or organization and its industry preserve jobs and maintain economic stability this is especially true if a company s collapse will have ripple effects that can bring about even more corporate failures | |
what are the risks of bailouts | the risks of a bailout include the possibility of moral hazard where companies may become reckless and take on too much risk knowing that they will be bailed out if they do fail another risk is the cost to taxpayers or other investors who may have to foot the bill for the bailout without seeing much upside | |
what are the terms of a bailout | the terms of a bailout will vary on a case by case basis however there will usually be set conditions or requirements for receiving a bailout such as a restructuring plan or changes to the company s management and operations bailouts may also come with certain strings attached such as limitations on executive compensation debt limits or increased oversight and accountability measures these conditions are intended to ensure that the company is able to become financially stable and avoid the need for future bailouts the bottom linea bailout occurs when a third party usually a government or government agency steps in to save a company or companies by providing them with capital credit and other forms of support a bailout is usually initiated when the consequences of allowing the company or companies to fail would lead to contagion and create even greater systemic risk in addition to the government other corporations private individuals or non profit organizations may also get involved when a company accepts a bailout it will often see its management team replaced and its debts restructured the company may also be put up for sale as a result existing shareholders may not always be saved by a bailout | |
what is bait and switch | bait and switch is a morally suspect sales tactic that lures customers in with specific claims about the quality or low prices on items that turn out to be unavailable in order to upsell them on a similar pricier item it is considered a form of retail sales fraud though it takes place in other contexts while many countries have laws against using bait and switch tactics not all occurrences constitute fraud understanding bait and switchthe bait in a bait and switch can be an advertised physical product or service that has a notably attractive price or terms it can also take the form of a teaser interest rate in the case of a mortgage loan or investment product once a customer comes into the store or office to inquire about the advertised price or rate the advertiser will attempt to sell the customer a more expensive product which constitutes the switch bait and switch tactics as a form of false advertising may be subject to lawsuits in many countries including the u s england and canada however no matter how aggressive the advertiser is in attempting to upsell a potential customer to a more expensive product if they can sell the advertised teaser product there is no course of action for the consumer it is perfectly legal in the u s for a business to advertise a teaser item that is stocked in a limited amount a loss leader for example as long as they also advertise that a limited number are available and offer a rain check if the item sells out 1while relatively uncommon the bait and switch tactic has gained notoriety in the mortgage market as a potentially unscrupulous marketing tactic meant to drive business in a mortgage bait and switch an agent or company will post exceedingly low mortgage rates knowing full well that the vast majority of applicants will be unable to qualify for these teaser rates once customers begin to come into the office to inquire about the low rate the agent will proceed to offer them the higher rates they are more likely to qualify for thus earning a greater commission a similar strategy is seen in auto purchase financing in which buyers are lured by the possibility of a car loan with a rate as low as 0 in reality very few people if any will qualify for such a rate bait and switch like tactics are common in other endeavors as well | |
how to notice and avoid bait and switch scams | bait and switch scams can be difficult to notice in advance but there are some ways to minimize becoming a victim first if something looks or sounds to good to be true it is a red flag an image of a brand new car for sale or a luxury apartment for rent but with rock bottom prices attached are probably misleading if a seller comments that a product is in limited supply or out of stock it can be another warning that you aren t going to get what s being offered confusing fine print or other terms and conditions can also be a sign of trouble in general if a seller is reluctant or unwilling to disclose information if you ask e g to send more pictures of the product specifications details etc it could be because they do not actually have that product around thus one way to avoid a bait and switch is to ask for more information and more photographs if online also be sure to get an offer of the deal in writing so that you can prove that you thought you were getting one thing and not the other always read the terms and conditions and fine print to see if anything strikes you as misleading | |
how to prove a bait and switch | bait and switch tactics are often considered to be a type of fraud and therefore is illegal bait and switch scams can fall under a number of violations from breach of contract to false advertising a bait and switch is also a potential violation of the consumer fraud and deceptive business practices act or section 5 of the ftc act ultimately the u s federal trade commission ftc is responsible for monitoring and enforcing laws that protect consumers from false advertising and fraudulent acts like bait and switch tactics however sellers can also minimize their exposure to such accusations by putting a legal disclaimer on their marketing materials proving a bait and switch case in court can be difficult and therefore it is often best to be vigilant as a consumer for instance to prosecute a false advertising claim there are five criteria that must be met under section 43 of the lanham act 3turbotax software maker intuit was fined 141 million in a settlement over bait and switch tactics related to its free to file tax service intuit was accused of misleading consumers into paying for online tax preparation services instead of using the company s free service offerings 4 | |
what is bait and switch in business | a bait and switch is a scam to mislead buyers whereby a seller advertises an appealing but ingenuine offer to sell a product or service that the seller does not actually intend to sell instead the seller offers a sub par defective or unwanted alternative | |
what is bait and switch in politics | in politics bait and switch can refer to a number of things politicians may be accused of a bait and switch if they campaign on one platform but then pursue a different agenda it may also refer to so called caption bills which are small pieces of legislation with generic titles but whose wording actually makes substantial changes to the law the bait is the title and generic nature of the packaging the switch is the legislative content | |
what is the penalty for bait and switch advertising | the penalty will depend on the severity of the case and under which laws the case has been prosecuted if it is a violation of false advertising the bait and switcher may be fined up to 10 000 and or up to one year in prison per offense plus legal fees and damages 5 | |
what is the balance of payments bop | the balance of payments bop also known as the balance of international payments is a statement of all transactions made between entities in one country and the rest of the world over a defined period such as a quarter or a year it summarizes all transactions that a country s individuals companies and government bodies complete with individuals companies and government bodies outside the country investopedia paige mclaughlinunderstanding the balance of payments bop the balance of payments bop transactions consist of imports and exports of goods services and capital as well as transfer payments such as foreign aid and remittances a country s balance of payments and its net international investment position together constitute its international accounts the balance of payments divides transactions into two accounts the current account and the capital account sometimes the capital account is called the financial account with a separate usually very small capital account listed separately the current account includes transactions in goods services investment income and current transfers the capital account broadly defined includes transactions in financial instruments and central bank reserves narrowly defined it includes only transactions in financial instruments the current account is included in calculations of national output while the capital account is not 1if a country exports an item a current account transaction it effectively imports foreign capital when that item is paid for a capital account transaction if a country cannot fund its imports through exports of capital it must do so by running down its reserves this situation is often referred to as a balance of payments deficit using the narrow definition of the capital account that excludes central bank reserves in reality however the broadly defined balance of payments must add up to zero by definition in practice statistical discrepancies arise due to the difficulty of accurately counting every transaction between an economy and the rest of the world including discrepancies caused by foreign currency translations the sum of all transactions recorded in the balance of payments must be zero as long as the capital account is defined broadly the reason is that every credit appearing in the current account has a corresponding debit in the capital account and vice versa history of balance of payments bop before the 19th century international transactions were denominated in gold providing little flexibility for countries experiencing trade deficits growth was low so stimulating a trade surplus was the primary method of strengthening a nation s financial position national economies were not well integrated however so steep trade imbalances rarely provoked crises the industrial revolution increased international economic integration and balance of payment crises began to occur more frequently the great depression led countries to abandon the gold standard and engage in competitive devaluation of their currencies but the bretton woods system that prevailed from the end of world war ii until the 1970s introduced a gold convertible dollar with fixed exchange rates to other currencies 2as the u s money supply increased and its trade deficit deepened however the government became unable to fully redeem foreign central banks dollar reserves for gold and the system was abandoned 3since the nixon shock as the end of the dollar s convertibility to gold is known currencies have floated freely meaning that a country experiencing a trade deficit can artificially depress its currency by hoarding foreign reserves for example making its products more attractive and increasing its exports 4 due to the increased mobility of capital across borders balance of payments crises sometimes occur causing sharp currency devaluations such as the ones that struck in southeast asian countries in 1997 5during the great recession several countries embarked on competitive devaluation of their currencies to try to boost their exports all of the world s major central banks responded to the financial crisis at the time by executing dramatically expansionary monetary policy this led to other nations currencies especially in emerging markets appreciating against the u s dollar and other major currencies many of those nations responded by further loosening the reins on their monetary policy to support their exports especially those whose exports were under pressure from stagnant global demand during the great recession 6special considerationsbalance of payments and international investment position data are critical in formulating national and international economic policy certain aspects of the balance of payments data such as payment imbalances and foreign direct investment are key issues that a nation s policymakers seek to address while a nation s balance of payments necessarily zeroes out the current and capital accounts imbalances can and do appear between different countries current accounts the u s had the world s largest current account deficit in 2022 at almost 972 billion china had the world s largest surplus at 402 billion 7economic policies are often targeted at specific objectives that in turn impact the balance of payments for example one country might adopt policies specifically designed to attract foreign investment in a particular sector while another might attempt to keep its currency at an artificially low level to stimulate exports and build up its currency reserves the impact of these policies is ultimately captured in the balance of payments data | |
what is a balance of payments bop example | funds entering a country from a foreign source are booked as credit and recorded in the bop outflows from a country are recorded as debits in the bop for example say japan exports 100 cars to the u s japan books the export of the 100 cars as a debit in the bop while the u s books the imports as a credit in the bop | |
what is the formula for balance of payments | the formula for calculating the balance of payments is current account capital account financial account balancing item 0 | |
what is bop and its components | the bop is all transactions between entities in one country and the rest of the world over some time there are three key bop components including the current account capital account and financial account the current account must balance the capital and financial accounts the bottom linethe bop is a summary of the money entering and exiting a country over a period of time it provides critical data that can be used to set economic policies and priorities and the effect of those policies will in turn influence the bop over time | |
what is the balance of trade bot | balance of trade bot is the difference between the value of a country s exports and the value of a country s imports for a given period balance of trade is the largest component of a country s balance of payments bop sometimes the balance of trade between a country s goods and the balance of trade between its services are distinguished as two separate figures the balance of trade is also referred to as the trade balance the international trade balance the commercial balance or the net exports investopedia matthew collinsunderstanding the balance of trade bot the formula for calculating the bot can be simplified as the total value of exports minus the total value of its imports the bot on its own is not an indicator of economic health and a negative trade balance is not necessarily bad in order to use the trade balance as part of an economic health assessment context is needed one must look at why the balance is positive or negative a country that imports more goods and services than it exports in terms of value has a trade deficit or a negative trade balance conversely a country that exports more goods and services than it imports has a trade surplus or a positive trade balance a positive balance of trade indicates that a country s producers have an active foreign market after producing enough goods to satisfy local demand there is enough demand from customers abroad to keep local producers busy a negative balance of trade means that currency flows outwards to pay for exports indicating that the country may be overly reliant on foreign goods however that is not always the case it could also mean the country is wealthy and has a high level of demand that needs to be satisfied calculating the balance of tradea country s balance of trade is calculated by the following formula bot exports imports begin aligned textbf bot textbf exports textbf imports end aligned bot exports imports | |
where exports represents the currency value of all goods and services exported to foreign countries and imports represents the currency value of all goods and services imported from foreign countries | here s an example of how to calculate the balance of trade let s say that a country s export in a given year are worth 100 million and its imports are worth 80 million to calculate the balance of trade you would subtract the value of the imports from the value of the exports balance of trade exports imports 100 million 80 million 20 millionin this example the balance of trade is 20 million which means that the country has a trade surplus of 20 million it s important to note that the balance of trade is typically measured in the currency of the country whose trade balance is being calculated for example if the country in the above example is the united states the balance of trade would be measured in us dollars if the country is japan it would be measured in japanese yen and so on examples of balance of tradethe united states imported 324 6 billion in goods and services in january 2024 and exported 257 2 billion in goods and services to other countries in january 2024 the united states had a trade balance of 67 4 billion or a 67 4 billion trade deficit 1a trade deficit is not a recent occurrence in the united states in fact the country has had a persistent trade deficit since the 1970s throughout most of the 19th century the country also had a trade deficit between 1800 and 1870 the united states ran a trade deficit for all but three years 2for its january february 2024 period china reported a trade surplus of 125 16 billion this was significantly higher than forecasted amounts and much greater than the december 2023 trade surplus of 75 3 billion 3balance of trade surplus vs deficita numerically positive balance of trade also known as a trade surplus occurs when a country s exports are worth more than its imports this is measured in their total value using the country s currency a trade surplus can be a result of a country having a competitive advantage in the production and export of certain goods or it can be the result of a country s currency being relatively undervalued making its exports cheaper for foreign buyers on the other hand a numerically negative balance of trade also known as a trade deficit occurs when a country imports more goods and services than it exports in terms of their total value in the country s currency this means that the country is spending more on imports than it is earning from exports while it may be a cause for concern in some instances often it s not a problem it is also not an indication of economic crisis or weakness a trade deficit can be the result of a country having a comparative disadvantage in the production of certain goods or it can be the result of a country s currency being relatively overvalued making its imports cheaper and its exports more expensive in general a trade surplus is seen as a positive sign for a country s economy while a trade deficit is often seen as a negative sign however this is not always the case a trade surplus or trade deficit is not inherently good nor bad the balance of trade alone is not an indicator of economic health the context of the balance of trade is very important it s necessary to look at why a trade deficit or surplus is occurring for example if imports fall faster than exports due to a recession killing demand that would be a situation in which a surplus can occur during a time of economic difficulty on the other hand exports could boom due to an increase in demand from a key trading partner an example of a trade surplus in positive times to access an economy s overall strength or weakness it s also necessary to look beyond the balance of trade at things such as inflation unemployment growth production and more special considerationsa country with a large trade deficit borrows money to pay for its goods and services while a country with a large trade surplus lends money to deficit countries a country may only be able to borrow a lot to run that deficit if it is deemed dependable and creditworthy the united states would be a great example of such a country on the other hand the less creditworthy a country the higher its borrowing costs will be and therefore its deficit will be more damaging a trade surplus or deficit is not always a viable indicator of an economy s health and it must be considered in the context of the business cycle and other economic indicators for example in a recession countries prefer to export more to create jobs and in turn more demand in the economy from those benefiting from the new jobs in times of economic expansion countries have a great appetite for imports and may use them to increase price competition which limits inflation balance of trade vs balance of paymentsthe balance of trade is the difference between a country s exports and imports of goods and services while the balance of payments is a record of all international economic transactions made by a country s residents including trade as well as financial capital and financial transfers the balance of trade is a part of the balance of payments and is represented in the current account which also includes income from investments and transfers such as foreign aid and gifts the capital account which is another part of the balance of payments includes financial capital and financial transfers it s important to note that the balance of trade and the balance of payments are not the same thing although they are related the balance of trade measures the flow of goods and services into and out of a country while the balance of payments measures all international transactions including trade in goods and services financial capital and financial transfers a country can have a positive balance of trade a trade surplus and a negative balance of payments a deficit if it is exporting more goods than it is importing but it is also losing financial capital or making financial transfers conversely a country can have a negative balance of trade a trade deficit and a positive balance of payments a surplus if it is importing more goods than it is exporting but it is also receiving a large amount of financial capital or receiving financial transfers | |
what is a trade surplus | a trade surplus occurs when the value of a country s exports exceeds the value of its imports this indicates a positive inflow of money shown by the balance of trade being a positive number | |
how can a country gain a trade surplus | countries can shift from a trade deficit to a surplus by investing heavily in export oriented manufacturing or extracting industries it is also possible to move toward a trade surplus by placing tariffs on imported goods or by devaluing the country s currency however each of these actions can have negative consequences for an economy there are always trade offs for example tariffs often lead to inflation and higher consumer prices devaluing a currency is obviously inflationary as well and wipes out people s savings a trade deficit on its own is not necessarily a problem and doesn t need fixing for the sake of fixing | |
how do we measure balance of trade | the balance of trade is typically measured as the difference between a country s exports and imports of goods to calculate the balance of trade you would subtract the value of a country s imports from the value of its exports if the result is positive it means that the country has a trade surplus and if the result is negative it means that the country has a trade deficit the bottom linethe balance of trade is the difference between a country s exports and imports of goods a numerically positive balance of trade also known as a trade surplus occurs when a country exports more goods than it imports this means that the country is earning more from its exports than it is spending on its imports and it is generally seen as a sign of economic strength although it s not an indicator of economic health on its own on the other hand a numerically negative balance of trade also known as a trade deficit occurs when a country imports more goods than it exports this means that the country is spending more on imports than it is earning from exports and it can be a cause for concern if it persists over a long period of time however it s not always a problem and many successful economies have run trade deficits for decades the balance of trade is an important component of a country s balance of payments which is a record of all its international financial transactions correction feb 8 2023 a previous version of this article incorrectly defined a positive balance of trade and a negative balance of payments it has been edited to reflect that a positive balance of trade and negative balance of payments occurs when a country is exporting more goods than it is importing | |
what is a balance sheet | the term balance sheet refers to a financial statement that reports a company s assets liabilities and shareholder equity at a specific point in time balance sheets provide the basis for computing rates of return for investors and evaluating a company s capital structure in short the balance sheet is a financial statement that provides a snapshot of what a company owns and owes as well as the amount invested by shareholders balance sheets can be used with other important financial statements to conduct fundamental analysis or calculate financial ratios investopedia katie kerpel | |
how balance sheets work | the balance sheet provides an overview of the state of a company s finances at a moment in time it cannot give a sense of the trends playing out over a longer period on its own for this reason the balance sheet should be compared with those of previous periods investors can get a sense of a company s financial well being by using a number of ratios that can be derived from a balance sheet including the debt to equity ratio and the acid test ratio along with many others the income statement and statement of cash flows also provide valuable context for assessing a company s finances as do any notes or addenda in an earnings report that might refer back to the balance sheet the balance sheet adheres to the following accounting equation with assets on one side and liabilities plus shareholder equity on the other balance out this formula is intuitive that s because a company has to pay for all the things it owns assets by either borrowing money taking on liabilities or taking it from investors issuing shareholder equity if a company takes out a five year 4 000 loan from a bank its assets specifically the cash account will increase by 4 000 its liabilities specifically the long term debt account will also increase by 4 000 balancing the two sides of the equation if the company takes 8 000 from investors its assets will increase by that amount as will its shareholder equity all revenues the company generates in excess of its expenses will go into the shareholder equity account these revenues will be balanced on the assets side appearing as cash investments inventory or other assets balance sheets should also be compared with those of other businesses in the same industry since different industries have unique approaches to financing special considerationsas noted above you can find information about assets liabilities and shareholder equity on a company s balance sheet the assets should always equal the liabilities and shareholder equity this means that the balance sheet should always balance hence the name if they don t balance there may be some problems including incorrect or misplaced data inventory or exchange rate errors or miscalculations each category consists of several smaller accounts that break down the specifics of a company s finances these accounts vary widely by industry and the same terms can have different implications depending on the nature of the business companies might choose to use a form of balance sheet known as the common size which shows percentages along with the numerical values this type of report allows for a quick comparison of items there are a few common components that investors are likely to come across theresa chiechi copyright investopedia 2019 components of a balance sheetaccounts within this segment are listed from top to bottom in order of their liquidity this is the ease with which they can be converted into cash they are divided into current assets which can be converted to cash in one year or less and non current or long term assets which cannot here is the general order of accounts within current assets long term assets include the following a liability is any money that a company owes to outside parties from bills it has to pay to suppliers to interest on bonds issued to creditors to rent utilities and salaries current liabilities are due within one year and are listed in order of their due date long term liabilities on the other hand are due at any point after one year current liabilities accounts might include long term liabilities can include some liabilities are considered off the balance sheet meaning they do not appear on the balance sheet shareholder equity is the money attributable to the owners of a business or its shareholders it is also known as net assets since it is equivalent to the total assets of a company minus its liabilities or the debt it owes to non shareholders retained earnings are the net earnings a company either reinvests in the business or uses to pay off debt the remaining amount is distributed to shareholders in the form of dividends treasury stock is the stock a company has repurchased it can be sold at a later date to raise cash or reserved to repel a hostile takeover some companies issue preferred stock which will be listed separately from common stock under this section preferred stock is assigned an arbitrary par value as is common stock in some cases that has no bearing on the market value of the shares the common stock and preferred stock accounts are calculated by multiplying the par value by the number of shares issued additional paid in capital or capital surplus represents the amount shareholders have invested in excess of the common or preferred stock accounts which are based on par value rather than market price shareholder equity is not directly related to a company s market capitalization the latter is based on the current price of a stock while paid in capital is the sum of the equity that has been purchased at any price par value is often just a very small amount such as 0 01 importance of a balance sheetregardless of the size of a company or industry in which it operates there are many benefits of reading analyzing and understanding its balance sheet first balance sheets help to determine risk this financial statement lists everything a company owns and all of its debt a company will be able to quickly assess whether it has borrowed too much money whether the assets it owns are not liquid enough or whether it has enough cash on hand to meet current demands balance sheets are also used to secure capital a company usually must provide a balance sheet to a lender in order to secure a business loan a company must also usually provide a balance sheet to private investors when attempting to secure private equity funding in both cases the external party wants to assess the financial health of a company the creditworthiness of the business and whether the company will be able to repay its short term debts managers can opt to use financial ratios to measure the liquidity profitability solvency and cadence turnover of a company using financial ratios and some financial ratios need numbers taken from the balance sheet when analyzed over time or comparatively against competing companies managers can better understand ways to improve the financial health of a company last balance sheets can lure and retain talent employees usually prefer knowing their jobs are secure and that the company they are working for is in good health for public companies that must disclose their balance sheet this requirement gives employees a chance to review how much cash the company has on hand whether the company is making smart decisions when managing debt and whether they feel the company s financial health is in line with what they expect from their employer limitations of a balance sheetalthough the balance sheet is an invaluable piece of information for investors and analysts there are some drawbacks because it is static many financial ratios draw on data included in both the balance sheet and the more dynamic income statement and statement of cash flows to paint a fuller picture of what s going on with a company s business for this reason a balance alone may not paint the full picture of a company s financial health a balance sheet is limited due its narrow scope of timing the financial statement only captures the financial position of a company on a specific day looking at a single balance sheet by itself may make it difficult to extract whether a company is performing well for example imagine a company reports 1 000 000 of cash on hand at the end of the month without context a comparative point knowledge of its previous cash balance and an understanding of industry operating demands knowing how much cash on hand a company has yields limited value different accounting systems and ways of dealing with depreciation and inventories will also change the figures posted to a balance sheet because of this managers have some ability to game the numbers to look more favorable pay attention to the balance sheet s footnotes in order to determine which systems are being used in their accounting and to look out for red flags last a balance sheet is subject to several areas of professional judgement that may materially impact the report for example accounts receivable must be continually assessed for impairment and adjusted to reflect potential uncollectible accounts without knowing which receivables a company is likely to actually receive a company must make estimates and reflect their best guess as part of the balance sheet example of a balance sheetthe image below is an example of a comparative balance sheet of apple inc this balance sheet compares the financial position of the company as of september 2020 to the financial position of the company from the year prior in this example apple s total assets of 323 8 billion is segregated towards the top of the report this asset section is broken into current assets and non current assets and each of these categories is broken into more specific accounts a brief review of apple s assets shows that their cash on hand decreased yet their non current assets increased this balance sheet also reports apple s liabilities and equity each with its own section in the lower half of the report the liabilities section is broken out similarly as the assets section with current liabilities and non current liabilities reporting balances by account the total shareholder s equity section reports common stock value retained earnings and accumulated other comprehensive income apple s total liabilities increased total equity decreased and the combination of the two reconcile to the company s total assets 1 | |
why is a balance sheet important | the balance sheet is an essential tool used by executives investors analysts and regulators to understand the current financial health of a business it is generally used alongside the two other types of financial statements the income statement and the cash flow statement balance sheets allow the user to get an at a glance view of the assets and liabilities of the company the balance sheet can help users answer questions such as whether the company has a positive net worth whether it has enough cash and short term assets to cover its obligations and whether the company is highly indebted relative to its peers | |
what is included in the balance sheet | the balance sheet includes information about a company s assets and liabilities depending on the company this might include short term assets such as cash and accounts receivable or long term assets such as property plant and equipment pp e likewise its liabilities may include short term obligations such as accounts payable and wages payable or long term liabilities such as bank loans and other debt obligations who prepares the balance sheet depending on the company different parties may be responsible for preparing the balance sheet for small privately held businesses the balance sheet might be prepared by the owner or by a company bookkeeper for mid size private firms they might be prepared internally and then looked over by an external accountant public companies on the other hand are required to obtain external audits by public accountants and must also ensure that their books are kept to a much higher standard the balance sheets and other financial statements of these companies must be prepared in accordance with generally accepted accounting principles gaap and must be filed regularly with the securities and exchange commission sec 2 | |
what are the uses of a balance sheet | a balance sheet explains the financial position of a company at a specific point in time as opposed to an income statement which reports financial information over a period of time a balance sheet is used to determine the health of a company on a specific day a bank statement is often used by parties outside of a company to gauge the company s health banks lenders and other institutions may calculate financial ratios off of the balance sheet balances to gauge how much risk a company carries how liquid its assets are and how likely the company will remain solvent a company can use its balance sheet to craft internal decisions though the information presented is usually not as helpful as an income statement a company may look at its balance sheet to measure risk make sure it has enough cash on hand and evaluate how it wants to raise more capital through debt or equity | |
what is the balance sheet formula | in accounting the footing is the final balance obtained by adding all the debits and credits a balance sheet an important financial tool calculates a company s assets with its liabilities and equity total assets are calculated as the sum of all short term long term and other assets total liabilities are calculated as the sum of all short term long term and other liabilities total equity is calculated as the sum of net income retained earnings owner contributions and shares of stock issued the formula is total assets total liabilities total equity | |
what is a balanced budget | a balanced budget is a situation in financial planning or the budgeting process where total expected revenues are equal to total planned spending this term is most frequently applied to public sector or government budgeting a budget can also be considered balanced in hindsight after a full year s worth of revenues and expenses have been incurred and recorded understanding a balanced budgetthe phrase balanced budget is commonly used in reference to official government budgets for example governments may issue a press release stating that they have a balanced budget for the upcoming fiscal year or politicians may campaign on a promise to balance the budget once in office | |
when revenues exceed expenses there is a budget surplus when expenses exceed revenues there is a budget deficit while neither of these is a technically balanced budget deficits tend to elicit more concern | the term budget surplus is often used in conjunction with a balanced budget a budget surplus occurs when revenues exceed expenses and the surplus amount represents the difference between the two in a business setting a company can reinvest surpluses back into itself such as for research and development expenses pay them out to employees in the form of bonuses or distribute them to shareholders as dividends in a government setting a budget surplus occurs when tax revenues in a calendar year exceed government expenditures the united states government has only achieved a budget surplus four times since 1970 it happened during consecutive years from 1998 until 2001 1a budget deficit by contrast is the result of expenses eclipsing revenues budget deficits necessarily result in rising debt as funds must be borrowed to meet expenses for example the u s national debt which is in excess of 34 trillion as of june 2024 is the result of accumulated budget deficits over many decades 2advantages and disadvantages of a balanced budgetproponents of a balanced budget argue that excessive budget deficits saddle future generations with untenable debt just as any household or business must balance its spending against available income over time or risk bankruptcy a government should strive to maintain some balance between tax revenues and expenditures most economists agree that an excessive public sector debt burden can pose a major systemic risk to an economy eventually taxes must be raised or the money supply artificially increased thus devaluing the currency to service this debt this can result in a crippling tax bill once taxes are eventually raised excessively high interest rates that crimp business and consumer access to credit or rampant inflation that may disrupt the entire economy on the other hand running consistent budget surpluses tends to not be politically popular while it may be beneficial for governments to sock away surpluses for so called rainy day funds in case of a downturn in tax revenue the government is generally not expected to operate as a for profit business the existence of surplus government funds tends to lead to demands for either lower taxes or more often increased spending since money accumulating in public accounts makes an attractive target for special interest spending running a generally balanced budget may help governments to avoid the perils of either deficits or surpluses however some economists feel budget deficits and surpluses serve a valuable purpose via fiscal policy enough so that risking the dire effects of excessive debt may be worth the risk at least in the short run keynesian economists insist that deficit spending represents a key tactic in the government s arsenal to fight recessions during economic contraction they argue demand falls which leads to gross domestic product gdp declines deficit spending keynesians say can be used to make up for deficient private demand or to stimulate private sector spending by injecting money into key sectors of the economy during good economic times they argue though perhaps less forcefully governments should run budget surpluses to restrain private sector demand driven by excessive optimism for keynesians a balanced budget in effect represents an abdication of the government s duty to use fiscal policy to steer the economy one way or another | |
what are the disadvantages of balanced budget | during periods of economic downturn it may be necessary for the government to spend money to shore up the economy even at the risk of a budget deficit for instance during the early months of the covid 19 pandemic the federal government passed multiple stimulus packages that raised the deficit but helped provide unemployment benefits and social safety net spending if the government had chosen not to fund relief programs the economic fallout of the public health emergency might have been more hard hitting for individuals and families | |
what are state balanced budget requirements | state balanced budget requirements are rules that prohibit a state from spending more than it takes in from tax revenue annually 3 | |
which states have balanced budget requirements | according to the tax policy center all states except for vermont have some kind of constitutional or statutory rule in place mandating a balanced budget this can take many forms some states require governors to propose balanced budgets others require that state legislature pass balanced budgets and some require both 3the bottom linea balanced budget refers to a financial situation in which revenue is equal to or greater than expenses the term can be applied to a range of situations though it s commonly used in the context of government budgeting proponents of a balanced budget argue that spending that is greater than revenue can be fiscally damaging other economists argue that budget deficits can be useful to fight recessions | |
what is a balanced fund | a balanced fund is a mutual fund that typically contains a component of stocks and bonds a mutual fund is a basket of securities in which investors can purchase typically balanced funds stick to a fixed asset allocation of stocks and bonds such as 70 stocks and 30 bonds bonds are debt instruments that usually pay a stable fixed rate of return the investment objective for a balanced mutual fund tends to be a mixture of growth and income which leads to the balanced nature of the fund balanced mutual funds are geared toward investors who are looking for a mixture of safety income and modest capital appreciation understanding balanced fundsa balanced fund is a type of hybrid fund which is an investment fund characterized by its diversification among two or more asset classes the amounts the fund invests into each asset class usually must remain within a set minimum and maximum value another name for a balanced fund is an asset allocation fund balanced fund portfolios do not materially change their asset mix unlike life cycle funds which adjust the holdings to lower the risk as an investor s retirement date approaches balanced funds also differ from actively managed funds which may evolve in response to the investor s changing risk return appetite or overall investment market conditions elements of a balanced fund portfolioretirees or investors with low risk tolerance can utilize balanced funds for healthy growth and supplemental income the elements of balanced funds include a mixture of stocks and bonds the equity component helps to prevent erosion of purchasing power and ensure the long term preservation of retirement nest eggs the equity holdings of a balanced fund lean toward large equities such as the ones found in the s p 500 index which contains 500 of the largest publicly traded companies in the united states balanced funds may also include dividend paying companies dividends are cash payments made by companies to their shareholders as a reward for owning their stock companies that consistently pay dividends over the long term tend to be well established and profitable the bond component of a balanced fund serves two purposes investment grade bonds such as aaa corporate debt and u s treasuries provide interest income through semi annual payments while large company stocks offer quarterly dividend payouts to enhance yield also rather than reinvest distributions retired investors may receive cash to bolster their income from pensions personal savings and government subsidies while they trade daily highly graded bonds and treasuries don t usually experience wild price swings that equities may experience as a result the stability of the fixed interest securities prevents wild jumps in the share price of a balanced mutual fund also debt security prices do not move in lockstep with stocks and can move in the opposite direction this bond stability provides balanced funds with ballast further smoothing out its portfolio s investment return over time balanced funds are the same as asset allocation funds advantages of balanced fundsbecause balanced funds rarely have to change their mix of stocks and bonds they tend to have lower total expense ratios ers which represent the cost of the fund moreover because they automatically spread an investor s money across a variety of types of stocks market risk is minimized if certain stocks or sectors underperform finally balanced funds allow investors to withdraw money periodically without upsetting the asset allocation diversified constantly rebalanced portfoliolow expense ratiosless volatilitylow riskfixed asset allocationsunsuited for tax shielding strategies the usual suspects investmentssafe but stodgy returnsdisadvantages of balanced fundson the downside the fund controls the asset allocation not the investor which might not match an investor s tax planning strategy for example many investors prefer to keep income producing securities in tax advantaged accounts and growth stocks in taxable ones but you can t separate the two in a balanced fund also investors can t use a bond laddering strategy buying bonds with staggered maturity dates to adjust cash flows and repayment of principal according to their financial situation the characteristic allocation of a balanced fund usually 60 equities 40 bonds may not always suit an investor s financial goals since needs and preferences can change over time some balanced funds play it too safe avoiding international or outside the mainstream markets which can hobble their returns real world example of a balanced fundthe vanguard balanced index fund admiral shares vbiax has a below average risk rating from morningstar with an above average reward profile 1 the fund s allocation consists of 60 stocks and 40 bonds over the past 10 years as of april 30 2022 the fund has returned 8 73 annually the vanguard balanced index fund admiral shares has an expense ratio of 0 07 and a 3 000 minimum investment amount 2 | |
what is a balanced investment strategy | a balanced investment strategy combines asset classes in a portfolio in an attempt to balance risk and return typically balanced portfolios are divided between stocks and bonds either equally or with a slight tilt such as 60 in stocks and 40 in bonds balanced portfolios may also maintain a small cash or money market component for liquidity purposes understanding a balanced investment strategythere are many different ways to put together a portfolio depending on the preferences and risk tolerance of the investor on one end of the spectrum are strategies aimed at capital preservation and current income these generally consist of safe but low yielding investments such as certificates of deposit investment grade bonds money market instruments and some blue chip stocks that pay dividends such strategies are appropriate for investors concerned with preserving the capital they already have and less concerned with growing that capital on the other end of the spectrum are strategies aimed at growth these more aggressive strategies generally involve a higher weighting of stocks including small cap companies if fixed income instruments are included they might have lower credit ratings or less security but offer a higher yield such as in the case of debentures preferred shares or higher yielding corporate bonds growth strategies are suitable for younger investors with a high risk tolerance who are comfortable accepting greater short term volatility in exchange for better expected long term returns investors who fall between these two camps can opt for a balanced investment strategy this would consist of mixing conservative and aggressive approaches for example a balanced portfolio might consist of 25 dividend paying blue chip stocks 25 small capitalization stocks 25 aaa rated government bonds and 25 investment grade corporate bonds although the exact parameters can be fine tuned most balanced investors will be seeking modest returns on their capital along with a high likelihood of capital preservation in the past investors would need to assemble their portfolios manually by purchasing individual investments alternatively they had to rely on professionals such as investment advisors or services offered through their financial institutions today automated investing platforms allow investors to automatically invest in a selection of strategies organized by risk tolerance the process of portfolio allocation is more accessible than ever | |
when determining what strategy to select it is important for investors to consider not only their objective capacity to bear risk such as their net worth and income but also their subjective risk tolerance | balanced fundsa balanced fund is a mutual fund that contains both a stock and bond component as well as a small money market component in a single portfolio generally these funds stick to a relatively fixed mix of stocks and bonds such as 60 40 stocks to bonds balanced mutual funds have holdings that are balanced between equity and debt with their objective somewhere between growth and income this leads to the name balanced fund balanced mutual funds are geared toward investors who are looking for a mixture of safety income and modest capital appreciation typically retirees or investors with low risk tolerance utilize balanced funds for healthy growth and supplemental income the equities component helps to prevent erosion of purchasing power and ensure the long term preservation of retirement nest eggs example of a balanced investment strategytrishia is a recent university graduate in her mid 20s she is new to investing and has about 10 000 to invest although trishia intends to make a down payment within the next few years she has no immediate needs for her investment capital and would be able to postpone withdrawing her capital until a more favorable time in the event of a sudden market decline objectively speaking trishia s youth and financial circumstances put her in a good position to adopt a relatively risky investment strategy that has high long term growth potential however given her subjective risk tolerance she opts for a more conservative approach using an online investment platform trishia decides on a balanced investment strategy featuring a 50 50 split between fixed income and equity securities the fixed income securities consist mainly of high grade government bonds along with some highly rated corporate bonds the equities consist of blue chip stocks all with a reputation for stable earnings and dividend payments investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is a balanced scorecard bsc | the term balanced scorecard bsc refers to a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes 1 used to measure and provide feedback to organizations balanced scorecards are common among companies in the united states the united kingdom japan and europe data collection is crucial to providing quantitative results as managers and executives gather and interpret the information company personnel can use this information to make better decisions for the future of their organizations investopedia michela buttignolunderstanding balanced scorecards bscs accounting academic dr robert kaplan and business executive and theorist dr david norton first introduced the balanced scorecard the harvard business review first published it in the 1992 article the balanced scorecard measures that drive performance both kaplan and norton worked on a year long project involving 12 top performing companies their study took previous performance measures and adapted them to include nonfinancial information 2companies can easily identify factors hindering business performance and outline strategic changes tracked by future scorecards bscs were originally meant for for profit companies but were later adapted for nonprofit organizations and government agencies it is meant to measure the intellectual capital of a company such as training skills knowledge and any other proprietary information that gives it a competitive advantage in the market the balanced scorecard model reinforces good behavior in an organization by isolating four separate areas that need to be analyzed these four areas also called legs involve 2the bsc is used to gather important information such as objectives measurements initiatives and goals that result from these four primary functions of a business companies can easily identify factors that hinder business performance and outline strategic changes tracked by future scorecards 2the scorecard can provide information about the firm as a whole when viewing company objectives an organization may use the balanced scorecard model to implement strategy mapping to see where value is added within an organization a company may also use a bsc to develop strategic initiatives and strategic objectives 2 this can be done by assigning tasks and projects to different areas of the company in order to boost financial and operational efficiencies thus improving the company s bottom line characteristics of the balanced scorecard model bsc information is collected and analyzed from four aspects of a business 1these four legs encompass the vision and strategy of an organization and require active management to analyze the data collected the balanced scorecard analyzes is often referred to as a management tool rather than a measurement tool because of its application by a company s key personnel benefits of a balanced scorecard bsc there are many benefits to using a balanced scorecard for instance the bsc allows businesses to pool together information and data into a single report rather than having to deal with multiple tools this allows management to save time money and resources when they need to execute reviews to improve procedures and operations scorecards provide management with valuable insight into their firm s service and quality in addition to its financial track record by measuring all of these metrics executives are able to train employees and other stakeholders and provide them with guidance and support this allows them to communicate their goals and priorities in order to meet their future goals another key benefit of bscs is how it helps companies reduce their reliance on inefficiencies in their processes this is referred to as suboptimization this often results in reduced productivity or output which can lead to higher costs lower revenue and a breakdown in company brand names and their reputations 2examples of a balanced scorecard bsc corporations can use their own internal versions of bscs for example banks often contact customers and conduct surveys to gauge how well they do in their customer service these surveys include rating recent banking visits with questions ranging from wait times interactions with bank staff and overall satisfaction they may also ask customers to make suggestions for improvement bank managers can use this information to help retrain staff if there are problems with service or to identify any issues customers have with products procedures and services in other cases companies may use external firms to develop reports for them for instance the j d power survey is one of the most common examples of a balanced scorecard 2 this firm provides data insights and advisory services to help companies identify problems in their operations and make improvements for the future j d power does this through surveys in various industries including the financial services and automotive industries results are compiled and reported back to the hiring firm 3balanced scorecard bsc faqs | |
what is a balanced scorecard and how does it work | a balanced scorecard is a strategic management performance metric that helps companies identify and improve their internal operations to help their external outcomes it measures past performance data and provides organizations with feedback on how to make better decisions in the future | |
what are the four perspectives of the balanced scorecard | the four perspectives of a balanced scorecard are learning and growth business processes customer perspectives and financial data these four areas which are also called legs make up a company s vision and strategy as such they require a firm s key personnel whether that s the executive and or its management team s to analyze the data collected in the scorecard 1 | |
how do you use a balanced scorecard | balanced scorecards allow companies to measure their intellectual capital along with their financial data to break down successes and failures in their internal processes by compiling data from past performance in a single report management can identify inefficiencies devise plans for improvement and communicate goals and priorities to their employees and other stakeholders | |
what are the balanced scorecard benefits | there are many benefits to using a scorecard the most important advantages include the ability to bring information into a single report which can save time money and resources it also allows companies to track their performance in service and quality in addition to tracking their financial data scorecards also allow companies to recognize and reduce inefficiencies 2 | |
what is a balanced scorecard example | corporations may use internal methods to develop scorecards for instance they may conduct customer service surveys to identify the successes and failures of their products and services or they may hire external firms to do the work for them j d power is an example of one such firm that is hired by companies to conduct research on their behalf the bottom linecompanies have a number of options available to help identify and resolve issues with their internal processes so they can improve their financial success balanced scorecards allow companies to collect and study data from four key areas including learning and growth business processes customers and finance by pooling together information in just one report companies can save time money and resources to better train staff communicate with stakeholders and improve their financial position in the market | |
what is a balloon loan | a balloon loan is a type of loan that does not fully amortize over its term since it is not fully amortized a balloon payment is required at the end of the term to repay the remaining balance of the loan 1balloon loans can be attractive to short term borrowers because they typically carry lower interest rates than loans with longer terms however the borrower must be aware of refinancing risks as there s a possibility the loan may reset at a higher interest rate | |
how a balloon loan works | mortgages are the loans most commonly associated with balloon payments balloon mortgages typically have short terms ranging from five to seven years however the monthly payments through this short term are not set up to cover the entire loan repayment instead the monthly payments are calculated as if the loan is a traditional 30 year mortgage 23that said the payment structure for a balloon loan is very different from a traditional loan at the end of the five to seven year term the borrower has paid off only a fraction of the principal balance and the rest is then due all at once at that point the borrower may sell the home to cover the balloon payment or take out a new loan to cover the payment effectively refinancing the mortgage alternatively they may make the payment in cash defaulting on a balloon loan will negatively impact the borrower s credit rating 4example of a balloon loanlet s say a person takes out a 200 000 mortgage with a seven year term and a 4 5 interest rate their monthly payment for seven years is 1 013 at the end of the seven year term they owe a 175 066 balloon payment special considerations for a balloon loansome balloon loans such as a five year balloon mortgage have a reset option at the end of the five year term that allows for a resetting of the interest rate based on current interest rates and a recalculation of the amortization schedule based on a new term if a balloon loan does not have a reset option the lender expects the borrower to pay the balloon payment or refinance the loan before the end of the original term if interest rates are very high and in the case of a mortgage the borrower doesn t plan to keep the home for long a balloon loan could make sense but it comes with high risk when the loan term is up the borrower will need financial discipline to save enough money for the balloon payment what s more if interest rates are low or are expected to rise they may well be higher when the borrower needs to refinance pros and cons of balloon loansfor some buyers a balloon loan has clear advantages but having a loan with a giant balloon payment of most or all of the principal also has clear disadvantages there s also an underlying risk of opting for a balloon loan it s easy to be tricked by the small size of the original interest only or mostly monthly payment into borrowing more money than an individual can comfortably afford to borrow that is also a potential road to financial ruin | |
what industries use balloon loans | balloon loans are popular in the construction industry and for home flippers contractors or real estate investors use the low initial payments to complete work on a project hoping to sell it before the balloon payment comes due | |
what happens if you can t pay your balloon payment | defaulting on your balloon payment is the same as defaulting on any loan it can lead to foreclosure and repossession of property defaulting will ruin your credit rating making it harder to borrow in the future 4can you refinance a balloon loan yes many people plan to refinance a balloon loan before the balloon payment is due to take advantage of the more affordable initial interest only period hoping that interest rates will be more favorable later this is risky however interest rates are volatile and you may end up refinancing for a higher rate than if you had chosen a fixed interest rate loan in the first place the bottom lineballoon loans can offer flexibility in the initial loan period by providing a low payment still borrowers should have a plan to pay the remaining balance or refinance before the payment comes due these loans do have their place for those who only need to borrow for a short time they can offer significant savings be realistic about your loan needs before borrowing | |
what is a balloon payment | a balloon payment is the final amount due on a loan that is structured as a series of small monthly payments followed by a single much larger sum at the end of the loan period the early payments may be all or almost all payments of interest owed on the loan with the balloon payment being the principal of the loan this type of loan is known as a balloon loan the balloon home mortgage loan became common in the years before the 2007 2008 financial crisis it allowed people eager to buy a home to obtain a mortgage payment that they could afford at least in the early years the balloon loan did not disappear with the financial crisis but is now more often used for business loans a project can be financed with a loan that allows for minimal payments early on with the balloon payment due only when the project is earning a return on the investment the balloon payment is similar to a bullet repayment investopedia joules garciaunderstanding balloon paymentsas the term balloon suggests the final payment on this type of loan is significantly large in recent years balloon payments have been more common in commercial lending than in consumer lending it allows a commercial lender to keep short term costs lower and take care of the balloon payment with future earnings the same logic is used by individual homebuyers but the risks are greater homebuyers are keeping their short term costs low while assuming that their incomes will be far greater when the balloon payment comes due that they will be able to refinance their mortgage before it is due or that they can sell the house and pay off the entire mortgage before the balloon payment comes due that strategy failed in the 2008 2009 financial crisis when homeowners who financed their purchases with balloon mortgages found it impossible to sell their homes at a price high enough to pay off the amount they had borrowed balloon payments are often packaged into two step mortgages in this financing structure a borrower receives an introductory and often lower interest rate at the start of their loan then the loan shifts to a higher interest rate after an initial borrowing period balloon payment examplesa balloon debt structure can be implemented for any type of debt it s most commonly used in mortgages auto loans and business loans the balloon mortgage is rarely used for traditional 15 year or 30 year mortgages since lenders don t want to wait that long to get their money back for balloon mortgages lenders prefer a five year to ten year term interest only balloon mortgages are available primarily to high net worth individuals who can afford large down payments they are often taken with the intention of refinancing before the balloon payment is due a balloon loan is sometimes confused with an adjustable rate mortgage arm with an arm the borrower receives an introductory rate for a set amount of time usually for one to five years the interest rate resets at that point and might continue to reset periodically until the loan has been fully repaid the incentive is a very low interest rate at the beginning compared to the fixed rate mortgage rate the downside is the potential for a substantially higher rate down the road an arm adjusts automatically unlike balloon loans balloon loans are not as common when used as auto loans however this structure works especially well for individuals who have an urgent need to secure a vehicle but can t immediately afford high monthly payments as lending restrictions are often not as stringent in the auto loan industry it is often easier for a borrower to secure this type of loan lenders are usually comfortable with the standard car loan term of up to six years it is usually easier for a business to secure a balloon loan if the business has a proven financial history and favorable credit record an established business can be in a better position than an individual wage earner to raise sufficient money to pay off the balloon payment for this reason lenders often consider businesses less risky than individual consumers for business loans balloon payments can be strategically used by a business to finance short term needs the business may draw on a balloon loan with no intention of holding the debt to the end of the term instead the company can use the money to repay the loan in full before the end of the loan term options for avoiding a balloon paymenta borrower has a couple of ways to get rid of a looming payment in addition to extinguishing the debt by paying off the balloon payment a borrower can balloon loans usually require collateral for home or car loans the lender may require a lien on the property being purchased should you default on your loan and not be able to satisfy the balloon payment the lender has a legal claim to seize the property advantages of balloon paymentsthe obvious advantage of balloon payments is the low initial payment requirement the monthly balloon payment amount during the fixed period is generally less than the payment amount of a fully amortized loan the timing of the payment size may mesh well with the borrower s income expectations as the borrower s salary increases due to career progression the debt obligation will rise as well a balloon note or loan often has a shorter underwriting process compared to other loans for this reason there may be lower administrative or transaction fees in securing the loan a borrower may also not be required to show as much documentation for this type of loan as balloon mortgages often do not require a home appraisal as part of loan closing a balloon payment structure is strategically advantageous for some borrowers for example people who flip houses can secure lower upfront monthly payments the borrower has time to remodel the house and sell it before the balloon payment is due this allows borrowers to preserve future cash flow for other purposes disadvantages of balloon paymentsballoon payments can be a big problem in a falling housing market as home prices decline homeowners may be unable to sell their homes for enough to cover the balloon payment and they might be unable to sell at any price for home flippers this means getting stuck with a high interest rate loan should sales stall borrowers often have no choice but to default on their loans and enter foreclosure regardless of their household incomes when faced with a balloon payment they cannot afford this results in the loss of the borrower s home some will be able to take out another loan to cover the upcoming balloon mortgage payment but this puts a tremendous strain on a family s finances balloon mortgages and auto loans may be difficult to refinance depending on the amount of equity that has been paid off the loans may only pay interest early on in this case the owner may have little to no equity in the property despite making consistent payments for years these types of loans can be harder to qualify for because principal payments are deferred lenders often prefer borrowers with a high credit score or high down payment in addition to compensate for the flexibility of the principal obligation and increased risk for the lender lenders usually charge higher interest rates for balloon debt compared to other types of loans lower upfront payments compared to other loan typesgreater buying power during low income periods with increasing debt obligation during higher income periodsshorter underwriting process compared to other loan typesgreater strategic potential for certain industriesfewer documentation requirements for underwritinggreater risk in foreclosure if you can t meet your loan requirementslower build up of equity resulting in potential difficulty in refinancing loanharder to qualify for due to higher credit preferences by lendershigher costs i e higher interest due to the riskier nature of the loan from the lender s perspective | |
what is a balloon payment | a balloon payment is a lump sum principal balance that is due at the end of a loan term the borrower pays much smaller monthly payments until the balloon payment is due these payments may be entirely or almost entirely interest on the loan rather than principal | |
how does a balloon payment work | a balloon payment works like any other loan installment payment the difference is that it is the final payment on the loan and is substantially higher than the previous payments a typical balloon loan requires only interest to be paid each month until the final month of the loan term in the final month the entire principal balance is due the interest paid each month is typically a fixed amount as the principal balance does not change and the interest charged each month is not capitalized as part of the loan but instead paid off immediately | |
is a balloon payment legal | yes a balloon payment is a legal debt instrument a lender can intentionally structure a loan for a borrower who wants to pay a series of low monthly payments followed by a single large payment of principal at the end of the loan the borrower must be aware of the long term obligation of paying down the principal balance all at once at the end of the loan | |
are balloon payments a good idea for a car purchase | a balloon payment may be suitable for borrowers who are in urgent need of a car but are unprepared to deal with a large monthly payment in such cases the borrower will probably pay a higher interest rate than is charged on a conventional car loan most importantly the borrower must keep an eye on that looming balloon payment at the end of the loan term and be ready to pay it the bottom lineballoon payments are relatively common for business ventures they lower financing costs during the early stages of a new project and allow the business time to realize some profits from the venture before they need to pay off the balance of the loan they are available to consumers but typically only for those with a hefty down payment and a healthy credit rating | |
when used for a home mortgage the balloon payment carries extra risks the buyer is paying mostly interest or only interest for some years and counting on price growth to provide equity | borrowers are assuming that they can refinance the mortgage or sell the home at a profit before the balloon payment falls due if the housing market takes an unexpected downturn and their home loses value that strategy may fail | |
what is a ballpark figure | a ballpark figure is a rough numerical estimate or approximation of the value of something that is otherwise unknown ballpark figures are commonly used by accountants salespersons and other professionals to estimate current or future results a stockbroker could use a ballpark figure to estimate how much money a client might have at some point in the future given a certain rate of growth a salesperson could use a ballpark figure to estimate how long a product a customer was thinking about buying might be viable a ballpark figure is essentially a placeholder established for purposes of speculating what the amount or total of something might amount to so that the parties involved can move forward in whatever negotiation or planning is underway as a concept it has applications in business estimates as well as in everyday life depending on the circumstances a ballpark figure is a broad numerical estimate of what something might amount to if it was measured accurately and assessed for the purpose of business negotiations dealmaking or general brainstorming of ideas understanding ballpark figuresballpark figures are estimates used to move a discussion or deal forward when the exact measurement of the size or amount of something cannot yet be determined ballpark figures can be used for day to day purposes such as estimating how much food and beverages might be needed for a barbecue or how many months it will likely take to pay off a new purchase ballpark figures are also used everywhere in the business world such as estimating how much it might cost to expand into a certain market or how many years it might take for a company to be profitable or for sales to justify a large purchase it can also be used to estimate public adoption of a concept technology or product as in how many people are likely to buy a certain phone and how long it might take them to upgrade that phone once purchased special considerationswhile ballpark figures are used frequently and can be helpful in establishing a baseline for discussion they should be treated as nothing more than estimates they are not hard numbers these figures are frequently blown out of proportion by salespersons and other professionals who must use persuasion to generate income or close deals major business and financial decisions should probably not be made based on these numbers however they could first serve as estimates to be refined through more thorough analysis a popular theory of the term posits that is probably has a history similar to that of the idiom in the same ballparkm which means approximately the same amount | |
what is the baltic dry index bdi | the baltic dry index bdi is a shipping and trade index created by the london based baltic exchange it measures changes in the cost of transporting various raw materials such as coal and steel members of the exchange directly contact shipping brokers to assess price levels for given shipping paths a product to transport and time to delivery or speed the baltic dry index is a composite of four sub indices that measure different sizes of dry bulk carriers or merchant ships capesize panamax supramax and handysize 1 | |
how the baltic dry index works | the baltic exchange calculates the index by assessing multiple shipping rates across more than 20 routes for each of the bdi component vessels analyzing multiple geographic shipping paths for each index gives depth to the index s composite measurement members contact dry bulk shippers worldwide to gather their prices and they then calculate an average 1 the baltic exchange issues the bdi daily a change in the baltic dry index can give investors insight into global supply and demand trends many consider a rising or contracting index to be a leading indicator of future economic growth it s based on raw materials because the demand for them portends the future these materials are bought to construct and sustain buildings and infrastructure not at times when buyers have either an excess of materials or are no longer constructing buildings or manufacturing products the baltic exchange also operates as a maker of markets in freight derivatives including types of financial forward contracts known as forward freight agreements the sizes of bdi vesselsthe bdi measures shipments on various sizes of cargo ships capesize boats are the largest ships in the bdi with 100 000 deadweight tonnage dwt or greater the average size of a capesize ship is 156 000 dwt this category can also include some massive vessels with capacities of 400 000 dwt capesize ships primarily transport coal and iron ore on long haul routes and are occasionally used to transport grains they re too large to cross over the panama canal 2panamax ships have a 60 000 to 80 000 dwt capacity and they re used mostly to transport coal grains and minor bulk products such as sugar and cement panamax cargo ships require specialized equipment for loading and unloading they can barely squeeze through the panama canal 2the smallest vessels included in the bdi are supramaxes also referred to as handymaxes or handysize these ships have a carrying capacity of 45 000 to 59 999 dwt they re sometimes although they re close in size to panamaxes supramaxes normally have specialized equipment for loading and unloading and they re used in ports where panamaxes cannot 2type of dry bulk commoditiesdry bulk commodities are usually divided into two categories major bulks and minor bulks some examples of major dry bulk commodities include iron ore coal and grain these major bulks account for nearly two thirds of global dry bulk trade minor bulks include steel products sugars cement and cover the remaining one third of global dry bulk trade coal along with iron ore is one of the most traded dry bulk commodities by volume in the world countries most involved in the importation of coal for their primary energy and electricity needs are india china and japan grain is another major cargo in terms of seaborne dry bulk trade and accounts for a chunk of the total dry bulk trade worldwide real world examplethe index can fall when the goods shipped are raw pre production material which is typically an area with minimal levels of speculation the index can experience high levels of volatility if global demand increases or suddenly drops off because the supply of large carriers tends to be small with long lead times and high production costs stock prices increase when the global market is healthy and growing and they tend to decrease when it s stalled or dropping the index is reasonably consistent because it depends on black and white factors of supply and demand without much in the way of influences such as unemployment and inflation the bdi predicted the 2008 recession in some measure when prices experienced a sharp drop in one striking example of the insight that can come from the index analysts could observe that between september 2019 and january 2020 the baltic dry index bdi fell by more than 70 a strong indication of economic contraction 3 this occurred directly ahead of the outbreak of the covid 19 pandemic then into 2021 the bdi rose dramatically as the pandemic led to snarls and delays in global shipping | |
what is bancassurance | bancassurance is an arrangement between a bank and an insurance company allowing the insurance company to sell its products to the bank s client base this partnership arrangement can be profitable for both companies banks earn additional revenue by selling insurance products and insurance companies expand their customer bases without increasing their sales force understanding bancassurancebancassurance arrangements are common in europe where the practice has a long history european banks such as cr dit agricole france abn amro netherlands bnp paribas france and ing netherlands dominate the global bancassurance market but the picture varies widely from country to country a 2013 report found that while bancassurance accounted for 83 6 of life insurance sales in italy 66 2 in spain 64 2 in france and 62 6 in austria its market share was lower in eastern europe and nonexistent in the united kingdom and ireland 1the united states has been slower than many nations to embrace the concept in part that s because the question of whether banks in the u s should be allowed to sell insurance was a matter of contentious debate for many years among the issues unfair competition for insurance agents possible risks to the banking sector and the potential for banks to pressure customers into buying insurance in order to qualify for loans advocates meanwhile maintained that both banks and insurance companies would profit from the arrangement that it would also be a convenience for consumers and that the added competition might lead to lower insurance prices the bank holding company act of 1956 effectively prohibited many large national banks from selling insurance products however whether a bank could sell insurance depended largely on the type of bank and which agency or agencies regulated it as the u s general accounting office noted in a 1990 report by the late 1980s many states allowed state chartered banks to sell most types of insurance and in towns with populations less than 6 000 bank holding companies national banks and some state banks can sell all types of insurance 2in 1999 the federal gramm leach bliley act eliminated most of the remaining restrictions on u s banks selling insurance products while continuing to allow the states to regulate other aspects of insurance 3bancassurance industry growththe bancassurance market is growing worldwide particularly for life insurance and especially in the asia pacific region the research and consulting firm imarc group says the global bancassurance market reached a value of 1 268 trillion in 2021 imarc expects the market to continue to grow at a compound annual growth rate cagr of 5 9 and attain a value of 1 802 trillion by 2027 a major factor driving the trend a growing geriatric population with greater need for health and life insurance as well as retirement plans 4the advantages and disadvantages of bancassurancefrom a consumer point of view bancassurance offers both advantages and disadvantages on the plus side buying insurance at the bank is convenient that s especially true in small towns where insurance agents may be scarce although less so now that insurance is widely available online that convenience may also encourage more americans who need life insurance to buy some on the negative side the ease of buying at the bank may discourage consumers from shopping around and getting a competitive price on their insurance there is also some question as to how qualified bank employees are to advise customers on their insurance needs compared with insurance agents and brokers who specialize in the field for banks that become involved in bancassurance there appears to be little downside except the possible risk to their reputation if the insurance products their employees sell prove inadequate or unsuitable for the consumer | |
when did bancassurance begin | bancassurance as we know it today appears to have begun in france in the 1970s which would account for its seemingly french name spain was also an early adopter in the 1980s 5 both of those countries continue to be bancassurance market share leaders who regulates bancassurance in the united states generally speaking in the u s the individual states continue to regulate insurance products and sales practices as well as to license insurance salespeople however since the passage of the gramm leach bliley act in 1999 state laws generally cannot prevent or restrict insurance activities conducted by national banks and their subsidiaries according to the office of the comptroller of the currency 6 | |
what types of insurance are sold at banks | depending on the country and the particular bank consumers can buy a wide variety of insurance at their local banks including life health and property and casualty insurance however life insurance is the dominant product in the u s and most of the world in 2018 for example about 29 of life insurance globally was sold through bancassurance while only about 2 of property and casualty insurance was according to mckinsey company 7the bottom linebancassurance is not a type of insurance but a sales channel for the selling of insurance products through banks it is common in much of the world today and growing in acceptance in the united states for banks and insurance companies bancassurance can be a profitable enterprise for consumers it can be convenient although it may discourage comparison shopping and limit their access to expert advice | |
what is the bandwagon effect | the bandwagon effect is a psychological phenomenon in which people do something primarily because other people are doing it regardless of their own beliefs which they may ignore or override this tendency of people to align their beliefs and behaviors with those of a group is also called a herd mentality the term bandwagon effect originates from politics but has wide implications commonly seen in consumer behavior and investment activities this phenomenon can be seen during bull markets and the growth of asset bubbles investopedia zoe hansen | |
why the bandwagon effect happens | the bandwagon effect arises primarily from psychological and sociological factors people are biologically programed to be social and like to be part of a group behaving the same way a group does can lead to belonging and acceptance people also like to be on the winning team and to signal their social identity to do so they adopt the behavior of the group around them and that behavior begins to seem desirable or normal due to proximity and repetition the human brain uses shortcuts known as heuristics to make decisions more efficiently one of these shortcuts is looking at what other people are doing if enough people are following a trend repeating a statement or making the same decision your brain will assume that it s the correct decision to make economically this can make sense as it allows you to economize on the costs of gathering information by relying on the knowledge and opinions of others for example if you are having a baby you could spend hours researching different baby strollers and trying to find the best option or if everyone you know has the same baby stroller model you might decide that s the best one because everyone else uses it as long as it is a good stroller you would have saved yourself hours of time lost to research that you didn t need on the other hand following what the group does without considering its full implications can cause problems this was seen in the lead up to the housing crisis in 2007 financial institutions all joined the subprime mortgage bandwagon creating an unregulated and unstable housing bubble investors and buyers all believed the market would continue to be stable because everyone else also believed it would remain stable this proved to be a false belief and led to the great recession of 2007 2009 repetition can also affect what people believe to be true people tend to believe claims are more true if they have been exposed to them more this is why advertisements propaganda and false news all work they expose people to the same idea over and over this is known as the illusory truth effect this can become part of the bandwagon effect as well you may support one sports team but if everyone you know constantly talks about how much better a different sports team is it starts to seem like a true statement the repetition alone may be enough to convince you to follow the crowd and start supporting the new team impact of the bandwagon effect in different areasthe bandwagon effect can be seen in different areas of everyday life it can be seen in everyday social behavior such as smoking because your friends smoke or exercising because your friends exercise it is also often at work in the fields of politics consumer behavior and finance in politics the bandwagon effect might cause citizens to vote for the person who appears to have more popular support because they want to belong to the majority the term bandwagon refers to a wagon that carries a band through a parade during the 19th century an entertainer named dan rice traveled the country campaigning for president zachary taylor rice s bandwagon was the centerpiece of his campaign events and he encouraged those in the crowd to jump on the bandwagon and support taylor by the early 20th century bandwagons were commonplace in political campaigns and jump on the bandwagon had become a derogatory term used to describe the social phenomenon of wanting to be part of the majority even when it means going against one s principles or beliefs consumers often economize on the cost of gathering information and evaluating the quality of consumer goods by relying on the opinions and purchasing behavior of other consumers to some extent this is a beneficial and useful tendency if other people s preferences are similar their consumption decisions are rational and they have accurate information about the relative quality of available consumer goods then it makes perfect sense to follow their lead and effectively outsource the cost of gathering information to someone else however this kind of bandwagon effect can create a problem in that it gives every consumer an incentive to free ride on the information and preferences of other consumers to the extent that it leads to a situation where information regarding consumer products might be underproduced or produced solely or mostly by marketers it can be criticized for example people might buy a new electronic item because of its popularity regardless of whether they need it can afford it or even really want it bandwagon effects in consumption can also be related to conspicuous consumption where consumers buy expensive products as a signal of economic status the bandwagon effect has been identified in behavioral economics as well investing and financial markets can be especially vulnerable to bandwagon effects because not only will the same kind of social psychological and information economizing factors occur but additionally the prices of assets tend to rise as more people jump on the bandwagon this can create a positive feedback loop of rising prices and increased demand for an asset related to george soros concept of reflexivity for example during the dotcom bubble of the late 1990s dozens of tech startups emerged that had no viable business plans no products or services ready to bring to market and in many cases nothing more than a name usually something tech sounding with com or net as a suffix despite lacking in vision and scope these companies attracted millions of investment dollars in large part due to the bandwagon effect | |
how to avoid the bandwagon effect | minimizing the bandwagon effect can be a difficult process groupthink is difficult to escape as are the biases that humans are socially prone to having there are three steps you can take to minimize the bandwagon effect you may eventually choose not to follow the crowd in some cases you might discover that the popular choice is also a good one for you either way you ll feel more confident if you ve taken the time to research and make your decision because it s what you want to do not just what everyone else is doing who first identified the bandwagon effect the term bandwagon stems from the 1848 u s presidential election during zachary taylor s successful campaign a popular performance clown invited taylor to join his circus bandwagon taylor received a significant amount of renown and people started claiming that his political opponents might also want to jump on the bandwagon | |
is the bandwagon effect positive or negative | the bandwagon effect itself is a neutral phenomenon whether following the behavior of others is positive or negative depends on the behavior being followed for example if everyone you know is saving for retirement and discusses it frequently you may be more likely to save for retirement because you are copying the behavior of those around you in that case the bandwagon effect would be positive for you but if everyone you know lives a lavish lifestyle and you do the same even though you can t afford it the bandwagon effect would have negative consequences for you | |
why is the bandwagon effect important to investors | the bandwagon effect can lead investors to follow the crowd which may result in asset bubbles or crashes depending on if the crowd is buying or selling in either case people may invest for fear of missing out fomo rather than making individual evaluations of investments and doing due diligence buying or selling simply because everyone else seems to be doing it can lead to bad outcomes the bottom linethe bandwagon effect is a phenomenon in which people start doing something because everybody else seems to be doing it it can be caused by psychological social and economic factors people may want to be part of a group that seems likely to win be convinced something is correct because they ve heard it repeated so many times or simply be influenced by their friends or relatives the bandwagon effect was first identified in politics people often vote for the candidate who appears to have the most support because they want to be part of the majority regardless of their own political beliefs it can also impact consumer spending and investing decisions | |
what is the bandwagon effect | the bandwagon effect is a psychological phenomenon in which people do something primarily because other people are doing it regardless of their own beliefs which they may ignore or override this tendency of people to align their beliefs and behaviors with those of a group is also called a herd mentality the term bandwagon effect originates from politics but has wide implications commonly seen in consumer behavior and investment activities this phenomenon can be seen during bull markets and the growth of asset bubbles investopedia zoe hansen | |
why the bandwagon effect happens | the bandwagon effect arises primarily from psychological and sociological factors people are biologically programed to be social and like to be part of a group behaving the same way a group does can lead to belonging and acceptance people also like to be on the winning team and to signal their social identity to do so they adopt the behavior of the group around them and that behavior begins to seem desirable or normal due to proximity and repetition the human brain uses shortcuts known as heuristics to make decisions more efficiently one of these shortcuts is looking at what other people are doing if enough people are following a trend repeating a statement or making the same decision your brain will assume that it s the correct decision to make economically this can make sense as it allows you to economize on the costs of gathering information by relying on the knowledge and opinions of others for example if you are having a baby you could spend hours researching different baby strollers and trying to find the best option or if everyone you know has the same baby stroller model you might decide that s the best one because everyone else uses it as long as it is a good stroller you would have saved yourself hours of time lost to research that you didn t need on the other hand following what the group does without considering its full implications can cause problems this was seen in the lead up to the housing crisis in 2007 financial institutions all joined the subprime mortgage bandwagon creating an unregulated and unstable housing bubble investors and buyers all believed the market would continue to be stable because everyone else also believed it would remain stable this proved to be a false belief and led to the great recession of 2007 2009 repetition can also affect what people believe to be true people tend to believe claims are more true if they have been exposed to them more this is why advertisements propaganda and false news all work they expose people to the same idea over and over this is known as the illusory truth effect this can become part of the bandwagon effect as well you may support one sports team but if everyone you know constantly talks about how much better a different sports team is it starts to seem like a true statement the repetition alone may be enough to convince you to follow the crowd and start supporting the new team impact of the bandwagon effect in different areasthe bandwagon effect can be seen in different areas of everyday life it can be seen in everyday social behavior such as smoking because your friends smoke or exercising because your friends exercise it is also often at work in the fields of politics consumer behavior and finance in politics the bandwagon effect might cause citizens to vote for the person who appears to have more popular support because they want to belong to the majority the term bandwagon refers to a wagon that carries a band through a parade during the 19th century an entertainer named dan rice traveled the country campaigning for president zachary taylor rice s bandwagon was the centerpiece of his campaign events and he encouraged those in the crowd to jump on the bandwagon and support taylor by the early 20th century bandwagons were commonplace in political campaigns and jump on the bandwagon had become a derogatory term used to describe the social phenomenon of wanting to be part of the majority even when it means going against one s principles or beliefs consumers often economize on the cost of gathering information and evaluating the quality of consumer goods by relying on the opinions and purchasing behavior of other consumers to some extent this is a beneficial and useful tendency if other people s preferences are similar their consumption decisions are rational and they have accurate information about the relative quality of available consumer goods then it makes perfect sense to follow their lead and effectively outsource the cost of gathering information to someone else however this kind of bandwagon effect can create a problem in that it gives every consumer an incentive to free ride on the information and preferences of other consumers to the extent that it leads to a situation where information regarding consumer products might be underproduced or produced solely or mostly by marketers it can be criticized for example people might buy a new electronic item because of its popularity regardless of whether they need it can afford it or even really want it bandwagon effects in consumption can also be related to conspicuous consumption where consumers buy expensive products as a signal of economic status the bandwagon effect has been identified in behavioral economics as well investing and financial markets can be especially vulnerable to bandwagon effects because not only will the same kind of social psychological and information economizing factors occur but additionally the prices of assets tend to rise as more people jump on the bandwagon this can create a positive feedback loop of rising prices and increased demand for an asset related to george soros concept of reflexivity for example during the dotcom bubble of the late 1990s dozens of tech startups emerged that had no viable business plans no products or services ready to bring to market and in many cases nothing more than a name usually something tech sounding with com or net as a suffix despite lacking in vision and scope these companies attracted millions of investment dollars in large part due to the bandwagon effect | |
how to avoid the bandwagon effect | minimizing the bandwagon effect can be a difficult process groupthink is difficult to escape as are the biases that humans are socially prone to having there are three steps you can take to minimize the bandwagon effect you may eventually choose not to follow the crowd in some cases you might discover that the popular choice is also a good one for you either way you ll feel more confident if you ve taken the time to research and make your decision because it s what you want to do not just what everyone else is doing who first identified the bandwagon effect the term bandwagon stems from the 1848 u s presidential election during zachary taylor s successful campaign a popular performance clown invited taylor to join his circus bandwagon taylor received a significant amount of renown and people started claiming that his political opponents might also want to jump on the bandwagon | |
is the bandwagon effect positive or negative | the bandwagon effect itself is a neutral phenomenon whether following the behavior of others is positive or negative depends on the behavior being followed for example if everyone you know is saving for retirement and discusses it frequently you may be more likely to save for retirement because you are copying the behavior of those around you in that case the bandwagon effect would be positive for you but if everyone you know lives a lavish lifestyle and you do the same even though you can t afford it the bandwagon effect would have negative consequences for you | |
why is the bandwagon effect important to investors | the bandwagon effect can lead investors to follow the crowd which may result in asset bubbles or crashes depending on if the crowd is buying or selling in either case people may invest for fear of missing out fomo rather than making individual evaluations of investments and doing due diligence buying or selling simply because everyone else seems to be doing it can lead to bad outcomes the bottom linethe bandwagon effect is a phenomenon in which people start doing something because everybody else seems to be doing it it can be caused by psychological social and economic factors people may want to be part of a group that seems likely to win be convinced something is correct because they ve heard it repeated so many times or simply be influenced by their friends or relatives the bandwagon effect was first identified in politics people often vote for the candidate who appears to have the most support because they want to be part of the majority regardless of their own political beliefs it can also impact consumer spending and investing decisions | |
what is the bank bill swap rate bbsw | the bank bill swap rate bbsw or bank bill swap reference rate is a short term interest rate used as a benchmark for the pricing of australian dollar derivatives and securities most notably floating rate bonds | |
what does the bbsw tell you | the bbsw is an independent reference rate that s used for pricing securities fixed income investors use bbsw since it s the benchmark to price floating rate bonds and other securities the bbsw is an average of the bank bill rates supplied by banks for various maturities in other words it s the midpoint rate for various bank eligible securities and is the rate that banks lend to each other in australia | |
how is the bbsw calculated | the bbsw is calculated and published by the australian securities exchange asx which maintains this rate the bank bill swap rate is australia s equivalent of london interbank offered rate libor and is used as a reference rate in much the same way on an institutional level for review libor is an average value of interest rates which is calculated from estimates submitted by the leading global banks on a daily basis it serves as the first step in calculating interest rates on various loans throughout the world the intercontinental exchange the authority responsible for libor will stop publishing one week and two month usd libor after dec 31 2021 all other libor will be discontinued after june 30 2023 1 for instance a variable floating rate may quote 100 basis points over libor whereas in australia they may use 100 basis points over the bbsw as stated earlier the bbsw is an average of the bank bill rates supplied by banks for various maturities according to the asx the bbsw is not as directly linked to the mortgage or other retail lending indexes as is the libor and other similar benchmarks its impact in these areas is thus minimal and limited to its general effects on interest rate levels there is a risk premium added to the bbsw to compensate for the risk of the securities as compared to the risk free rate which is typically based on government bonds for example in the u s the risk free rate is typically the u s treasury since it s backed by the u s government the credit premium added to the bbsw is typically small such as five to ten basis points however it has exceeded over 300 basis points during the financial crisis of 2008 and the months following a prime bank is one of several approved financial institutions and includes australia s four largest banks the asx reviews the members of this group annually membership requirements as listed on the asx include example of the bank bill swap rate bbsw let s say that interest rates for bank bills was 4 for the first six months of the year while rates jumped to 5 and remained at 5 for the second half of the year the average for the year would be 4 5 plus any risk premium if the risk premium was 15 basis points the bbsw would be 4 65 including the average of bank bill rates and with the risk premium added of course in reality there are more than two interest rates to average out in calculating the bbsw but it s typically considered a midpoint of all of those rates the difference between sibor and bbswthe singapore interbank offered rate known by its abbreviation sibor is the benchmark interest rate stated in singapore dollars for lending between banks within the asian market the sibor is a reference rate for lenders and borrowers that participate directly or indirectly in the asian economy the terms of the loans vary from overnight to one year notably the u k version libor is similar to the sibor while the bbsw is the australian version of libor and sibor limitations of using the bbswas with any reference rate the bbsw might not truly reflect the credit risk that exists in the market financial benchmarks did not predict the financial crisis of 2008 and the great recession that followed as a result the risk premium may not always reflect the total market risk and may act as a lagging indicator | |
what is bank capital | bank capital is the difference between a bank s assets and its liabilities and it represents the net worth of the bank or its equity value to investors the asset portion of a bank s capital includes cash government securities and interest earning loans e g mortgages letters of credit and inter bank loans the liabilities section of a bank s capital includes loan loss reserves and any debt it owes a bank s capital can be thought of as the margin to which creditors are covered if the bank would liquidate its assets | |
how bank capital works | bank capital represents the value of a bank s equity instruments that can absorb losses and have the lowest priority in payments if the bank liquidates while bank capital can be defined as the difference between a bank s assets and liabilities national authorities have their own definition of regulatory capital the main banking regulatory framework consists of international standards enacted by the basel committee on banking supervision through international accords of basel i basel ii and basel iii these standards provide a definition of the regulatory bank capital that market and banking regulators closely monitor because banks serve an important role in the economy by collecting savings and channeling them to productive uses through loans the banking industry and the definition of bank capital are heavily regulated while each country can have its own requirements the most recent international banking regulatory accord of basel iii provides a framework for defining regulatory bank capital regulatory capital classificationsaccording to basel iii regulatory bank capital is divided into tiers these are based on subordination and a bank s ability to absorb losses with a sharp distinction of capital instruments when it is still solvent versus after it goes bankrupt common equity tier 1 cet1 includes the book value of common shares paid in capital and retained earnings less goodwill and any other intangibles instruments within cet1 must have the highest subordination and no maturity tier 1 capital includes cet1 plus other instruments that are subordinated to subordinated debt and have no fixed maturity no embedded incentive for redemption and for which a bank can cancel dividends or coupons at any time tier 1 capital consists of shareholders equity and retained earnings tier 1 capital is intended to measure a bank s financial health and is used when a bank must absorb losses without ceasing business operations from a regulator s point of view bank capital and tier 1 capital in particular is the core measure of the financial strength of a bank tier 1 capital is the primary funding source of the bank typically it holds nearly all of the bank s accumulated funds these funds are generated specifically to support banks when losses are absorbed so that regular business functions do not have to be shut down under basel iii the minimum tier 1 capital ratio is 8 5 which is calculated by dividing the bank s tier 1 capital by its total risk based assets for example assume there is a bank with tier 1 capital of 176 263 billion and risk weighted assets worth 1 243 trillion the bank s tier 1 capital ratio for the period was 176 263 billion 1 243 trillion 14 18 which meets the minimum basel iii requirement of tier 1 capital of 8 5 and the total capital ratio of 10 5 tier 2 capital consists of unsecured subordinated debt and its stock surplus with an original maturity of fewer than five years minus investments in non consolidated financial institution subsidiaries under certain circumstances the total regulatory capital is equal to the sum of tier 1 and tier 2 capital tier 2 capital includes revaluation reserves hybrid capital instruments subordinated term debt general loan loss reserves and undisclosed reserves tier 2 capital is supplementary capital because it is less reliable than tier 1 capital tier 2 capital is considered less reliable than tier 1 capital because it is more difficult to accurately calculate and is composed of assets that are more difficult to liquidate under basel iii the minimum total capital ratio is 10 5 there is not a specified requirement for tier 2 capital book value of shareholders equitythe bank capital can be thought of as the book value of shareholders equity on a bank s balance sheet because many banks revalue their financial assets more often than companies in other industries that hold fixed assets at a historical cost shareholders equity can serve as a reasonable proxy for the bank capital typical items featured in the book value of shareholders equity include preferred equity common stock paid in capital retained earnings and accumulated comprehensive income the book value of shareholders equity is also calculated as the difference between a bank s assets and liabilities | |
what is a bank confirmation letter bcl | a bank confirmation letter bcl is a letter from a bank or financial institution confirming the existence of a loan or a line of credit that has been extended to a borrower the letter officially vouches for the fact that the borrower typically an individual company or organization is eligible to borrow a specified amount of funds for a specified purpose | |
how a bank confirmation letter bcl works | a bank confirmation letter s purpose is to assure a third party generally a seller that the borrower has access to sufficient financial resources to complete a transaction such as the purchase of goods the confirmation letter sometimes known as a comfort letter is not a guarantee of payment but only an assurance of the borrower s financial resources to make payment bank confirmation letters typically require the signature of representatives of the bank or the financial institution who are authorized to issue such correspondence since a letter of confirmation is issued in regard to a particular transaction or project it s not transferable to a different transaction or project if the bank s customer decides to enter into a different deal or purchase the customer usually is required to obtain a new letter of confirmation for example a prospective home buyer decides to buy a different home than the one specified in the bank confirmation letter a new bcl would be needed regulations vary from country to country in terms of whether and to what extent a letter of confirmation must state the specific purpose for which a loan or line of credit is being extended to the borrower common uses of a bank confirmation letterbank confirmation letters are most commonly prepared for a business customer of the bank vouching for the existence of a specified line of credit the letters often serve to reassure sellers of a large number of goods they may also be issued for a company that is entering into a joint venture project with another company while the letter does not guarantee payment or provision of funds it does provide an assurance of a high probability of the company receiving payment from the bank s customer a bank confirmation letter serves to assure all concerned parties in a business transaction that the bank s customer the borrower has or has available the necessary financial resources to conclude the transaction the most common use of a bank confirmation letter by an individual is during the purchase of a home or land in such cases the letter provides confirmation to a seller or realtor that the bank s customer is approved for a mortgage up to a specified amount for a proposed purchase the letter is not a commitment to buy the property it is merely a reassurance that the bank s customer has access to funds to complete a purchase in most situations a prospective buyer will not be able to close on a property without having a bank confirmation letter in hand bank confirmation letter faqsa bank confirmation letter can be received from your bank upon request the bank will issue the letter with the appropriate signatures and provide it to you a bank certification letter is a letter issued by a bank that confirms an individual has an account with that bank and the total value of the funds in the account a bank verification letter is the same as a bank certification letter a letter from a bank confirming that an individual has an account at that bank with the total value of the funds in the account to obtain a bank confirmation letter from your bank you may request in person at a bank branch from one of the bankers by a phone call to the bank and depending on the financial institution through their online platform | |
what is bank credit | bank credit is the amount of credit available to a business or individual from a banking institution in the form of loans bank credit therefore is the total amount of money a person or business can borrow from a bank or other financial institution a borrower s bank credit depends on their ability to repay any loans and the total amount of credit available to lend by the banking institution types of bank credit include car loans personal loans and mortgages understanding bank creditbanks and financial institutions make money from the funds they lend out to their clients these funds come from the money clients deposit in their checking and savings accounts or invest in certain investment vehicles such as certificates of deposit cds in return for using their services banks pay clients a small amount of interest on their deposits as noted this money is then lent out to others and is known as bank credit bank credit consists of the total amount of combined funds that financial institutions advance to individuals or businesses it is an agreement between banks and borrowers where banks make loans to borrowers by extending credit a bank essentially trusts borrowers to repay the principal balance as well as interest at a later date whether someone is approved for credit and how much they receive is based on the assessment of their creditworthiness approval is determined by a borrower s credit rating and income or other considerations this includes collateral assets or how much debt they already have there are several ways to ensure approval including cutting the total debt to income dti ratio an acceptable dti ratio is 36 or below 1borrowers are generally encouraged to keep card balances at 20 or less of the credit limit and pay off all late accounts banks typically offer credit to borrowers who have adverse credit histories with terms that benefit the banks themselves higher interest rates lower credit lines and more restrictive terms special considerationsbank credit for individuals has grown considerably as consumers have become used to relying on debt for various needs this includes financing for large purchases such as homes and automobiles as well as credit that can be used to make items needed for daily consumption businesses also use bank credit in order to fund their day to day operations many companies need funding to pay startup costs to pay for goods and services or to supplement cash flow as a result startups or small businesses use bank credit as short term financing types of bank creditbank credit comes in two different forms secured and unsecured secured credit or debt is backed by a form of collateral either in the form of cash or another tangible asset in the case of a home loan the property itself acts as collateral banks may also require certain borrowers to deposit a cash security in order to get a secured credit card secured credit reduces the amount of risk a bank takes in case the borrower defaults on the loan banks can seize the collateral sell it and use the proceeds to pay off part or all of the loan because it is secured with collateral this kind of credit tends to have a lower interest rate and more reasonable terms and conditions banks normally charge lower interest rates on secured credit because there s a higher risk of default on unsecured credit vehicles unsecured credit on the other hand is not backed by collateral these kinds of credit vehicles are riskier than secured debt because the chance of default is higher as such banks generally charge higher interest rates to lenders for unsecured credit examples of bank creditthe most common form of bank credit is a credit card a credit card approval comes with a specific credit limit and annual percentage rate apr based on the borrower s credit history the borrower is allowed to use the card to make purchases they must pay either the balance in full or the monthly minimum in order to continue borrowing until the credit limit is reached banks also offer mortgage and auto loans to borrowers these are secured forms of credit that use the asset the home or the vehicle as collateral borrowers are required to make fixed payments at regular intervals usually monthly bi weekly or monthly using a fixed or variable interest rate one example of business credit is a business line of credit loc these credit facilities are revolving loans granted to a company they may be either secured or unsecured and give corporations access to short term capital credit limits are normally higher than those granted to individual consumers because of the needs of businesses their creditworthiness and their ability to repay business locs are normally subject to annual reviews | |
what is an example of a bank credit | examples of bank credit include any money that a bank has loaned out to you this includes mortgages auto loans personal loans and credit cards a bank credit is a loan made from a bank to a borrower that needs to be paid back | |
what credit score is needed for a bank loan | the credit score needed for a bank loan will depend on the individual s finances the size of the loan and what the loan is being used for generally a credit score of 640 is required or between 600 and 700 2will a bank give a loan with bad credit usually a bank will give a loan with bad credit these may not be traditional banks but various other banks or online lenders when a person has bad credit receiving a loan will be difficult and costly banks will usually charge a higher interest rate provide a smaller loan size and may include other stipulations the bottom linebank credit allows individuals to purchase high priced items that would otherwise be difficult to purchase just with cash such as houses and cars while some bank credit helps build assets such as mortgages certain bank credit such as credit cards can be dangerous if not managed correctly ensuring your debt to income ratio is at an acceptable level will help control any bank credit and contribute to keeping your personal finances in good shape | |
what are bank deposits | bank deposits consist of money placed into banking institutions for safekeeping these deposits are made to deposit accounts such as savings accounts checking accounts and money market accounts at financial institutions the account holder has the right to withdraw deposited funds as set forth in the terms and conditions governing the account agreement investopedia mira norian | |
how bank deposits work | the deposit itself is a liability owed by the bank to the depositor bank deposits refer to this liability rather than to the actual funds that have been deposited when someone opens a bank account and makes a cash deposit they surrender the legal title to the cash and it becomes an asset of the bank in turn the account is a liability to the bank types of bank depositsa current account also called a demand deposit account is a basic checking account consumers deposit money and the deposited money can be withdrawn as the account holder desires on demand these accounts often allow the account holder to withdraw funds using bank cards checks or over the counter withdrawal slips in some cases banks charge monthly fees for current accounts but they may waive the fee if the account holder meets other requirements such as setting up direct deposit or making a certain number of monthly transfers to a savings account there are several different types of deposit accounts including current accounts savings accounts call deposit accounts money market accounts and certificates of deposit cds frequently banks will have after hours or night depository lock boxes that allow businesses to deposit cash and check receipts outside of normal banking hours savings accounts offer account holders interest on their deposits however in some cases account holders may incur a monthly fee if they do not maintain a set balance or a certain number of deposits although savings accounts are not linked to paper checks or cards like current accounts their funds are relatively easy for account holders to access in contrast a money market account offers slightly higher interest rates than a savings account but account holders face more limitations on the number of checks or transfers they can make from money market accounts financial institutions refer to these accounts as interest bearing checking accounts checking plus or advantage accounts these accounts combine the features of checking and savings accounts allowing consumers to easily access their money but also earn interest on their deposits like a savings account a time deposit account is an investment vehicle for consumers also known as certificates of deposit cd time deposit accounts tend to offer a higher rate of return than traditional savings accounts but the money must stay in the account for a set period of time in other countries time deposit accounts feature alternative names such as term deposits fixed term accounts and savings bonds deposit insurancethe federal deposit insurance corporation fdic provides deposit insurance that guarantees the deposits of member banks for at least 250 000 per depositor per bank member banks are required to place signs visible to the public stating that deposits are backed by the full faith and credit of the united states government credit unions are insured by the national credit union association ncua for up to 250 000 as well 12 | |
how much cash can you deposit without being questioned | a person in a trade or a business can deposit only up to 10 000 in a single transaction or multiple transactions without any issue some businesses may allow employees to deposit funds into their accounts using a warm card if depositing more than 10 000 irs form 8300 will need to be completed 3 |
Subsets and Splits