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what are some leadership styles | the styles of leadership can be imagined as existing on a grid with the axis representing the desire for production and the concern for employees being an effective leader can depend on one or more approaches one is to lead by example showing others how to proceed and coaching them another is to delegate tasks to others based on their skills and experience a third is to direct others from a position of authority finally a good leader can be supportive and help team members achieve their goals the bottom lineleadership is as much an art as it is a matter of ability it s about guiding and encouraging staff and setting and achieving goals as well as tackling and resolving problems before they can become larger excellent leadership skills can lead to eventually achieving roles such as ceo or chair of a company it can provide gratifying work on a smaller scale if your goals aren t quite that lofty | |
what is a leadership grid | the leadership grid is a model of behavioral leadership developed in the 1960s by robert blake and jane mouton previously known as the managerial grid the leadership grid is based on two behavioral dimensions concern for production which is plotted on the x axis on a scale from one to nine points and concern for people which is plotted on a similar scale along the y axis the model identified five leadership styles by their relative positions on the grid the first number in the examples below reflects a leader s concern for production the second number is a leader s concern for people understanding the leadership gridthe leadership grid demonstrates that placing an undue emphasis on one area while overlooking the other stifles productivity the model proposes that the team leadership style which displays a high degree of concern for both production and people may boost employee productivity some of the perceived benefits of using the leadership grid include its ability to measure performance as well as the ability to perform a self analysis of your own leadership style businesses and organizations continue to use the grid there are some perceived limitations to the leadership grid however for example it may offer a flawed self assessment due in part to its use of minimal empirical data to support the effectiveness of the grid the model also does not take into account a variety of factors such as the work environment and internal or external variables that may be factors types of behaviors found on the leadership gridthe impoverished or indifferent leadership style in the model refers to the style that shows little regard for the team or overall production such leaders efforts and concerns are more centered on self preservation which includes not allowing any actions to blowback on them the produce or perish leadership style focuses solely on production with a draconian disregard for the needs of the workers on the team the leader who follows this path may see high attrition rates due to their need for control and neglect of the team s needs the middle of the road leadership approach offers a balance of speaking to the team s needs as well as the organization s production needs but neither aspect is adequately fulfilled in the process this may lead to average and below average results in team performance and satisfaction someone with a country club leadership style sees the team s needs first and foremost over everything else the assumption by the leader is that happiness within the team will naturally lead to improved productivity however there is no guarantee the team approach is considered to be the most effective form of leadership according to the leadership grid s creators the leader shows a commitment to staff empowerment as well as toward increasing productivity by encouraging the workers to operate as a team the belief is they will be motivated to accomplish more | |
what is a leading indicator | a leading indicator is a measurable set of data that may help to forecast future economic activity leading economic indicators can be used to predict changes in the economy before the economy begins to shift in a particular direction they have the potential to be useful for businesses investors and policy makers leading indicators are one of three main types of indicators the other two are lagging indicators and coincident indicators investopedia julie bangunderstanding leading indicatorsleading indicators must be measurable to be useful as predictors of where the economy may be headed policy makers and central bankers use leading indicators when setting fiscal or monetary policy 1 businesses study them to anticipate the effect of future economic conditions and then make strategic decisions regarding markets and revenue all businesses track their own bottom lines and balance sheets but such data are lagging indicators meaning they re produced by events that have already happened importantly a business past performance does not necessarily indicate how it will do in the future investors use leading indicators to guide their investment strategies as they try to anticipate market conditions many focus on those indicators directly related to the stock market these can include the housing market retail sales building permits business startups and more examples of leading indicatorseconomists closely watch the purchasing managers index pmi the pmi reflects trends in the manufacturing and service sectors and can be a useful signal of growth in a nation s gross domestic product gdp due to changes in the demand for materials from corporations 2durable goods orders is a monthly survey of manufacturers that is produced by the u s census bureau it measures industrial activity in the durable goods sector and the state of the supply chain 3along with durable goods orders many people consider the consumer confidence index cci to be one of the most accurate leading indicators this index surveys consumers about their attitudes toward the economy and their perceptions of economic activity going forward 4the u s department of labor provides a weekly report on the number of jobless claims as an indicator of the economy s health 5 a rise in jobless claims indicates a weakening economy which could have a negative effect on the stock market a drop in jobless claims may indicate that companies are growing and hiring which can be positive for the stock market many market participants consider the yield curve to be a leading indicator of particular interest is the spread between two year and 10 year treasury yields this is because two year yields in excess of 10 year yields have been correlated to both recession and short term market volatility if such an inverted yield curve occurs it may signal that a recession is approaching 6while not a metric issued by economists or government agencies customer complaints or negative online reviews can be seen as a leading indicator of customer dissatisfaction that may signal problems with a business product quality or service failures these can point to lower future revenue growth or profits conversely positive customer satisfaction data may suggest that these factors will trend upward in the future leading indicators often present tradeoffs among accuracy precision and lead time in predicting future events accuracy of leading indicators and how to use themleading indicators are not always accurate however looking at several leading indicators in conjunction with other types of data may provide actionable information about the future health of an economy an ideal leading indicator would predict changes in economic trends or business performance accurately within a narrow range of estimates and over a major time horizon however in practice all leading indicators show variable performance along these lines for example the advance warning of economic downturns provided by capital goods new orders data can offer a long lead time for action however the historical lead time between turning points in capital goods and a specific target indicator such as changing stock prices or gdp may range from 12 to 24 months you end up with data indicating a long lead time for action but low precision about when to take it | |
what s more the magnitude of changes in capital goods new orders might not bear any consistent relationship with the size of changes in gdp making it inaccurate except as an indicator of timing therefore this indicator would be useful as a long term warning sign but it would not support a precise estimate of the timing or size of future trends | on the other hand a leading indicator might give highly accurate and precise information about a turning point or trend in the market or the economy but only over a few months or quarters such an indicator could provide detailed input for estimating the trends that affect your business or investments but it might not provide that information in sufficient time to take full advantage of the insight gained by themselves both types of leading indicators might be helpful yet neither provides the full picture needed to maximize performance in practice this means that using a range of different leading indicators that are more or less accurate precise and forward looking can provide the best opportunity to capitalize on future trends while leading indicators can provide insight into the advisability of taking actions as a government a business or an investor they have nothing to do with the impact that results from taking those actions leading indicators vs lagging indicatorsleading indicators are used to predict future economic performance lagging indicators are data that reflect past economic performance they re used to confirm economic change and financial market patterns | |
what are leading and lagging indicators | leading indicators are measurable pieces or sets of data that may suggest future economic business or investment trends a lagging indicator is a measurable figure or set of data that changes at some point after an economic or business trend occurs | |
what are the 3 types of economic indicators | leading indicators are one of the three main types of broader economic indicators the others are lagging indicators which reflect past activity and coincident indicators which reflect current activity | |
where can i find reports on leading indicators | the reports are issued by various government agencies and other organizations certain business publications e g the wall street journal will publish a calendar of upcoming announcements as well as the actual data some of the entities responsible for the data include the the conference board consumer confidence index the u s department of labor jobless claims and the u s census bureau durable goods orders | |
what is an example of a leading indicator | one of the most famous examples is the consumer confidence index cci this is a survey regularly performed by the conference board to determine how optimistic or pessimistic consumers are about their expected future financial situation 4the bottom lineleading indicators have the potential to be a highly valuable tool for economists investors business owners and consumers when used properly they can signal upcoming changes and broad trends in the economy however the economy is not guaranteed to behave in the way that leading indicators suggest and it is crucial that you know which indicators are most appropriate to evaluate and how to properly make use of them | |
what are leads and lags | leads and lags in international business usually refer to the deliberate acceleration or delaying of payments due in a foreign currency in order to take advantage of an expected change in currency exchange rates corporations and governments may time payments due in a foreign currency if they anticipate a change in currency values that is in their favor understanding leads and lagsa corporation or government can control the schedule of payments received or made within reasonable limits when a payment to a foreign entity is involved the organization may opt to pay earlier or later than scheduled these changes would be made in anticipation of capturing the benefit from a change in currency exchange rates this consideration can affect the smallest or the largest transactions if a company in one country were about to acquire a company in another country and the target company s country currency was expected to decrease in value relative to the acquiring company s country delaying the purchase would be in the interest of the acquiring company a strengthening of the currency being paid out would lead to a smaller payout for the entity in question while a weakening of the currency would lead to increased costs the longer the payment was delayed risks of leading and laggingbecause it amounts to a timing strategy leading and lagging implies risks currency rates can move in an unexpected direction | |
when a business has an expected foreign exchange transaction it may need to buy or sell the currency that it needs to complete the transaction currency prices move in response to supply and demand between forex traders companies and nations on the forex market a transaction between currencies settles on the spot date for most currency pairs this is two business days after the order was placed companies might also enter into a currency forward contract which locks the rate of the exchange | if it is expected that a currency s future price will decline against the spot price it is known as a forward discount counterparties apply forward points to the future exchange creating either a forward discount or a forward permium examples of timing a foreign paymentcurrency exchange rates are difficult to forecast but certain financial and political events may play out according to a predictable schedule these predicable scheduled events can provide insight into the direction of a exchange rate such events can include elections and budget deadlines for example great britain s decision to exit the european union known as brexit was triggered by a referendum on june 23 2016 the british pound fell in value versus the u s dollar immediately after the vote it kept falling for some weeks afterward before recovering slightly as of may 25 2022 it still has not recovered to its pre brexit levels 1if a u s company has agreed to buy a canadian asset it will need to buy canadian dollars and sell u s dollars to complete the transaction the canadian dollar moves constantly in its value compared to the u s dollar in the year ending may 25 2022 for example the canadian currency ranged between about 1 20 and about 1 30 in comparison to the u s dollar 2if the company believes the canadian dollar is going to strengthen against the u s dollar it will accelerate the transaction lead before the price of the asset increases in u s dollar terms if the company believes the canadian dollar will weaken it will hold off payment lag in the hope that the bill becomes cheaper in u s dollar terms | |
what is leakage | in economics leakage refers to capital or income that diverges from some kind of iterative system leakage is usually used in relation to a particular depiction of the flow of income within a system referred to as the circular flow of income and expenditure in the keynesian model of economics within this depiction leakages are the non consumption uses of income including saving taxes and imports understanding leakagethis particular keynesian model of the flow of income is usually depicted as a circle and the components include national income output consumption and factor payments non consumption uses of income savings taxes and imports are leaked out of the main flow this reduces the money available throughout the rest of the economy this theory of keynesian economics purports that when leakage causes a shortage of capital governments might have to take steps to stimulate their economies by injecting cash into their systems this injection of funds can be achieved by increasing the level of exports to foreign nations or by borrowing funds from investors or foreign governments imported goods are sometimes referred to as a source of leakage because they can have the effect of transferring income that was earned in one country to another country the funds used to purchase the imports leave the immediate area resulting in an outflow from the domestic area | |
when the term leakage is used in the retail sector it usually refers to consumers who spend money outside their local market this presents a challenge for businesses within this kind of economy in general they must search for other sources of revenue | another scenario where leakage is relevant is in a model of credit creation that assumes that all loans borrowed from a bank re deposited into the system of course this would never happen in reality but it allows for a simple calculation of the amount of credit that is created in reality cash leakages occur when amounts of money are borrowed from banks but not re deposited leakages also occur in the form of funds deposited in banks but not lent out in this system cash leakage lowers the ability of credit creation in the case of transnational corporations tncs leakage can also occur large companies sometimes have factories or production facilities in other countries and these factories create wealth for the company which is then not transferred to the economy of the host country and instead to that of the corporation involved the economic value of goods and profits lost here is leakage tourism can cause leakage through funds transitioning between those who live in a particular area and chosen tourist destinations additionally tourism based businesses that have facilities in one area but hold headquarters in another can create leakage as funds are shifted to the headquarters location information or data leakage occurs when internal information that should be held private or confidential is released to the public this release of information can include the accidental or intentional disclosure of information or a failure to secure the information which leads to exposure | |
what is lean six sigma | lean six sigma is a team focused managerial approach that seeks to improve performance by eliminating resource waste and defects it combines six sigma methods and tools with the lean manufacturing lean enterprise philosophy it strives to eliminate the waste of physical resources time effort and talent while assuring quality in production and organizational processes simply put lean six sigma teaches that any use of resources that doesn t create value for the end customer is considered a waste and should be eliminated understanding lean six sigmalean six sigma is a combination of lean methodology and six sigma strategy 1 lean methodology was established by japanese automaker toyota in the 1940s its purpose was to remove non value adding activities from the production process 2six sigma on the other hand was established in 1986 by an engineer at u s telecommunications company motorola who was inspired by japan s kaizen model it was trademarked by the company in 1993 its method seeks to identify and reduce defects in the production process it also strives to streamline the variability of the production process 3lean six sigma emerged in the 1990s as large u s manufacturers attempted to compete with japan s better made products the combination strategy was introduced by michael george and robert lawrence jr in their 2002 book lean six sigma combining six sigma with lean speed 4companies can arrange for lean six sigma training and certification from a wide selection of organizations that specialize in the approaches of lean six sigma and six sigma the lean concept of management focuses on the reduction and elimination of eight kinds of waste known as downtime an acronym for clay is there no word for the d jenny overproduction waiting non utilized talent transportation inventory motion and extra processing lean refers to any method measure or tool that helps in the identification and elimination of waste 5the term six sigma refers to tools and techniques that are used to improve manufacturing processes the strategy attempts to identify and eliminate the causes of defects and variations in business and manufacturing processes six sigma s dmaic phases are utilized in lean six sigma the acronym stands for define measure analyze improve and control see lean six sigma phases below it refers to the data driven five step method for improving optimizing and stabilizing business and manufacturing processes 6a lean six sigma approach that combines lean strategy and six sigma s tools and techniques highlights processes that are prone to waste defects and variation and then reduces them to ensure improvement in a company s operational processes the techniques and tools used to accomplish essential goals of the lean six sigma strategy include 7lean six sigma just in time jit training allows employees to focus resources on what customers need and when they need it rather than building up unnecessary inventory lean six sigma phasesthe dmaic phases of lean six sigma are used to identify and improve existing process problems with unknown root causes 6define the problem from a company perspective stakeholder perspective and customer perspective figure out the quality expectations that customers have and the extent of the problem examine the current process and how it contributes to the problem determine whether the process can meet customers previously defined quality expectations match each process step to your quality criteria support your measurements with actual performance data examine all information gathered thus far to finalize the exact nature of the problem its scope and its cause solve the problem and verify the improvement collaborate to structure a solution that eliminates both the problem and its cause use your data to ensure that the solution fits the issue at hand test the solution and derive performance data to support it monitor improvement and continue to improve where possible finalize acceptable performance criteria establish a plan that can deal with variations that occur sustain improvements and prevent a reoccurrence of the original problem dmaic works best when used to solve a problem relating to a process quality or waste issue in an organization 8lean six sigma belt levelslean six sigma training uses belts to denote lean six sigma expertise the exact specifications for each belt may differ depending on what organization provides the certification benefits of lean six sigmathere are a number of established benefits to lean six sigma methods for employees customers vendors and the company by increasing the efficiency of important processes companies can improve the work experience for employees and the customer experience for buyers this can build loyalty inside and outside of a company streamlined simplified processes can increase control and a company s ability to capitalize on new opportunities quickly they can also lead to more sales and revenue lower costs and more successful business results involving employees in a group or a company wide efficiency effort can improve their skills e g analytical thinking and project management and growth opportunities while boosting camaraderie by preventing defects companies save on the time money and human effort previously required to identify and eliminate them lean six sigma vs six sigmalean six sigma and six sigma are two related strategies that can solve process problems both can help companies make noteworthy improvements in quality efficiency and use of time by analyzing the way their processes function both use the dmaic phases method both are based on creating a problem solving workplace culture however six sigma is focused on reducing defects and process variability to improve process output and quality to meet customer expectations lean six sigma is focused on reducing or eliminating the wasteful use of resources and defects to improve workflow and create more value for customers lean six sigma combines aspects of six sigma such as data analysis and aspects of the lean methodology such as waste eliminating tools to improve process flow maintain continuous improvement and achieve business goals | |
what is the meaning of lean six sigma | lean six sigma is a process improvement strategy that seeks to eliminate inefficiencies in a company s process flow by identifying the causes of waste or redundancy and developing solutions to address them | |
what are the five principles of lean six sigma | define measure analyze improve and control are the five principles and phases of lean six sigma they re the steps practitioners take to create more efficient processes and a workplace culture that s focused on continuous improvement | |
why is lean six sigma important | many consider lean six sigma important for the measurable and consistent improvements in operations and business results that companies achieve using it it also might be considered important because it combines the significant process streamlining of the lean methodology of the 1940s with the six sigma data driven approach of the 1980s | |
what is lean six sigma training | lean six sigma training instructs students in the basics of six sigma methodology as well as the six sigma dmaic roadmap students also learn how to apply the concepts in practical scenarios as they go through the courses 5 | |
how much does it cost to get lean six sigma training | the cost of lean six sigma training varies depending on whether you do self study or take courses online taught live by a virtual instructor or in person as well as the level of belt you are pursuing self study white belt training is available for free as of june 19 2024 for what is described as a limited time while online white belt training is 99 1415 online training starts at yellow belt for 125 with green belt 257 black belt 399 and master black belt 699 the courses are self paced and take anywhere from one to seven weeks 16an eight day in person classroom master black belt training done over two weeks costs 4 975 17 a three to four day course in lean fundamentals ranges from 1 300 to 2 000 for in person training and 399 to 784 for online training 1819the bottom linelean six sigma is a management approach and method that endeavors to eliminate any wasteful use of resources plus defects in production processes so as to improve employee and company performance it draws on the lean concept of the 1940s established by japan s toyota to reduce waste and the six sigma strategy of the 1980s established by u s company motorola to reduce defects by combining these teachings lean six sigma puts the best of both to work to streamline efficient operations and financial outcomes for all kinds of organizations | |
what is lean startup | a lean startup is a method used to found a new company or introduce a new product on behalf of an existing company the lean startup method advocates developing products that consumers have already demonstrated they desire so that a market will already exist as soon as the product is launched as opposed to developing a product and then hoping that demand will emerge gaging consumer interestby employing lean startup principles product developers can gauge consumer interest in the product and determine how the product might need to be refined this process is called validated learning and it can be utilized to avoid the unnecessary use of resources in product creation and development through lean startup if an idea is likely to fail it will fail quickly and cheaply instead of slowly and expensively hence the term fail fast the lean startup method was developed by american entrepreneur eric ries founder and ceo of the long term stock exchange ltse he fully explains the method in his bestselling book the lean startup which has been translated into 30 languages 1lean startup is an example of consumers dictating the type of products they are offered by their respective markets rather than those markets dictating what products will be offered to them lean startup vs traditional businessesthe lean startup method also differentiates itself from the traditional business model when it comes to hiring lean startups hire workers who can learn adapt and work quickly while traditional businesses hire workers based on experience and ability lean startups also use different financial reporting metrics instead of focusing on income statements balance sheets and cash flow statements they focus on customer acquisition cost lifetime customer value customer churn rate and how viral their product could be requirements for lean startupthe lean startup method considers experimentation to be more valuable than detailed planning five year business plans built around unknowns are considered a waste of time and customer reaction is paramount instead of business plans lean startups use a business model based on hypotheses that are tested rapidly data does not need to be completed before proceeding it just needs to be sufficient when customers do not react as desired the startup quickly adjusts to limit its losses and return to developing products consumers want failure is the rule not the exception entrepreneurs following this method test their hypotheses by engaging with potential customers purchasers and partners to gauge their reactions about product features pricing distribution and customer acquisition with the information entrepreneurs make small adjustments called iterations to products and large adjustments called pivots correct any major concerns this testing phase might result in changing the target customer or modifying the product to better serve the current target customer the lean startup method first identifies a problem that needs to be solved it then develops a minimum viable product or the smallest form of the product that allows entrepreneurs to introduce it to potential customers for feedback this method is faster and less expensive than developing the final product for testing and reduces the risk that startups face by decreasing their typical high failure rate lean startup redefines a startup as an organization that is searching for a scalable business model not one that has an existing business plan that it is determined to execute example of lean startupfor example a healthy meal delivery service that is targeting busy single 20 somethings in urban areas might learn that it has a better market in 30 something affluent mothers of newborns in the suburbs the company might then change its delivery schedule and the types of foods it serves to provide optimal nutrition for new mothers it might also add on options for meals for spouses or partners and other children in the household the lean startup method is not to be used exclusively by startups companies such as general electric qualcomm and intuit have all used the lean startup method ge used the method to develop a new battery for use by cell phone companies in developing countries where electricity is unreliable | |
what is a learning curve | a learning curve is a mathematical concept that graphically depicts how a process is improved over time due to learning and increased proficiency the learning curve theory is that tasks will require less time and resources the more they are performed because of proficiencies gained as the process is learned the learning curve was first described by psychologist hermann ebbinghaus in 1885 and is used as a way to measure production efficiency and to forecast costs 1a learning curve is typically described with a percentage that identifies the rate of improvement in the visual representation of a learning curve a steeper slope indicates initial learning that translates into higher cost savings and subsequent learnings result in increasingly slower more difficult cost savings understanding a learning curvethe learning curve also is referred to as the experience curve the cost curve the efficiency curve or the productivity curve this is because the learning curve provides cost benefit measurements and insight into all the above aspects of a company the idea behind this is that any employee regardless of position takes time to learn how to carry out a specific task or duty the amount of time needed to produce the associated output is high then as the task is repeated the employee learns how to complete it quickly and that reduces the amount of time needed for a unit of output that is why the learning curve is downward sloping in the beginning with a flat slope toward the end with the cost per unit depicted on the y axis and total output on the x axis as learning increases it decreases the cost per unit of output initially before flattening out as it becomes harder to increase the efficiencies gained through learning learning curves are often associated with percentages that identify the rate of improvement for example a 90 learning curve means that for every time the cumulative quantity is doubled there is a 10 efficiency gained in the cumulative average production time per unit the percentage states the percentage of time that will carry over to future iterations of the task when production is doubled 2learning curve formulathe learning curve has a formula to identify a target cumulative average time per unit or batch the formula for the learning curve is y a x b where y cumulative average time per unit or batch a time taken to produce initial quantity x the cumulative units of production or the cumulative number of batches b the slope or learning curve index calculated as the log of the learning curve percentage divided by the log of 2 begin aligned bf y ax b textbf where textbf y text cumulative average time per unit or batch textbf a text time taken to produce initial quantity textbf x text the cumulative units of production or the qquad text cumulative number of batches textbf b text the slope or learning curve index calculated qquad text as the log of the learning curve percentage qquad text divided by the log of 2 end aligned y axbwhere y cumulative average time per unit or batcha time taken to produce initial quantityx the cumulative units of production or the cumulative number of batchesb the slope or learning curve index calculatedas the log of the learning curve percentagedivided by the log of 2 learning curve calculationlet s use an 80 learning curve as an example this means that every time we double the cumulative quantity the process becomes 20 more efficient in addition the first task we complete took 1 000 hours y 1000 1 log 80 log 2 1000 1 an average of 1 000 hours per task to complete one task begin aligned y 1000 times1 frac text log 80 text log 2 1000 times 1 text an average of 1 000 hours per task quad text to complete one task end aligned y 1000 1log2log 80 1000 1 an average of 1 000 hours per task to complete one task now let s double our manufacturing output the initial time spent on the first task will stay 1 000 hours however our value for x will now change from one to two y 1000 2 log 80 log 2 1000 8 an average of 800 hours per task to complete two tasks begin aligned y 1000 times2 frac text log 80 text log 2 1000 times 8 text an average of 800 hours per task quad text to complete two tasks end aligned y 1000 2log2log 80 1000 8 an average of 800 hours per taskto complete two tasks this means that the total cumulative amount of time needed to perform the task twice was 1 600 since we know the total amount of time taken for one task was 1 000 hours we can infer that the incremental time to perform the second task was only 600 hours this diminishing average theoretically continues as you advance along the learning curve for example the next doubling of tasks will occur at four tasks completed y 1000 4 log 8 log 2 1000 64 an average of 640 hours per task to complete four tasks begin aligned y 1000 times 4 frac text log 8 text log 2 1000 times 64 text an average of 640 hours per task quad text to complete four tasks end aligned y 1000 4log2log 8 1000 64 an average of 640 hours per taskto complete four tasks in this final example it took a total of 2 560 hours to produce 4 tasks knowing it took 1 600 hours to produce the first two tasks the learning curve indicates it will only take a total of 960 hours to produce the third and fourth task in theory the third and fourth task in the example above would have taken different amounts of time due to the fourth task being theoretically more efficient than the third task however the time taken for each of these two units is often shown as the average i e 960 hours two units 480 hours for each of the third and fourth unit learning curve tablethe learning curve can become complicated when trying to distinguish between the cumulative quantity the cumulative production time the cumulative average production time and the incremental production time therefore it is common to see a learning curve table that summarizes and neatly organizes each value this type of information is very useful in cost accounting the example above would have table as follows note that the cumulative quantity must double between rows to continue the table the next row must be calculated using a quantity of eight in addition note that the incremental time is a cumulation of more and more units as the table is extended for example the 600 hours of incremental time for task no 2 is the time it took to yield one additional task however the 960 hours in the next row is the time it took to yield two additional tasks learning curve graphsbecause learning curve data easily creates trend lines it s fairly common to see learning curve data depicted graphically there are several data points to choose from one of which is the total cumulative time needed to produce a given number of tasks or units in the graph below the learning curve shows that more time is needed to generate more tasks however the graph above fails to demonstrate how the process is becoming more efficient because of the graph s upward slowing curve it appears it takes incrementally more time to perform more tasks however due to the nature of the learning curve the x axis is doubling and incrementally taking less time per unit for example consider the graph below that demonstrates the approximate average time needed to perform a given number of tasks shapes types of learning curveslearning curves can be depicted visually in different ways they can be represented in a chart with linear coordinates like the charts above in which the shape is an actual curve a learning curve can also be depicted between axis points in a chart as a straight line or a band of points lower learning curve percentages mean higher degrees of improvement as a result the lower the learning curve percentages the steeper the slope of graphs benefits of using the learning curvecompanies know how much an employee earns per hour and can derive the cost of producing a single unit of output based on the number of hours needed a well placed employee who is set up for success should decrease the company s costs per unit of output over time businesses can use the learning curve to inform production planning cost forecasting and logistics schedules the slope of the learning curve represents the rate in which learning translates into cost savings for a company the steeper the slope the higher the cost savings per unit of output this standard learning curve is known as the 80 learning curve it shows that for every doubling of a company s output the cost of the new output is 80 of the prior output as output increases it becomes harder and harder to double a company s previous output depicted using the slope of the curve which means cost savings slow over time learning curve examplethe learning curve has many applications within the realm of business it can help assess the true cost of undertaking a project for example the learning curve can play a fundamental part in understanding production costs and cost per unit consider a new hire who is placed on a manufacturing line as the employee becomes more proficient at their job they will be able to manufacture more goods in a smaller amount of time all else being equal in this example a 90 learning curve would mean there is a 10 improvement every time the number of repetitions doubles in the long run a company can use this information to plan financial forecasts price goods and anticipate whether it will meet customer demand | |
why is a learning curve important | a learning curve is important because it can be used as a planning tool to understand when operational efficiencies may occur the learning curve identifies how quickly a task can be performed over time as the performer of that task gains proficiency this is useful for a company to know when allocating employee s time dedicating training for new procedures or allocating costs across new products | |
what does a high learning curve mean | a high or steep learning curve indicates that it takes a substantial amount of resources to perform an initial task however it also signifies that subsequent performance of the same task will take less time due to the task being relatively easier to learn a high learning curve indicates to a business that something might require intensive training but that an employee will quickly become more proficient over time | |
how is a learning curve measured and calculated | a learning curve is measured and calculated by determining the amount of time it will take to perform a task then a learning curve assigns an improvement value to identify the rate of efficiency the task performer will incur as they learn and become more proficient at the task the formal calculation to identify the cumulate time is y ax b where y is the total amount of time taken a is the time to produce the first task x is the total number of tasks performed and b is the slope of the learning curve | |
when a learning curve has a given percentage this indicates the rate at which learning and improvement occur most often the percentage given is the amount of time it will take to perform double the amount of repetitions in the example of a 90 learning curve this means there is a corresponding 10 improvement every time the number of repetitions doubles | the bottom linemost people usually get better at doing something the more they do it the time and resources spent to do something the first time is probably higher than the time and resources spent on performing the same task for the 100th time this idea of continual improvement is measured through the learning curve the learning curve graphically or mathematically depicts how time spent on completing tasks often decreases over time as proficiency is gained | |
what is a lease | a lease is a contract outlining the terms under which one party agrees to rent an asset in this case property owned by another party it guarantees the lessee also known as the tenant use of the property and guarantees the lessor the property owner or landlord regular payments for a specified period in exchange both the lessee and the lessor face consequences if they fail to uphold the terms of the contract a lease is a form of incorporeal right investopedia julie bangunderstanding a leaseleases are legal and binding contracts that set forth the terms of rental agreements in real estate and real and personal property these contracts stipulate the duties of each party to effect and maintain the agreement and are enforceable by each for example a residential property lease includes not all leases are designed the same but all of them have some common features these include the rent amount the due date of rent the expiration date of the lease the landlord requires the tenant to sign the lease thereby agreeing to its terms before occupying the property most residential leases are standard with the same terms for all tenants leases for commercial properties on the other hand are usually negotiated in accordance with the specific lessee and typically run from one to 10 years with larger tenants often having longer complex lease agreements the landlord and tenant should retain a copy of the lease for their records this is especially helpful if and when any disputes arise special considerationsconsequences for breaking leases range from mild to damaging depending on the circumstances under which they are broken a tenant who breaks a lease without prior negotiation with the landlord faces a civil lawsuit a derogatory mark on their credit report or both as a result of breaking a lease a tenant may encounter problems renting a new residence as well as other issues associated with having negative entries on a credit report tenants who need to break their leases must often negotiate with their landlords or seek legal counsel in some cases giving a certain amount of notice or forfeiting the security deposit allows tenants to break their leases with no further consequences some leases have early termination clauses that allow tenants to terminate the contracts under a specific set of conditions job related relocation divorce induced hardship or when their landlords do not fulfill their contractual obligations for example a tenant may be able to terminate a lease if the landlord does not make timely repairs to the property the terms of a lease cannot violate state or federal law so a clause that allows a landlord to enter the premises at any time without notice or one that via court action grants a landlord to recover more than statutory limits allow is not enforceable discrimination during the rental process is illegal if you think you ve been discriminated against in the course of your search or application based on your race religion sex marital status national origin disability or age there are steps you can take such as filing a complaint with the u s department of housing and urban development s hud office of fair housing and equal opportunity 1certain groups of people have more leeway in ending leases early chief among these are members of the military under the servicemembers civil relief act they can break their leases if they receive active duty orders requiring them to relocate for more than 90 days 23many states allow domestic violence victims to break leases without negative consequences the abuse must have been fairly recent normally within the last year and the tenant usually should show some form of proof such as a court order of protection or a police report documenting the violence 4some states also allow renters especially older adults to terminate a lease early due to disability health conditions or medical crises that make living in the current home untenable usually required is a letter from a local doctor hospital or other medical professional attesting to the health condition even people in these protected groups must give landlords at least 30 days notice in writing of their desire to break the lease coronavirus induced shutdowns and financial hardships have caused many renters to wonder if they can get out of their leases without being penalized because of the pandemic the short answer is no despite federal and eviction moratoriums the pandemic does not relieve a tenant from their contractual obligations 5 even in the era of covid 19 if you end a lease early you re still responsible for your rent until the end date in your contract that said there might be extenuating circumstances and exceptions on aug 3 2021 the biden administration imposed a center for disease control recommended 60 day moratorium on evictions for failure to make rent or housing payments in areas experiencing high incidences of the delta variant of the virus 6 however on aug 26 2021 the supreme court vacated the cdc order effectively ending the eviction moratorium 7on sept 24 2021 the federal housing finance agency fhfa announced that fannie mae and freddie mac would continue to offer covid 19 forbearance to multifamily property owners 8 so if your landlord has a fannie or freddie backed mortgage an fha loan or a va loan they must agree not to evict tenants solely for the nonpayment of rent and allow flexibility in back payments having lost the threat of evictions landlords in these situations may be more lenient in letting a renter break a lease if you want to break your lease because of financial problems there are rental assistance programs in place the federal emergency rental assistance program for example has thus far allocated just 3 billion of its 47 billion budget 910 you can learn about eligibility and finding a local assistance program or a counselor through consumerfinance gov the website of the consumer financial protection bureau cfpb 11types of leasesbeyond residential leases tenants who lease commercial properties have a variety of lease types available all of which are structured to assign more responsibility on the tenant and provide greater up front profit for the landlord some commercial leases require the tenant to pay rent plus the landlord s operational costs while others require tenants to pay rent plus property taxes and insurance the four most common types of commercial real estate leases include | |
how do leases work | leases are generally legally binding contracts between two parties the lessor and the lessee they involve a piece of property rented out by the owner the lessor to the lessee or the tenant leases can be verbal agreements but are normally drawn up in writing both parties agree to the terms of the lease including the rental amount length of time for the contract as well as any consequences that may result if either party doesn t uphold the terms and conditions of the contract | |
what benefits do leases provide for landlords and tenants | signing a lease provides both landlords and tenants with clear terms and conditions outlining the relationship and the rental agreement doing so also establishes the rights and responsibilities of each party involved for instance leases provide both parties with structure in that they establish the cost associated with renting and the length of time under which the lease is exercisable this provides both parties with stability a lease also gives both parties a clear understanding of what happens when either party breaks or goes against any of the terms laid out within the lease contract can you break a lease either party can break a lease but doing so isn t advisable as there may be consequences involved tenants may be responsible to pay the landlord early release charges and or the remaining balance to pay off the lease in some cases breaking a lease may even hurt a tenant s credit score landlords may have to provide tenants with alternate living spaces while others may face civil or legal challenges if they break their leases without cause regardless of whether you re a tenant or landlord it s always a good idea to talk to the other party involved to avoid any negative consequences and end the lease amicably certain protected groups such as active military members or victims of domestic violence may break their leases without any consequences as long as they are able to provide some proof | |
what is a lease extension | a lease extension refers to a legal agreement that extends the term of an existing lease or rental agreement extensions are not a requirement in a business relationship but are often granted just before an original agreement is set to expire they are common in relationships between landlords and tenants of commercial and residential property or between parties who lease vehicles machinery plants and equipment | |
how lease extensions work | a lease is a contract that requires the lessee or the user to pay the lessor or owner for the use of an asset for a specified period of time leases are common for rental properties or for the use of equipment vehicles or machinery and plants when the asset being rented is tangible property it may also be referred to as a rental agreement | |
when a lease expires both the lessor and the lessee have a few options available the lessee can vacate or give up access to the property or the two parties can agree to a lease renewal this option may require some renegotiation of the terms of the new lease the final option is to extend the lease the terms of the original lease are normally still in force but the time frame for an extension tends to be shorter so in the case of a residential rental property the landlord may keep some of the original lease terms like the rental amount due but extend the period of tenancy for the lessee | the lease extension is a formal document that must include certain details it should name all the parties involved in the agreement as well as the dates on which the extension begins and ends the extension document should also reference the earlier agreement being extended some lease extensions especially in real estate are granted automatically they may specify a certain length of time for the extension or may allow for the use of the property on a month to month basis special considerationslease extensions are an important part of the lessor lessee relationship as they reduce the risk involved for each party for example a landlord who agrees to a lease extension can keep the original lease terms intact including any provisions about notices to vacate this means the tenant has to provide prior written notice before vacating the property the landlord can rest assured there are no surprises and won t have to risk an empty unit similarly a lease extension can give tenants some stability with a proper extension in place tenants won t have to give up their units after the lease expires although not a requirement lease extensions reduce the risk involved for both the lessor and the lessee businesses enter lease agreements and agree to lease extension agreements for a variety of reasons the primary reason for leasing an asset rather than buying it is risk management a business may decide to lease a parcel of land so that it is protected from the risk of fluctuations in land prices this allows the business to focus on its core competency rather than real estate another reason for leasing is to simplify disposal a construction company for instance may decide to lease a piece of heavy equipment rather than buy it so that it does not have to deal with selling the equipment after it is no longer needed a lessee may pay more per hour in order to use the equipment but this can be worthwhile if it saves time and the cost of selling the equipment at a later date examples of lease extensionsa lease extension may be executed between a landlord and a tenant in this case if both parties choose to continue the tenancy the landlord may issue a lease extension when the original lease is set to expire lease extensions may also be granted to lessees by car dealerships let s assume a consumer leases a car for four years after that period the lessee may decide to buy or begin another lease for a brand new car the dealership may grant an extension of the original lease if the new replacement vehicle is not yet available | |
what is a lease option | a lease option is an agreement that gives a renter a choice to purchase the rented property during or at the end of the rental period it also precludes the owner from offering the property for sale to anyone else when the term expires the renter must either exercise the option or forfeit it a lease option is also known as a lease with the option to purchase | |
how a lease option works | a lease option gives a potential buyer more flexibility than a standard lease purchase agreement which requires the renter to buy the home when the lease ends the price of the home is agreed to upfront by the buyer the renter and the owner the price is typically at the current market value of the home allowing the renter to buy the home in the future at today s price for that option the renter is usually charged an upfront fee by the owner which might be 1 of the home s sale price the fee goes to the downpayment if the renter decides to buy the home at the end of the lease the lease option is especially helpful to those who might be building their credit or don t have enough saved for a downpayment however there are several features of lease options to consider requirements for a lease optionleasing options come with a tradeoff for property owners since they may lose the chance to sell the property for a higher price in exchange tenants pay more to rent with a leasing option than they would pay otherwise the owner charges a premium in addition to the standard monthly rent for the option to buy at today s price when the lease ends the premium might be a percentage added to the current rent such as a 10 surcharge of the standard monthly rent for a home of that size the premium which is often called rent credit becomes part of the downpayment for the home if the option is exercised to buy the home by the renter however the renter forfeits the extra money paid above the standard rent if the home is not purchased at the end of the lease some owners might take a one time cash payment often called valuable consideration which is similar to the premium paid for an option in the financial markets this is not a deposit on the purchase of the property meaning it s not refundable the amount ranges from a token fee to 5 of the expected purchase price the good news for renters is that typically banks will allow the total funds of the premium above the rental payments to go to the downpayment for purchasing the home however if the rent charged was an at market rate the bank may not allow any of the funds to be applied to the purchase price it s important that buyers check with multiple banks to determine their policies regarding financing a mortgage for a home with a lease option the term of the option may be any period on which the property owner and renter agree but is commonly one to three years the lease option contract also stipulates the property s purchase price at the start of the lease or how that price will be determined at the end of the option more specifics on the lease option terms are in the following section lease option termsthere are a number of lease option characteristics or terms starting with the actual lease term this defines the period during which the tenant will occupy the property the purchase option price is also a critical component of the lease agreement determining the price at which the tenant can buy the property if they choose to exercise their option in some cases an exact dollar may not be given but instead a method of calculating the value i e the official kelley blue book value at the date of lease termination the option fee also known as option consideration is a non refundable upfront payment made by the tenant to the landlord to secure the right to purchase the property during the lease term rent credits if applicable are additional financial incentives in some lease option agreements that may sometimes be used to offset fees or the purchase price lease options often have an exercise period that defines the specific timeframe within which the tenant must notify the landlord of their intent to exercise the purchase option it is crucial for the tenant to adhere to this timeframe to avoid losing the right to buy the property lease options usually have default and termination clauses default and termination provisions should outline what happens if either party fails to meet their obligations some lease option agreements may include an option for the tenant to extend the lease term or exercise period if they need more time to decide on exercising the purchase option in some cases this extension may incur a fee last the lease option may require an appraisal and inspection this is to determine the property s current value and condition at the time of exercising the purchase option in many ways this protects the buyer from not overpaying for a less than valuable good industries with lease optionsthis article primarily focuses on real estate however there are a variety of industries that often bake lease options into contract agreements these industries include but are not limited to consider making a proposal for the right to buy other assets you lease that are not included on this list after a good has been used the owner may recognize that its useful life has diminished and if you re satisfied with the product you may end up guiding an easy sale reasons to use a lease optionthere are several reasons why the renter and the owner might enter into a lease option it s important to consider whether the benefits outweigh any drawbacks for entering into the agreement a potential buyer may have many reasons to use a lease option rather than buy the property outright at the start a major consideration is not having enough money or credit to make the purchase renting can allow the potential buyer to save money for the purchase and at the same time build their credit by making regular on time payments the renter has a chance to buy a property in the future at today s prices if the renter doesn t have the money saved today to buy the home but is worried the home s value will increase in the next few years the lease option is a good choice also if the renter loves the home the school district or the neighborhood the lease option takes the home off the market allowing the renter to save enough to buy it when the lease ends even if the potential buyer has the means to purchase the property they may not want to commit to it right away for example if the potential buyer is from another place they might want to live in the new town before committing to the purchase or they may still have their old property to sell before being able to buy the new property finally the property may not qualify for certain loans including a va loan due to needed repairs or upgrades by renting first the potential buyer can make those improvements in order to qualify for the loan later a property owner may enter into a lease option agreement because they had trouble selling the house outright the option can make the property more attractive to different types of potential buyers also if a homeowner is thinking of selling the home in a few years the lease option allows the owner to collect a premium above the current market for rent the worst case scenario is that the renter doesn t buy the house the owner places it on the market to sell and keeps the extra funds paid above the standard monthly rent there may also be tax issues involved in selling the property outright now instead of selling it later the option while not a guarantee to sell later does make it more likely that the owner has a buyer ready to go at the end of the option the renter forfeits the extra money paid above the standard monthly rent if the option to buy the home is not exercised at the end of the lease lease option vs right of first offerin many ways a lease option or lease to own agreement is similar to a right of first offer a right of first offer rofo is a contractual provision that grants a specific party the first opportunity to purchase a property if the property owner decides to sell the property they must first present the terms of the sale to the party holding the rofo this gives the holder the chance to accept or decline the offer if they decline or fail to respond within a specified timeframe the property owner can then proceed to offer the property to other interested parties however should the negotiated price of the property materially vary from the price that was originally offered to the original tenant there may a clause that requires the seller to re approach the original tenant with the same package lease option vs right of first refusala lease option is slightly different from a right of first refusal rofr a rofr is a contract that gives a specific party usually a tenant or lessee the right to match the terms of any offer made by a third party to purchase the property before the property owner can proceed with the sale for example party a owns a property and receives an offer from party b to buy it the tenant party c has the opportunity to match the terms offered by party b and if party a agrees to sell they must approach party c first though this feels similar to a lease option there are substantial differences between the two in a lease option a tenant may be presented with an upfront opportunity to buy a property should they decline they may not be approached with the opportunity again with a rofr it is on the seller to decide whether or not to pursue a sale only at that time is the tenant looped into a potential deal instead of the clause being enacted based on the passage of time a rofr is triggered by the decision to sell special considerationsrenter s insurance is typically required for the renter s personal belongings renter s insurance protects for any loss in value of belongings and furnishings in the home also it s important that it be mandated that the owner also have homeowner s insurance in the event something happens during the lease term that could adversely affect the property s value such as a fire or water damage an appraisal contingency should be included in the lease option agreement in other words when the lease ends the home s value could have decreased an appraisal provides an updated value of the property before the purchase and sale go through it s important to calculate the exact amount of money to be paid to the owner at the end of the lease option remember the owner is taking the house off the market and forgoing any gains in the home s market value by entering into the lease option the owner will want to be adequately compensated for not being able to sell the house to another person who was ready to buy it for those considering a lease option or a lease option to buy they should ideally have a lawyer who is familiar with lease option transactions to review the fine print to make sure there aren t any surprises when the lease term ends a lease option should not be confused with a lease purchase option in a lease purchase option the buyer is required to buy the home at the end of the rental period example of a lease to own optionsuppose that a landlord wishes to sell their home valued at 500 000 the house has a long term tenant who is currently saving to buy their own home both parties could try their luck on the housing market but it would likely take several months for the landlord to find a suitable buyer and the tenant to find a suitable property and seller moreover selling the house would require the property owner to vacate the tenants thereby losing a source of monthly income instead the landlord could offer their tenant a leasing option providing an easier transition for both parties in a typical lease option the prospective buyer tenant would pay an additional 3 to 5 of the house price 15 000 to 25 000 as an option fee as well as an additional premium to their monthly rent in exchange they would have the option to buy the house in two years at today s price the monthly premiums would contribute to the downpayment this arrangement works out to the advantage of both parties although there is a tradeoff the buyer renter can lock in a favorable price on the home but if they do not exercise the purchase option they will have paid more money than they would have paid for an ordinary rental in addition they may also be responsible for maintenance costs that are normally the landlord s responsibility the seller landlord makes more money initially but they lose the chance to take a higher offer | |
how does a lease option work for a car | a rent to own car or lease to own car uses a similar loan agreement to a lease option the renter buyer pays an upfront downpayment as well as weekly payments however there s no purchase option at the end of the rental period the buyer owns the car outright this arrangement ultimately costs less than a subprime loan and does not require a credit check however it s much more expensive than buying a car with good credit | |
how do you find lease to own homes | according to homelight one way to find a lease to own home is to look for agents or brokerages with a lease to own program it is also possible to contact sellers directly many property owners may want to sell their property without the trouble of going through a realtor finally it is also possible to find lease to own arrangements from the foreclosure market a lease to own arrangement on a house in pre foreclosure would provide the owners with a steady income stream and a path to selling the house 1 | |
how do you write a lease to own contract | there are many sample lease to own contracts and templates available online however due to the size of the financial commitment it would be wise to have a lawyer review your lease to own contract | |
does a lease to own agreement help build your credit | lease to own agreements are typically not reported to credit bureaus according to experian making them unlikely to appear on your credit report however you can always ask your landlord to report your rent payments thereby helping to raise your credit score of course that cuts both ways a missed or late payment could end up reducing your credit 2the bottom lineleasing options are a popular way for homeowners to secure a potential buyer without having to put the property on the market after paying an upfront fee the tenant gains the right to buy the home at the end of their tenancy often for a preferential price this arrangement gives additional flexibility to prospective homebuyers allowing them to build their savings and credit as they prepare to buy a home | |
what are lease payments | a lease payment is the equivalent of the monthly rent that is formally dictated under a contract between two parties granting one participant the legal right to use the other individual s real estate holdings manufacturing equipment computers software or other fixed assets for a specified amount of time a lease provides the lessee with limited right to use without transferring ownership in return for payment to the lessor the length of time in which lease payments will be made can range from a month to month timetable as is traditionally the case with software as a service saas business models or it may contrarily extend through extremely long lengths of time such as 100 years or more which is often the case in land lease scenarios understanding lease paymentslease payments can be made by individuals as well as companies individuals traditionally use leases to finance cars but they may also use them to obtain the use of computer equipment tracts of land and other physical assets a lease payment amount is determined by a variety of different considerations such as an asset s value local residual values in a given neighborhood discount rates and a lessee s credit score a company s lease payments are used in the calculation of the fixed charge coverage ratio which helps investors determine if a company is able to cover its fixed expenses such as leases and interest the fixed charge coverage ratio is essentially an amplified version of the times interest earned ratio or the times interest coverage ratio it s highly adaptable for practical usage with nearly all fixed costs since these fixed costs are so similar to lease payments common types of leasesthe most common types of lease agreements are as follows the most significant characteristic of an operating lease is that it allows for both financing and maintenance in which lease payments include an element for financing charges as well as maintenance components operating leases require lessors to regularly service the leased equipment in question for example it is not uncommon for aircraft owners to lease out their jet engines in many cases the owners don t possess the technical knowledge required to maintain the parts for themselves because the components are highly specialized in such cases it behooves owners to include maintenance charges directly with lease payments financial leases differ from operating leases in that they do not embed maintenance fees in the lease payments newer leases types which often offer more customized service levels and lease payment structures include synthetic leases and leases tied to mileage hours or usage levels for example general electric often leases expensive locomotive components with lease payments that are tied to mileage in theory a lessee is only paying for what they need for consumers looking to lease an automobile instead of purchasing one beware of fact that some dealers impose mileage minimums in order to protect the resale value of the vehicle | |
what is a lease rate | a lease rate is the amount of money paid over a specified time period for the rental of an asset such as real property or an automobile the lease rate the amount the lessor earns from allowing someone else to use their property compensates them for not being able to use that property during the term of the lease | |
how a lease rate works | the meaning of lease rate depends on the context in which it is being used namely what type of property is being leased in commercial real estate the lease rate is the cost to occupy the space commonly stated as a dollar amount per square foot of space per year the lease rate can also be stated in terms of dollars per month as with a rental agreement or even dollars per year the terms of the lease will spell out the time period that the lease rate applies for it may also spell out incremental increases in the lease rate over multi year leases to get a true idea of the cost of renting a space in addition to the lease rate the potential tenant will need to know if the lease is single double or triple net a single net lease is a commercial real estate lease agreement in which the tenant agrees to pay property taxes in addition to rent a double net lease is a rental agreement whereby the tenant agrees to cover the costs of two of the three primary property expenses taxes utilities or insurance premiums also known as a net net nn lease these are most commonly found among commercial tenants finally a triple net lease triple net or nnn is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property including real estate taxes building insurance and maintenance because most commercial lease rates are set out in dollars per square foot it makes it easier for the potential lessee tenant to compare the leasing costs of properties with different size profiles special considerationsthe question of when to lease equipment or space rather than building or buying is one that businesses struggle with generally speaking the key factor is how long the leased property is expected to be in use for shorter term surges in equipment demand or operational expansion pushed by temporary market conditions leasing is an excellent solution that minimizes sunk costs if the increased demand is expected to be long term then the up front costs of ownership usually dwindle in comparison with the savings over time and the potential for appreciation in a commercial property that said some companies prefer to lease over the long term anyway as it relieves the company from having to worry about non core business issues like equipment and building maintenance types of lease rates | |
when it comes to cars and equipment the leasing company essentially buys the car from the dealer and rents it to you so the lessor has lent the money for the purchase upfront and you are paying back on that loan | although the dealer and the leasing party can be the same person setting up the three party agreement allows the dealership to sell inventory to the leasing arm and the leasing arm to generate income on these pseudo loans before moving the vehicle back into the dealership as used inventory the lessee gets a car that they can use without the burden of ownership in the case of an automobile lease the monthly payment on the vehicle is based on the car s expected depreciation and residual value a predetermined amount that the car will be worth at the end of the lease term as well as the lease rate which is usually stated as a percentage through monthly payments the lessee compensates the automobile dealer for both the vehicle s depreciation and for tying up assets in vehicles instead of investing that money elsewhere in this case the lease rate is roughly equivalent to an interest rate the lease payments include the lease rate factor also called the money factor that captures the financing element of car leases in the case of commercial property the building has been constructed as an investment with the hopes of bringing in tenants there are only two entities in this transaction and any compensation for the initial investment in the building is baked into the lease rate as part of the overall business plan | |
what is a leaseback | a leaseback is an arrangement in which the company that sells an asset can lease back that same asset from the purchaser with a leaseback also called a sale leaseback the details of the arrangement such as the lease payments and lease duration are made immediately after the sale of the asset in a sale leaseback transaction the seller of the asset becomes the lessee and the purchaser becomes the lessor a sale leaseback enables a company to sell an asset to raise capital then lets the company lease that asset back from the purchaser in this way a company can get both the cash and the asset it needs to operate its business understanding leasebacksin sale leaseback agreements an asset that is previously owned by the seller is sold to someone else and then leased back to the first owner for a long duration in this way a business owner can continue to use a vital asset but ceases to own it another way of thinking of a leaseback is like a corporate version of a pawnshop transaction a company goes to the pawnshop with a valuable asset and exchanges it for a fresh infusion of cash the difference would be that there is no expectation that the company would buy back the asset who uses leasebacks and why the most common users of sale leasebacks are builders or companies with high cost fixed assets like property land or large expensive equipment as such leasebacks are common in the building and transportation industries and the real estate and aerospace sectors companies use leasebacks when they need to utilize the cash they invested in an asset for other purposes but they still need the asset itself to operate their business sale leasebacks can be attractive as alternative methods of raising capital when a company needs to raise cash it typically takes out a loan incurring debt or effects an equity financing issuing stock a loan must be repaid and shows up on the company s balance sheet as a debt a leaseback transaction can actually help improve a company s balance sheet health the liability on the balance sheet will go down by avoiding more debt and current assets will show an increase in the form of cash and the lease agreement although equity does not need to be paid back shareholders have a claim on a company s earnings based on their portion of its stock a sale leaseback is neither debt nor equity financing it is more like a hybrid debt product with a leaseback a company does not increase its debt load but rather gains access to needed capital through the sale of assets example of a leasebackthere are numerous examples of sale leasebacks in corporate finance however a classic easy to understand example lies in the safe deposit vaults that commercial banks give us to store our valuables at the outset a bank owns all of the physical vaults in its basements the bank sells the vaults to a leasing company at market price which is substantially higher than the book value subsequently the leasing company will offer back these vaults to the same banks to rent on a long term basis the banks in turn sub lease these vaults to us its customers more benefits of leasebackssale leaseback transactions may be structured in various ways that can benefit both the seller lessee and the buyer lessor however all parties must consider the business and tax implications as well as the risks involved in this type of arrangement | |
what is a leaseback | a leaseback is an arrangement in which the company that sells an asset can lease back that same asset from the purchaser with a leaseback also called a sale leaseback the details of the arrangement such as the lease payments and lease duration are made immediately after the sale of the asset in a sale leaseback transaction the seller of the asset becomes the lessee and the purchaser becomes the lessor a sale leaseback enables a company to sell an asset to raise capital then lets the company lease that asset back from the purchaser in this way a company can get both the cash and the asset it needs to operate its business understanding leasebacksin sale leaseback agreements an asset that is previously owned by the seller is sold to someone else and then leased back to the first owner for a long duration in this way a business owner can continue to use a vital asset but ceases to own it another way of thinking of a leaseback is like a corporate version of a pawnshop transaction a company goes to the pawnshop with a valuable asset and exchanges it for a fresh infusion of cash the difference would be that there is no expectation that the company would buy back the asset who uses leasebacks and why the most common users of sale leasebacks are builders or companies with high cost fixed assets like property land or large expensive equipment as such leasebacks are common in the building and transportation industries and the real estate and aerospace sectors companies use leasebacks when they need to utilize the cash they invested in an asset for other purposes but they still need the asset itself to operate their business sale leasebacks can be attractive as alternative methods of raising capital when a company needs to raise cash it typically takes out a loan incurring debt or effects an equity financing issuing stock a loan must be repaid and shows up on the company s balance sheet as a debt a leaseback transaction can actually help improve a company s balance sheet health the liability on the balance sheet will go down by avoiding more debt and current assets will show an increase in the form of cash and the lease agreement although equity does not need to be paid back shareholders have a claim on a company s earnings based on their portion of its stock a sale leaseback is neither debt nor equity financing it is more like a hybrid debt product with a leaseback a company does not increase its debt load but rather gains access to needed capital through the sale of assets example of a leasebackthere are numerous examples of sale leasebacks in corporate finance however a classic easy to understand example lies in the safe deposit vaults that commercial banks give us to store our valuables at the outset a bank owns all of the physical vaults in its basements the bank sells the vaults to a leasing company at market price which is substantially higher than the book value subsequently the leasing company will offer back these vaults to the same banks to rent on a long term basis the banks in turn sub lease these vaults to us its customers more benefits of leasebackssale leaseback transactions may be structured in various ways that can benefit both the seller lessee and the buyer lessor however all parties must consider the business and tax implications as well as the risks involved in this type of arrangement | |
what is a leasehold improvement | the term leasehold improvement refers to changes made to customize a rental property to satisfy the particular needs of a specific tenant these changes and alterations may include painting installing partitions changing the flooring or putting in customized light fixtures improvements may be undertaken by the landlord or the tenant and may be paid by the tenant investopedia michela buttignol | |
how leasehold improvements work | leasehold improvements are commonly referred to as tenant improvements or build outs these changes are generally made by landlords of commercial properties and may be provided for an existing or new tenant any changes are tailored to the specific needs of a tenant and make the space more attractive and appealing to them once the lease ends the improvements generally belong to the landlord unless otherwise specified in the agreement if the tenant can take them they must remove them without any damage to the property 1certain criteria must be met for changes to qualify as leasehold improvements changes must be made to the interior to accommodate the specific needs of the tenant including any of the following not all changes are considered leasehold improvements modifications made for one tenant don t qualify for other tenants including their neighbors exterior building renovations such as landscaping parking lot repairs or roofing don t qualify either even interior alterations like upgrades made to a building s elevator or hvac systems aren t considered leasehold improvements that s because they don t benefit a specific tenant 1leasehold improvements are considered qualified improvement property for tax purposes along with building improvements qualified restaurant property and qualified retail improvements under the tax cuts and jobs act tcja of 2017 2special considerationsleasehold improvements are meant to customize and change rental properties landlords do so to meet the needs of the lessors but how do building owners treat the depreciation of these improvements it depends entirely on the accounting method owners can depreciate leasehold improvements over 15 years under the internal revenue code irc under certain conditions these include making improvements things are a little different according to generally accepted accounting principles gaap under gaap leasehold improvements are amortized over the shorter of the useful life of those leasehold improvements and the remaining lease term 4types of leasehold improvementsthis type of leasehold improvement gives the tenant authority to oversee the project taking the burden off the landlord especially if the process is time consuming the landlord normally puts provisions in place in the lease that cover the budget of the tenant allowance improvement this is usually listed as a lump sum or on a per square foot basis landlords may either pay the renovation construction company directly or reimburse the tenant directly if project budgets are exceeded the tenant covers the balance 5the landlord may offer the tenant rent discounts for leasehold improvements if this option is included in the lease the tenant may get rent relief of some type such as one free month or reduced rent for certain periods per year tenants can use this to save on space alterations just like with the tia the tenant oversees the project and controls the lease improvements the tenant is also responsible if costs exceed the budget 6this option is also called a build out in this case the landlord presents an improvement package or other options to the tenant the landlord is typically the one who manages the project allowing the tenant more time to devote to their business in most cases tenants may not end up with the modifications they actually want to help their business grow if they do choose to add on to the changes they must cover the additional cost 6this type of leasehold improvement is normally undertaken at the beginning of the lease in most cases cost estimates and plans are submitted by the tenant while the landlord is the one who supervises and pays for all of the work 6leasehold improvements rulesin december 2015 the u s congress passed the protecting americans from tax hikes path act which modified and extended many tax provisions related to depreciation including leasehold improvements the bill made permanent a tax savings provision that allowed for 15 year straight line cost recovery on qualified leasehold improvements under those guidelines the passing of the tcja in 2017 changed the way landlords and tenants can claim deductions involving leasehold improvements the new law modified some of the requirements improvements must still be made to the interior of the building which means enlargements to buildings elevators and escalators roofs fire protection alarm and security systems and hvac systems still don t qualify 8the qualified improvement property no longer requires both parties landlords and tenants to be unrelated it also eliminated the three year requirement stating that all improvements may be made after the date when the property was first placed in service according to the internal revenue service irs 2the coronavirus aid relief and economic security cares act made some tweaks to qualified improvement property when it was passed in 2020 the act put a 15 year recovery period for qip and allowed filers to claim first year depreciation for any qip 910most lenders won t allow repayment terms beyond the life of the lease if financing is required to pay for any leasehold improvements accounting for leasehold improvementsthe irs does not allow deductions for improvements but because improvements are considered part of the building they are prone to depreciation the irs allows for depreciation deductions as long as these conditions are satisfied whoever does the work is allowed to take the depreciation deduction whether that s the landlord or the tenant the tcja increased the maximum amount allowed to 1 million from 500 000 2accounting experts suggest expensing any improvements made that amount to less than the company s capitalization limit during the same period if they exceed this amount the total should be capitalized and amortized over the term of the lease or over the shorter period of the life of the improvements 11leasehold improvement vs building improvementwhile they may effectively be building improvements leasehold improvements are distinctly different that s because they only really make an impact on the space for a specific tenant building improvements on the other hand benefit everyone in the property and generally change the overall structure of the building itself 12examples of building improvements include putting up a new roof paving a driveway and or parking lot adding a parking lot renovating the lobby adding a new or repairing an existing elevator and updating the hvac system as such building improvements help extend the overall life of the structure 12examples of a leasehold improvementlandlords may pay for leasehold improvements to encourage tenants to rent spaces for longer periods of time especially in the retail industry for example a business owner leases a building for their disc golf shop the landlord may choose to add four walls to the leased area to create built in displays and storage areas for the discs these alterations are considered leasehold improvements let s take another example from the retail sector the owner of store a decides to lease space through company b the store only has four walls and no other amenities through the lease negotiation company b the landlord agrees to install shelving a service counter for cash registers and a display unit with special lighting before store a opens its doors | |
what are examples of leasehold improvements | there are many examples of leasehold improvements a leasehold improvement is anything that benefits one specific tenant usually in a commercial property this includes painting adding new walls putting up display shelves changing flooring and lighting and the addition of offices walls and partitions who pays for leasehold improvements landlords budget and pay for improvements by offering a tenant improvement allowance or through rent discounts they may also pay by offering the tenant a package of modifications from which they can choose the tenant is normally responsible for any additional costs that go over the budget | |
are leasehold improvements tax deductible | you can t deduct leasehold improvements but the irs does allow building owners to account for their depreciation because any improvements made are considered to be part of the building 13the bottom lineleasehold improvements are changes made by landlords property owners or tenants to ready maintain or fix rental units for the benefit of a specific tenant these can include painting repairs updates and replacements of fixtures and appliances owners cannot deduct these outlays from their taxes directly because they are considered to be capital improvements but the irs does afford them depreciation expense over time | |
what is the least squares criterion | the least squares criterion is a formula used to measure the accuracy of a straight line in depicting the data that was used to generate it that is the formula determines the line of best fit this mathematical formula is used to predict the behavior of the dependent variables the approach is also called the least squares regression line understanding the least squares criterionthe least squares criterion is determined by minimizing the sum of squares created by a mathematical function a square is determined by squaring the distance between a data point and the regression line or mean value of the data set a least squares analysis begins with a set of data points plotted on a graph independent variables are plotted on the horizontal x axis while dependent variables are plotted on the vertical y axis the analyst uses the least squares formula to determine the most accurate straight line that will explain the relationship between an independent variable and a dependent variable advances in computing power in addition to new financial engineering techniques have increased the use of least square methods and extended its basic principles least squares and related statistical methods have become commonplace throughout finance economics and investing even if its beneficiaries aren t always aware of their use for example the robo advisors now used by many investing platforms employ monte carlo simulation techniques to manage portfolios though this is accomplished behind the scenes and out of the sight of the account holders who use them other applications include time series analysis of return distributions economic forecasting and policy strategy and advanced option modeling instead of trying to solve an equation exactly mathematicians use the least squares method to arrive at a close approximation this is referred to as a maximum likelihood estimate the least squares approach limits the distance between a function and the data points that the function explains it is used in regression analysis often in nonlinear regression modeling in which a curve is fit into a set of data mathematicians use the least squares method to arrive at a maximum likelihood estimate the least squares approach is a popular method for determining regression equations and it tells you about the relationship between response variables and predictor variables modeling methods that are often used when fitting a function to a curve include the straight line method the polynomial method the logarithmic method and the gaussian method linear or ordinary least squares is the simplest and most commonly used linear regression estimator for analyzing observational and experimental data it finds a straight line of best fit through a set of given data points | |
what is the least squares method | the least squares method is a form of mathematical regression analysis used to determine the line of best fit for a set of data providing a visual demonstration of the relationship between the data points each point of data represents the relationship between a known independent variable and an unknown dependent variable this method is commonly used by statisticians and traders who want to identify trading opportunities and trends understanding the least squares methodthe least squares method is a form of regression analysis that provides the overall rationale for the placement of the line of best fit among the data points being studied it begins with a set of data points using two variables which are plotted on a graph along the x and y axis traders and analysts can use this as a tool to pinpoint bullish and bearish trends in the market along with potential trading opportunities the most common application of this method is sometimes referred to as linear or ordinary it aims to create a straight line that minimizes the sum of squares of the errors generated by the results of the associated equations such as the squared residuals resulting from differences in the observed value and the value anticipated based on that model for instance an analyst may use the least squares method to generate a line of best fit that explains the potential relationship between independent and dependent variables the line of best fit determined from the least squares method has an equation that highlights the relationship between the data points if the data shows a lean relationship between two variables it results in a least squares regression line this minimizes the vertical distance from the data points to the regression line the term least squares is used because it is the smallest sum of squares of errors which is also called the variance a non linear least squares problem on the other hand has no closed solution and is generally solved by iteration dependent variables are illustrated on the vertical y axis while independent variables are illustrated on the horizontal x axis in regression analysis these designations form the equation for the line of best fit which is determined from the least squares method advantages and disadvantages of the least squares methodthe best way to find the line of best fit is by using the least squares method but traders and analysts may come across some issues as this isn t always a fool proof way to do so some of the pros and cons of using this method are listed below one of the main benefits of using this method is that it is easy to apply and understand that s because it only uses two variables one that is shown along the x axis and the other on the y axis while highlighting the best relationship between them investors and analysts can use the least square method by analyzing past performance and making predictions about future trends in the economy and stock markets as such it can be used as a decision making tool the primary disadvantage of the least square method lies in the data used it can only highlight the relationship between two variables as such it doesn t take any others into account and if there are any outliers the results become skewed easy to apply and understandhighlights relationship between two variablescan be used to make predictions about future performanceonly highlights relationship between two variables | |
doesn t account for outliers | equations from the line of best fit may be determined by computer software models which include a summary of outputs for analysis where the coefficients and summary outputs explain the dependence of the variables being tested example of the least squares methodhere s a hypothetical example to show how the least square method works let s assume that an analyst wishes to test the relationship between a company s stock returns and the returns of the index for which the stock is a component in this example the analyst seeks to test the dependence of the stock returns on the index returns to achieve this all of the returns are plotted on a chart the index returns are then designated as the independent variable and the stock returns are the dependent variable the line of best fit provides the analyst a line showing the relationship between dependent and independent variables | |
what is the least squares method | the least squares method is a mathematical technique that allows the analyst to determine the best way of fitting a curve on top of a chart of data points it is widely used to make scatter plots easier to interpret and is associated with regression analysis these days the least squares method can be used as part of most statistical software programs | |
how is the least squares method used in finance | the least squares method is used in a wide variety of fields including finance and investing for financial analysts the method can help to quantify the relationship between two or more variables such as a stock s share price and its earnings per share eps by performing this type of analysis investors often try to predict the future behavior of stock prices or other factors | |
what is an example of the least squares method | consider the case of an investor considering whether to invest in a gold mining company the investor might wish to know how sensitive the company s stock price is to changes in the market price of gold to study this the investor could use the least squares method to trace the relationship between those two variables over time onto a scatter plot this analysis could help the investor predict the degree to which the stock s price would likely rise or fall for any given increase or decrease in the price of gold who first discovered the least squares method although the inventor of the least squares method is up for debate the german mathematician carl friedrich gauss claims to have invented the theory in 1795 1the bottom linetraders and analysts have a number of tools available to help make predictions about the future performance of the markets and economy the least squares method is a form of regression analysis that is used by many technical analysts to identify trading opportunities and market trends it uses two variables that are plotted on a graph to show how they re related | |
what is the least preferred coworker scale | developed by american scholar fred fiedler the scale identifies whether an individual s leadership style is either relationship oriented or task oriented the least preferred coworker lpc scale requires a person to rate the one individual they would least want to work with the least preferred co worker using a range of 18 to 25 opposing positive or negative adjectives with ratings from 1 to 8 the lpc score is then computed by totaling all the ratings a high lpc score indicates that the individual is a relationship oriented leader while a low lpc score suggests a task oriented leader | |
how the least preferred coworker scale works | a typical set of opposing adjectives used in the lpc scale would include pleasant or unpleasant friendly or unfriendly supportive or hostile and so on the responses are graded from 1 for the least favorable attribute for example unpleasant or unfriendly to 8 for the most favorable one pleasant or friendly the lpc scale assumes that people whose leadership style is relationship oriented tend to describe their least preferred co workers in a more positive manner while those whose style is task oriented rate them more negatively applying the lpc scalethe scale is based on the notion that no single leadership style is perfect or ideal as an organization s needs change depending on circumstances and context for instance a team made up of veteran workers well versed in their tasks may be served best by a relationship oriented style of leadership the team doesn t require heavy handed approaches like strict guidelines that a less experienced team might need similarly a veteran team may at times need task oriented leadership such instances might include if a deadline is looming or if the goals include sensitive milestones that will be difficult to achieve if the team is made up of both veteran professionals and untrained staff the situational needs of the objective could mean leadership styles may change based on the moment or the individuals who need guidance special considerationssituational favorableness also plays a role in the leadership style adopted the leadership member relationship is a barometer of how much influence and trust exists between the team and its leader if this bond is weak the leader can be said to hold a weak position in this regard this can be swayed by the leader s position of power in the organization the amount of power and authority a leader has to direct the team who works for them might be described as strong meaning they have clear control to see their mandates are followed if that power is weak they have less control over the team to ensure the action that is taken | |
what is a ledger balance | a ledger balance is computed by a bank at the end of each business day and includes all withdrawals and deposits to calculate the total amount of money in a bank account the ledger balance is the opening balance in the bank account the next morning and remains the same all day the ledger balance is also often referred to as the current balance and is different than the available balance in an account if you log into your online banking you may see your current balance the balance at the beginning of the day and the available balance which is the aggregate amount at any point during the day formula and calculation of ledger balanceyou can use the following formula to calculate the ledger balance of your account ledger balance opening balance credits debitsin order to calculate your ledger balance add all the credits deposits reversals etc that go through your account during the day to the opening balance then subtract all the withdrawals transfers and other debits from that figure this will give you the end of day or ledger balance | |
how a ledger balance works | the ledger balance is updated at the end of the business day after all transactions are approved and processed banks calculate this balance after posting all transactions such as deposits interest income wire transfers that go both in or out cleared checks cleared credit card or debit transactions and any correction of errors it represents the existing balance on an account at the onset of the next business day processing delays related to pending deposits can occur because the bank must first receive funds from the financial institution of the person or business who issued the check wire transfer or another form of payment once the money has been transferred the money is made accessible to the account holder the bank statement only provides the ledger balance to a particular date deposits made and checks written on or after this date do not appear on the statement the ledger balance may be used to determine whether the requirement to maintain a specific minimum balance is being satisfied it is also included in bank account receipts the ledger balance differs from the available balance of the bank account in banking and accounting the ledger balance is used in the reconciliation of book balances | |
how to calculate a ledger balance | you can calculate your ledger balance by taking the opening balance and subtract debits and add any credits deposits debits may include any transaction made throughout the day such as bank card transactions credits include deposits such as payroll as well as payments from customers or refunds after adding the credits and subtracting the debits from your opening balance you ll have your current ledger balance ledger balance vs available balancethe ledger balance differs from the customer s available balance which is the aggregate funds accessible for withdrawal at any one point because the ledger balance remains the same throughout the day it does not include real time transaction updates the available balance changes frequently throughout the day as transactions hit the bank account neither balance includes outstanding checks just written from the account but the available balance updates for recent automated teller machine atm withdrawals deposits and other transactions as the information is received by the bank understanding the difference between ledger balance and available balance is a vital aspect of proper financial planning after viewing the ledger balance if a check is written or a transaction is made an account holder may withdraw more money than is available this may lead to bank overdraft charges as well as fees from the other party s bank or business monitoring balances on a regular basis alerts a customer of any unauthorized transactions that occur or potential errors committed by the bank opening balance at the start of the daybalance without pending transactionsdoesn t change as frequentlyreal time balancechanges throughout the daymoney immediately availableimportance of ledger balancesthe ledger balance is the balance at the beginning of the day not the ending balance this balance is usually calculated at the end of the day which is the same as the available balance | |
don t rely on bank statements either as noted above balances displayed on statements are taken from a ledger balance on the statement date keep in mind that if you ve conducted any transaction conducted after the statement date such as deposits withdrawals checks or anything else will affect your available balance | in order to ensure you re working with the most updated balance at all times it s always important to keep your records up to date you may consider keeping your own ledger with a running total of your balance after considering any and all transactions through your account example of a ledger balancesay the opening balance for monday morning is 1 000 you have a payroll deposit of 500 and 150 charges on your bank card regardless of the transaction the ledger balance remains the same throughout the day that is the deposit and the bank card charge haven t officially cleared however the available balance will be updated to reflect these changes can i spend my ledger balance you can only spend your available balance and not your ledger balance if the ledger balance is greater than the available balance you can only spend up to the available balance | |
what is ledger balance and available balance | ledger balance is the amount of money in your account that might not account for transactions made during the day such as charges or deposits the available balance is the ledger balance less transactions made during the day | |
how long does it take for a ledger balance to clear | the ledger balance is often updated to reflect the available balance within a day it generally takes less than 24 hours for the ledger balance to become available the bottom linethe ledger balance isn t updated until the end of the business day the available balance is the ledger balance with pending transactions added or subtracted these pending transactions can include checks wire transfers deposits and bank card charges | |
what is a ledger wallet | ledger is a company that makes physical cryptocurrency wallets that look similar to usb drives or other storage devices the company offers users several hardware and cold wallet options ledger promises users that its wallets are safe and secure for use with crypto assets headquartered in france the company also has operations in san francisco it was launched by eight experts with backgrounds in embedded security cryptocurrencies and entrepreneurship the company s goal is to create secure solutions for blockchain applications 1types of walletsto understand the types of wallets ledger makes it s important to know what wallets do and how they are classified here s a quick refresher to use your cryptocurrency you re required to use private keys to access them these private keys which are long alphanumeric strings of numbers are what thieves and hackers are after because they are the weak link in a blockchain originally cryptocurrency users wrote or printed these keys on paper hence the term paper wallet and removed their keys from their computers to prevent theft however paper is easily damaged and as you might imagine many users lost their keys applications with user interfaces that ran on personal computers laptops and mobile devices were developed to make blockchain more user friendly attract more users and store the keys for you however these programs introduced an additional risk they were accessible to hackers and thieves because they are software based to address concerns over private key security and longevity cryptocurrency developers created other types of wallets cryptocurrency wallets are now generally classified into three categories hardware and software wallets can be further classified into | |
how ledger wallets work | ledger offers cold non custodial hardware wallets these multicurrency wallets store private keys offline on a secure hardware device these wallets are device based which means they use storage mechanisms like usb drives to store private keys thereby making it difficult for hackers to access them from an online location the private key is moved to a certified secure chip by the software on the device and ledger s application the company offers three different hardware wallets the ledger nano s plus the ledger nano x and the ledger stax these hardware wallets work with the ledger live app which the owner uses to access the keys and purchase and manage your crypto all transactions that are executed must be authorized by the user these storage wallets let you perform various functions including sending and receiving cryptocurrency and using two factor authentication 2fa applications 2all ledger products combine a secure element and a proprietary operating system designed specifically to protect a user s cryptocurrency assets they generate a 24 word 96 character backup recovery phrase to access your cryptocurrencies if the device is lost or stolen for the extra cautious the 24 word phrase can be etched into steel in a billfodl which holds seed phrases or keys in a sturdy physical form 3types of ledger walletsledger s first product was the ledger nano s introduced in 2016 4 the ledger nano s was eventually replaced with three other products the ledger nano s plus the ledger nano x and the ledger stax the ledger nano s plus is referred to by ledger as a nano s on steroids 4 the nano s plus resembles a portable usb device with a usb c connection it allows users to manage more than 5 500 digital assets with enough memory to install up to 100 apps the company says it is compatible with more than 5 000 coins and non fungible tokens nfts the ledger nano s plus is compatible with mac windows and android devices 5the unit retails for 79 usd 5ledger introduced the nano x in 2019 6 this is a usb type device that like every other ledger device keeps the owner s crypto coins and nfts offline it is bluetooth enabled and has a usb c connection this device works with macos windows ios and android it has the capacity for more than 5 500 different tokens and users can have up to 100 different apps the ledger nano x retails for 149 usd 7you may be required to purchase additional items to use your devices such as the on the go kit to connect to a mobile device the ledger stax is a portable storage device designed by ledger to store cryptocurrency assets it is small enough to fit into the palm of your hand users can name their stax and the lock screen can be customized like a smartphone some of the features include this device supports more than 5 000 coins and nfts as with all ledger devices it comes with a secure element chip 8the unit retails for 279 usd | |
how safe are ledger wallets | ledger promises users that its devices are safe and secure for use in fact the company claims that its devices have never been hacked it credits its track record with technical innovations rigorous testing and user awareness 9 | |
what are private keys | private keys are special codes used in the cryptocurrency market they work just like passwords keys are usually alphanumeric which means they are comprised of both letters and numbers they are generated by a cryptocurrency wallet and are used to authorize cryptocurrency transactions | |
what s the difference between a hot and cold wallet | hot wallets are connected to the internet and are accessible through smartphones mobile devices laptops and desktop computers cold wallets are hardware devices that are not internet enabled the bottom lineyou have several wallet options available to store the keys to your cryptocurrency safely of the different types cold hardware wallets are the most secure option because they make your keys inaccessible until you need them one of the leading names in cold hardware wallets is ledger the company maintains that its devices are completely safe and secure and have never been hacked | |
what was ftx us derivatives | ftx u s derivatives was a digital currency futures and options exchange and clearinghouse regulated by the commodity futures trading commission cftc after its parent company ftx declared bankruptcy in 2022 it was one of the few properties that were not a part of the bankruptcy proceedings the company remains operational today but is under new ownership and a different name the exchange is now ledgerx and it is owned by miami international holdings as of may 2023 1the exchange offered physical settlements of all contracts block trading and algorithmic trading opportunities for institutional investors it also allowed direct access for all traders understanding ftx us derivativesftx u s derivatives was the first exchange to offer cryptocurrency contracts in the u s using fractionalized portions of cryptocurrency contracts for bitcoin were called mini contracts and ether contracts were called deci contracts these fractional contracts enabled investors to make granular trades and allowed for scalability as the markets fluctuated ftx u s derivatives was registered with the cftc as a designated contract market derivatives clearing organization and swap execution facility 2in october 2021 ftx u s acquired ledgerx which changed its name to ftx u s derivatives ftx u s derivatives offered cryptocurrency futures options and swaps all of which were physically delivered instead of cash settled in november 2022 ftx declared bankruptcy after figuring out it had run out of liquidity due to customer withdrawals over the years ftx operated it was suspected that exchange customers had billions of dollars stolen in a scheme led by bankman fried its founder sam bankman fried stepped down as ceo he was charged with wire fraud conspiracy to commit wire fraud securities and commodities fraud and conspiracy to commit money laundering ftx u s derivatives however was not a part of its bankruptcy proceedings the exchange rebranded as or reverted to its old name ledger x and was then purchased by miami international holdings in may of 2023 1like a regular futures contract the company s cryptocurrency futures contracts allowed investors to buy or sell at a predetermined price and time in the future contract sizes depended upon the cryptocurrency ftx u s derivatives offered contracts for the current and following month and two quarterly settlements the swap contracts from ftx u s derivatives offered investors an inexpensive way to buy or sell cryptocurrency all futures and swap contracts were fully collateralized a service for institutional investors allowed for the direct negotiation of block trades with ftx u s derivatives acting as the clearinghouse 3 | |
what happend to ftx | ledgerx was purchased by ftx and rebranded as ftx u s derivatives in 2021 ftx filed for bankruptcy in november 2022 and its founder sam bankman fried stepped down as ceo after ftx declared bankruptcy in 2022 the exchange was purchased and rebranded back to ledgerx who was the ceo of ftx john j ray iii who led the restructuring of enron became ceo of ftx in november 2022 | |
does sam bankman fried face a lawsuit | in november 2022 ftx founder sam bankman fried was named in a class action lawsuit on behalf of ftx customers bankman fried was found guilty on all charges the bottom lineftx u s derivatives was an exchange owned by ftx the cryptocurrency exchange owned by sam bankman fried bankman fried was charged with and found guilty of several financial crimes after ftx declared bankruptcy in 2022 the exchange is now owned by miami holdings international and is named ledgerx once again | |
what is a leg | a leg is one piece of a multi part trade often a derivatives trading strategy in which a trader combines multiple options or futures contracts or in rarer cases combinations of both types of contract to hedge a position to benefit from arbitrage or to profit from a spread widening or tightening within these strategies each derivative contract or position in the underlying security is called a leg | |
when entering into a multi leg position it is known as legging in to the trade exiting such a position meanwhile is called legging out note that the cash flows exchanged in a swap contract may also be referred to as legs | understanding a lega leg is one part or one side of a multi step or multi leg trade these kinds of trades are just like a race of a long journey they have multiple parts or legs they are used in place of individual trades especially when the trades require more complex strategies a leg can include the simultaneous purchase and sale of a security for legs to work it s important to consider timing the legs should be exercised at the same time in order to avoid any risks associated with fluctuations in the price of the related security in other words a purchase and a sale should be made around the same time to avoid any price risk there are multiple types of legs which are outlined below legging optionsoptions are derivative contracts that give traders the right but not the obligation to buy or sell the underlying security for an agreed upon price also known as the strike price on or before a certain expiration date when making a purchase a trader initiates a call option when selling it s a put option the simplest option strategies are single legged and involve one contract these come in four basic forms investopedia sabrina jianga fifth form the cash secured put involves selling a put option and keeping the cash on hand to buy the underlying security if the option is exercised by combining these options with each other and or with short or long positions in the underlying securities traders can construct complex bets on future price movements leverage their potential gains limit their potential losses and even make free money through arbitrage the practice of capitalizing on rare market inefficiencies the long straddle is an example of an options strategy composed of two legs a long call and a long put this strategy is good for traders who know a security s price will change but aren t confident of which way it will move the investor breaks even if the price goes up by their net debit the price they paid for the two contracts plus commission fees or decreases by their net debit profits if it moves further in either direction or else loses money this loss though is limited to the investor s net debit as the chart below shows the combination of these two contracts yields a profit regardless of whether the underlying security s price rises or falls the collar is a protective strategy used on a long stock position it comprises three legs this combination amounts to a bet that the underlying price will go up but it s hedged by the long put which limits the potential for loss this combination alone is known as a protective put by adding a short call the investor has limited their potential profit on the other hand the money the investor receives from selling the call offsets the price of the put and might even have exceeded it therefore lowering the net debit this strategy is usually used by traders who are slightly bullish and don t expect large increases in price the iron condor is a complex limited risk strategy but its goal is simple to make a bit of cash on a bet that the underlying price won t move very much ideally the underlying price at expiration will be between the strike prices of the short put and the short call profits are capped at the net credit the investor receives after buying and selling the contracts but the maximum loss is also limited building this strategy requires four legs or steps you buy a put sell a put buy a call and sell a call at the relative strike prices shown below the expiration dates should be close to each other if not identical and the ideal scenario is that every contract will expire out of the money otm that is worthless futures legsfutures contracts can also be combined with each contract constituting a leg of a larger strategy these strategies include calendar spreads where a trader sells a futures contract with one delivery date and buys a contract for the same commodity with a different delivery date buying a contract that expires relatively soon and shorting a later or deferred contract is bullish and vice versa other strategies attempt to profit from the spread between different commodity prices such as the crack spread the difference between oil and its byproducts or the spark spread the difference between the price of natural gas and electricity from gas fired plants | |
what is the legal lending limit | the legal lending limit is the maximum dollar amount that a single bank can lend to a given borrower this limit is expressed as a percentage of an institution s capital and surplus the limits are regulated by the office of the comptroller of the currency occ | |
how the legal lending limit works | the legal lending limit for national banks was established under the united states code u s c and is overseen by the occ details on national bank lending limits are reported in u s c title 12 part 32 3 1the federal deposit insurance corp fdic provides insurance for u s depositors both the fdic and the occ are involved in the national bank chartering process both entities also work to ensure that national banks follow established rules defined in the united states code which details federal statutes the lending limit legal code applies to national banks and savings associations across the nation the federal code on lending limits states that a national bank or savings association may not issue a loan to a single borrower for more than 15 of the institution s capital and surplus 1this is the base standard and requires an institution to closely follow capital and surplus levels that are also regulated under federal law banks are allowed an additional 10 percentage points for the lending limit for collateralized loans thus they can lend up to 25 of capital and surplus if a loan is secured by readily marketable securities 1state chartered banks may have their own lending limits but they are often similar to the occ standard for example new york chartered banks have a lending limit of 15 of their capital stock surplus fund and undivided profits cups and 25 for loans secured by appropriate collateral 2special considerationssome loans may be allowed special lending limits loans that may qualify for special lending limits include the following loans secured by bills of lading or warehouse receipts installment consumer paper loans secured by livestock and project financing advances pertaining to a pre qualifying lending commitment additionally some loans may not be subject to lending limits at all these loans may include certain commercial paper or business paper discounted loans bankers acceptances loans secured by u s obligations loans affiliated with a federal agency loans associated with a state or political subdivision loans secured by segregated deposit accounts loans to financial institutions with the approval of a specified federal banking agency loans to the student loan marketing association sallie mae loans to industrial development authorities loans to leasing companies credit from transactions financing certain government securities and intraday credit banks are required to hold significant amounts of capital which typically causes lending limits to apply only to institutional borrowers generally capital is divided into tiers based on liquidity tier 1 capital includes its most liquid capital such as statutory reserves tier 2 capital may include undisclosed reserves and general loss reserves national banks are required to have a total capital to assets ratio of 8 3surplus may refer to a number of components at a bank categories included as surplus may be profits loss reserves and convertible debt among others | |
how is a bank s legal lending limit expressed | a bank s legal lending limit is given as a percentage of an institution s capital and surplus the legal limit for national banks is 15 of the bank s capital these limits prevent excessive loans to one person or to related persons who are financially dependent according to the occ 4 | |
which banks must comply with the legal lending limit | u s lending limit legal code applies to national banks and savings associations nationwide the federal code on lending limits says that a national bank or savings association may not issue a loan to a single borrower for more than 15 of the institution s capital and surplus most state regulated banks follow similar guidelines for maximum lending limits will i be faced with applying for a loan that exceeds banks legal limits it s highly unlikely banks are required to hold significant amounts of capital which typically causes lending limits to apply only to large institutional borrowers the bottom linethe legal lending limit is the maximum amount that a single bank can lend to a given borrower it s expressed as a percentage of an institution s capital and surplus the limits are regulated by the occ lending limit law applies to national banks and savings associations across the nation the federal code on lending limits states that a national bank or savings association may not issue a loan to a single borrower for more than 15 of the institution s capital and surplus but because most banks capital holdings are extensive the majority of retail or smaller business borrowers won t be affected by the legal lending limit | |
what is a legal monopoly | a legal monopoly refers to a company that is operating as a monopoly under a government mandate a legal monopoly offers a specific product or service at a regulated price it can either be independently run and government regulated or both government run and government regulated a legal monopoly is also known as a statutory monopoly | |
how legal monopolies work | a legal monopoly is initially ordered because it is perceived as the best option for both a government and its citizens for example in the u s at t operated as a legal monopoly until 1982 because it was deemed vital to have cheap and reliable service that was readily available to everyone railroads and airlines have also been operated as legal monopolies throughout different periods in history a legal monopoly materially differs from a de facto monopoly which refers to a monopoly that is not created by a government entity the prevailing idea behind instituting legal monopolies is that if too many competitors invest in their own delivery infrastructure prices across the board in a given industry would climb to unreasonably high levels while this idea has merit it does not sustain itself indefinitely because in most cases capitalism eventually wins out over legal monopolies as technologies advances and economies evolve playing fields typically level out all on their own consequently costs drop and barriers to entry diminish in other words competition ultimately benefits consumers more so than legal monopolies do examples of legal monopoliesthroughout history various governments have imposed legal monopolies on a variety of commodities including salt iron and tobacco the very earliest iteration of a legal monopoly is the statute of monopolies of 1623 an act by england s parliament under this statute patents evolved from letters patent which is written orders issued by a monarch granting title to an individual or a corporation the dutch east india company british east india company and similar national trading companies were granted exclusive trade rights by their respective national governments private freelance traders operating outside the scope of those two companies were subject to criminal penalties consequently those companies fought wars in the 17th century in an effort to define and defend their monopoly territories legal monopolies on alcohol remain fairly common both as a source of public revenue and as a means of control meanwhile monopolies on opium and cocaine once important revenue sources were converted or re instituted during the twentieth century to curb the abuse of controlled substances for example mallinckrodt incorporated is the only legal supplier of cocaine in the united states the regulation of gambling in many places includes a legal monopoly with respect to national or state lotteries where private operations are allowed with businesses like horse racing tracks off track betting venues and casinos the authorities may license only one operator | |
what is the legal rate of interest | the legal rate of interest is the highest rate of interest that can be legally charged on any type of debt and to which a lender must adhere the legal rate of interest applies to all types of debt although certain types of debt may carry a higher legal rate than another for instance the legal limit for a payday lender may be higher than the legal limit for a student loan the limit is set to prevent lenders from charging borrowers excessive interest rates understanding the legal rate of interestan interest rate that exceeds the legal rate of interest is classified as usury there are usually stiff penalties for usury in most states such as fines or even the forfeiture of principal and or interest the legal rate of interest can also be classified as the highest rate that lenders can charge for any legal claim that can be enforced in a court of law in the united states individual states are responsible for setting their own interest rate laws although this type of financial activity could fall under the constitution s commerce clause congress has not traditionally focused on usury the government considers the collection of interest payments through violent means a federal offense each state may set a legal rate of interest through their respective laws for example new york set its interest rates quaterly delaware s legal rate of interest is 5 1 above the federal reserve rate which makes it subject to fluctuations in addition to these limits each state typically sets separate general usury limits that may be higher new york s limit is 16 2 for civil usury and 25 3 for criminal usury banks and other providers of financing who do business in a state could be subject to that jurisdiction s legal rate of interest there are certain exceptions and circumstances that may let lenders charge rates in excess of a jurisdiction s legal rate of interest customers can choose to waive this protection when they apply for financing many lenders and financiers may require such an agreement to be signed by their customers to receive any financing the language that grants the company the right to charge higher interest rates may be included in the terms of service agreeing to receive financing at the interest rate assigned by the lender could override the protections that a legal rate of interest offer whether or not the customer later attests to fully understanding her rights special considerations for the legal rate of interestlenders might be able to bypass a legal rate of interest through similar methods used to circumvent usury laws for instance credit card providers are allowed to charge interest rates based on the state where the company is incorporated rather than the states where their customers live the lender might choose to incorporate in a state such as delaware that offers more relaxed usury laws than other states credit card companies typically have the option of charging interest rates that are allowed by the state where the company was incorporated rather than follow the usury laws that apply in the states where borrowers live nationally chartered banks similarly can apply the highest interested allowed by the state where the institution was incorporated by incorporating in states such as delaware or south dakota lenders have historically benefited from greater leeway allowed in those states relaxed usury laws | |
what is a legal separation | a legal separation is a court ordered arrangement whereby a married couple lives apart leading separate lives a legal separation is a popular alternative to a divorce when the parties are unsure of the state of their marriage but want to establish financial boundaries and responsibilities such as separation of assets custody of dependents and child support | |
why would you get a legal separation | although the reasons for seeking a legal separation vary there are some common ones worth noting some religions prohibit married couples from divorcing and a legal separation grants most of the benefits of a divorce without compromising religious tenets also those unsure of their marital future may opt for a legal separation hoping for a reconciliation 1in spite of the pain from a split sometimes a legal separation makes sense when a divorce doesn t for example a legal separation can be temporary while a divorce is permanent some couples legally separate when trial separations don t work this may be their last attempt at saving their marriage couples with minor children often cite that a legal separation is more ideal for their children than a divorce although the parents function as a separate unit the family may remain together maintaining stability and order for the most part moreover many parents find that their children are better able to adjust to a divorce if they legally separate first additionally a legal separation is often simpler and more cost effective than a divorce with a legal separation it s possible to retain health and retirement benefits 1 also for those who want a divorce a legal separation is required in some states before a judge will grant one 2 | |
when the actual date of separation is determined it freezes a spouse s ability to freely spend money from a joint credit card or bank account it also limits control over other assets such as properties and vehicles 3 | reaching a 10th anniversary is a monumental occasion but it is also a milestone that affects future benefits for couples deciding to part ways a legal separation may keep benefit entitlements intact for example military spouses must remain married for a decade to take advantage of the benefits provided by the uniformed services former spouse protection act 4also having remained married for at least 10 years qualifies ex spouses for certain spousal social security benefits 5 if your spouse will draw significantly more social security than you will in retirement it is beneficial to remain married for a minimum of 10 years so you can draw a larger sum by drawing on your spouse s social security retirement benefits a legal separation is as serious as a divorce because both are orders of the court containing duties and obligations that each party must legally uphold if the couple later divorces judges may consider the details of the separation agreement when ruling on a divorce other types of separationlegal separation isn t the only option for couples who prefer to separate instead of divorce unlike a legal separation a trial separation is an informal decision by a couple to temporarily separate as the name suggests couples use this approach when they aren t entirely certain about the separation and want to test whether or not a separation is right for them 6permanent separation is considered by some to be the stage preceding a legal separation unlike a trial separation the couple has at this point decided to separate permanently and assume there is no hope for reconciliation 6 however for whatever reason perhaps due to health insurance issues costs or just inertia the couple has not taken action to mark the separation in court separation vs divorce vs annulmentthough a divorce marks the official end of a valid marriage an annulment treats the marriage as if it had never happened when a judge grants an annulment it indicates that the court does not recognize the arrangement as having been a legally valid marriage there are a number of scenarios in which a person can request an annulment among them 7 | |
is separation the same as divorce | in most cases the legal termination of a marriage will result in a divorce unlike a separation a divorce is permanent this means both spouses are free to remarry however depending on the state where the couple lived and how long the marriage lasted a divorce also means the termination of economic benefits such as shared insurance assets and liabilities ultimately electing for a divorce over a legal separation or vice versa is a personal choice factors such as the cost of the divorce religious beliefs the shared benefits that come with remaining married any time frame thresholds such as a 10 year anniversary for military couples as well as simple uncertainty about permanently ending the marriage may make separation the correct choice | |
when crafting a legal separation both spouses should thoroughly address any issues about responsibilities shared assets or any other situation specific to the marriage that needs to be addressed if the terms of the agreement are not clearly defined in the petition the judge won t be able to help you | legal separation requirementsevery petition for legal separation must include the following information 8 | |
what are the disadvantages of a legal separation | legal separations are serious and shouldn t be rushed into while not as well known and extreme as a divorce they still can be expensive complicated to execute create further friction between couples and introduce obligations that may be complicated to reverse some argue that a married couple should either work out their differences or just divorce with a legal separation the couple is legally separated but remains married this leaves them in a kind of strange middle ground for example with this status spouses cannot remarry as they would be able to do with a divorce and if legal separation does lead to divorce the couple will end up spending more money on court and legal fees etc | |
do you need a lawyer to establish a legal separation | it is entirely possible to obtain a legal separation without hiring a lawyer most state and or county courts have the necessary separation petition forms available for free on their websites you and your spouse must complete all the necessary forms and submit them to the court clerk 9 | |
which states allow legal separation | most states allow legal separations the exceptions are delaware florida georgia maryland massachusetts michigan mississippi pennsylvania south carolina and texas which instead offer alternatives 2 | |
how much does a legal separation cost | if both parties are in agreement don t contest the separation and do not hire a lawyer to create the separation petition the cost of legal separation will only amount to the court filing fee usually around 80 up to over 400 depending on the state 10 in queens county new york for example the cost of filing a separation petition is 210 9 the separation becomes much more expensive if there are issues that need to be resolved through the use of a lawyer | |
how long does it take to get a legal separation | the length of the separation process can vary depending on the state and the complexity of the agreement but the process typically takes around six months to a year the bottom linein most states but not all it s possible to legally separate from your spouse the process involves filing a petition in court and leaves you neither married nor divorced it s a middle ground where you live separate lives and have separate bank accounts but are unable to remarry legal separation is a serious matter that comes with duties that each party is legally obligated to uphold and it is generally pursued as an alternative to divorce for religious beliefs the benefit of younger children or financial reasons | |
what is legal tender | legal tender is anything recognized by law as a means to settle a public or private debt or meet a financial obligation including tax payments contracts and legal fines or damages the national currency is legal tender in practically every country a creditor is legally obligated to accept legal tender toward repayment of a debt understanding legal tenderlegal tender is established by a statute that specifies the thing to be used as legal tender and the institution that is authorized to produce and issue it to the public such as the u s treasury in the united states and the royal canadian mint in canada in the u s the recognized legal tender consists of federal reserve notes and coins creditors are required to accept them as payment offered to discharge a debt however except where prohibited by state law private businesses may refuse to accept some or all forms of cash tender provided that a transaction has not already occurred and debt has not been incurred by the customer by default and design legal tender laws prevent the widespread adoption of anything other than the existing legal tender as money in the economy a check or a credit swipe is not legal tender it functions as a money substitute and merely represents a means by which the holder of the check can eventually receive legal tender for the debt cryptocurrencies are not generally accepted for use as money largely because they lack legal tender status however el salvador became the first country in the world to accept bitcoin as legal tender in june 2021 1in may 2013 the governor of arizona vetoed a bill that would have made gold and silver coins legal tender in the state in addition to existing u s currency 2special considerationssome currencies such as the u s dollar and euro are used as legal tender in countries that either does not issue currencies of their own or have found the stable dollar preferable to their own currency for example ecuador adopted the u s dollar as legal tender in 2000 after the ecuadorian issued currency the sucre depreciated rapidly such that 1 was worth 25 000 sucres 3adopting the u s dollar as the primary legal tender is colloquially known as dollarization although the practice generally is called currency substitution in general a legal tender can be in two fundamental forms a government can simply ratify market determined commodity money such as gold to be legal tender and agree to accept tax payments and enforce contracts denominated in that commodity alternatively a government can declare an adulterated commodity or valueless token to be legal tender which then takes on the characteristics of a fiat currency economic function of legal tenderlegal tender serves several purposes by default it is used by market participants to fulfill the functions of money in the economy a medium of indirect exchange a unit of account a store of value and a standard of deferred payment proponents of legal tender laws argue that markets generally fail to produce the optimal type quality and quantity of money and that legal tender enhances the usefulness of money as a means to reduce transaction costs specifically having a legal tender can allow flexibility in the money supply and a single currency can eliminate the transaction costs associated with the use of multiple competing currencies the imposition of legal tender is one way to achieve a single currency the legal tender also makes monetary policy possible from the point of view of the issuer legal tender allows the manipulation debasement and devaluation of the currency by the issuer to obtain seigniorage and facilitates the issuance of fiduciary media by the banking system to meet the needs of trade in the absence of legal tender laws gresham s law would make monetary policy seigniorage currency manipulation and fiduciary media issuance much more difficult as good money tends to drive out bad money in that case cryptocurrency and legal tenderthe popularity of cross border and online shopping is increasing the demand for more forms of money such as popular cryptocurrency alternatives like bitcoin to be recognized as legal tender however given official objection to such alternatives except in a few minor cases these may still be some years away and they do not represent legal tender in the u s or most other countries note that el salvador became the first country in june 2021 in the world to accept bitcoin as legal tender 1many online services accept cryptocurrencies and this practice is perfectly legal due to their status as unofficial competitors to legal tender cryptocurrencies are mostly limited to use in gray and black market activity or as speculative investments however there are a few exceptions in 2018 facing devastating hyperinflation venezuelan president nicolas madura ordered all federal institutions to accept a new electronic currency the petro as legal tender the venezuelan petro is controlled centrally by the venezuelan government based on their own estimation of the value of their natural resources the petro was claimed to be backed by venezuela s natural gas mineral and oil reserves 4 venezuela s experiment with the petro has not made much progress however and the petro does not circulate generally as money despite its legal tender status the tiny republic of the marshall islands rmi also announced that it would adopt a new cryptocurrency the sovereign as legal tender the sovereign will be pegged to an existing decentralized peer to peer cryptocurrency market currently the u s dollar functions as money and legal tender in the rmi and will continue to do so alongside the new legal tender when the government begins issuing sovereigns 5 | |
what is legislative risk | legislative risk is the potential that regulations or legislation by the government could significantly alter the business prospects of one or more companies these changes can adversely affect investment holdings in that company legislative risk may occur as a direct result of government action or by altering the demand patterns of the company s customers investors rarely complain about bailouts and preferential treatment to specific industries perhaps because they all harbor a secret hope of profiting from them however when it comes to regulations and tax they complain what subsidies and tariffs can give to an industry in the form of competitive advantages regulation and tax can take away from many more with a single law subsidy or switch of the printing press they can send shock waves around the world and destroy companies and whole industries for this reason many investors consider legislative risk as a huge factor when evaluating stocks a significant investment can turn out to be not that great after consideration of the government it operates under for related reading see the government and risk a love hate relationship legislative risk explainedlegislative risk refers to the tentative relationship between governments and business specifically it s the risk that government actions will constrain a corporation or industry thereby adversely affecting an investor s holdings in that company or industry the actual risk can appear in several ways including an antitrust suit new regulations or standards specific taxes subsidies and so on the legislative risk varies in degree according to industry but every industry has some exposure in theory the government acts as a buffer zone to keep the interests of businesses and the public from grinding on one another it is the role of the government to step in when industry is endangering the public and seems unwilling to regulate itself in practice the government tends to over legislate this legislation increases the public image of the importance of the government as well as providing the individual congressmen with publicity these powerful incentives lead to a more increased legislative risk than is truly necessary real world examples of legislative riskan example of an industry with high legislative risk is the healthcare industry drug manufacturers and healthcare providers both must contend with many ongoing legal issues related to medicare insurance coverage and other customer payment issues another example comes from wal mart stores inc wmt the company outlined certain political risks it faces in its annual 10 k filing with the securities and exchange commission sec under its operating risk section in its regulatory compliance reputational and other risks section the company outlines the risk associated with legislative judicial regulatory and political economic risks risk factors mentioned includein its risks associated with suppliers wal mart mentioned potential political and economic instability in the countries where foreign suppliers operate the also state labor problems and international trade policies and the imposition of tariffs as issues the company names brazil and china specifically and the complexity of their federal state and local laws | |
what is the bloomberg aggregate bond index | the bloomberg aggregate bond index or the agg is a broad based fixed income index used by bond traders and the managers of mutual funds and exchange traded funds etfs as a benchmark to measure their relative performance the agg is to the bond market what the wilshire 5000 total stock index is to the equity market the index has been known as the bloomberg agg only since august 2021 it was for many years the barclays agg bloomberg purchased barclays fixed income indexes in 2016 and for the following five years labeled them as bloomberg barclays indices all now carry only the bloomberg name 1understanding the bloomberg aggregate bond indexthe bloomberg aggregate bond index is widely considered to be one of the best total bond market indices the index includes government treasury securities corporate bonds mortgage backed securities mbs asset backed securities abs and munis to simulate the universe of bonds in the market it tracks bonds that are of investment grade quality or better the agg s history can be traced to earlier indices founded by the kuhn loeb co investment bank in 1973 the investment bank created two indices one that tracked u s government bonds and a second that tracked corporate bonds 2composition of the bloomberg aggregate bond indexthe composition of the agg index is designed to represent the full range of investment grade bonds traded in the u s it is composed of more than 10 000 issues u s treasuries represent nearly 40 of the index the remaining components represent the debt of major industries including real estate industrial companies financial institutions and utilities an etf tied to the agg will closely mirror this distribution for example the ishares agg etf holds about 10 000 securities the composition of the etf includes as of jan 22 2022 39 17 tied to u s treasuries 10 91 federal national mortgage association 5 65 government national mortgage association 5 36 uniform mbs and 4 5 federal home loan mortgage corporation the remainder each making up less than 1 is in bonds issued by the federal home loan mortgage corporation gold bank of america jpmorgan chase morgan stanley and goldman sachs 3funds and etfs that track the agginvestors looking to gain maximum exposure to the fixed income market can purchase an etf or a mutual fund that tracks the index the largest bond etf is the ishares core u s aggregate bond etf which has net assets of more than 90 billion as of jan 22 2022 3the vanguard total bond market index fund admiral shares vbtlx with 316 2 billion in assets as of jan 22 2022 among the largest bond mutual funds in the world tracks the performance of the bloomberg u s aggregate float adjusted index 4the vanguard total bond market index fund has 65 4 of its funds invested in u s government debt 3 7 in aaa rated debt 3 2 in aa debt 12 1 in a debt and 15 5 in bbb debt 5 | |
what was lehman brothers | lehman brothers was a global financial services firm it provided investment banking trading investment management private banking research brokerage private equity and associated services the firm was one of the largest investment banks in the united states until sept 15 2008 when it declared bankruptcy its failure was largely caused and accelerated by the subprime mortgage crisis its bankruptcy remains the largest ever at the time of its chapter 11 filing lehman brothers was in operation for 164 years 1understanding lehman brotherslehman brothers was considered one of the major players in the global banking and financial services industries at the time of its bankruptcy filing lehman held some 600 billion in assets diversified globally and was the fourth largest investment firm in the u s it invested heavily in mortgage origination in the u s from 1996 to 2006 in large part by utilizing leverage at its peak at a ratio of about 30 1 4 as such some say the firm became a de facto real estate hedge fund when real estate values peaked and began to falter between 2007 and 2008 lehman brothers became especially vulnerable 5over much of 2008 the firm fought off losses by issuing stock selling assets and reducing costs issuing debt under such conditions became difficult to impossible it had huge tranches of subprime and low rated mortgage loans on its books that it either could not or chose not to sell 6 | |
when these loans became illiquid the firm went through a credit crunch which meant it couldn t pay its creditors lehman could no longer raise cash cheaply by issuing debt and issuing stock under such conditions led to share dilution and negative sentiment which caused its share price to fall meanwhile housing prices fell as buyers stayed on the sidelines because of market conditions and the inability to secure credit as a result the global financial system was under threat of collapse with the absence of any additional loans being made and the firm s significant threat of failure 1 | the federal reserve bank of new york and several large investment u s banks met on sept 12 2008 to discuss an emergency liquidation of lehman in an attempt to stabilize the markets the goal was to avoid a costly government bailout such as the 25 billion loan the government made to bear stearns in march 2008 7 the discussions which involved a potential sale to bank of america and barclays failed vetoed by the bank of england and the u k financial services authority efforts by potential acquirers to secure federal intervention were also unsuccessful 8lehman brothers failure placed the subprime mortgage crisis prominently into the public eye and presaged the deepening of the great recession history of lehman brotherslehman brothers was established by henry lehman who emigrated from germany he opened a dry goods store in montgomery alabama in 1844 the store became known as lehman brothers with the arrival of his brothers emmanuel and mayer their operation quickly expanded from dry goods into cotton and other commodities trading 9the firm s operations shifted to new york in 1858 at that time the city became home to cotton and other commodities trading henry lehman was responsible for the first incarnation of the grocery and general store business while his brothers laid the groundwork for what would become a financial industry powerhouse 9over the next century and a half the company underwent numerous changes and engaged in several alliances and partnerships while the lehman brothers bankruptcy did not cause the great recession or even the subprime mortgage crisis its downfall triggered a massive selloff in the global markets lehman brothers was allowed to fail the repercussions were felt immediately and globally for instance the dow jones industrial average djia fell 500 points the same day that lehman declared bankruptcy its failure is regarded as a contributor to the great recession that followed 10lehman brothers todaylehman brothers assets real estate holdings and operations were sold off in a fire sale liquidation to repay investors within a month japanese bank nomura bought the firm s operations in the asia pacific region japan hong kong australia and also its investment banking and equities trading businesses in the middle east and europe 11 barclays purchased its north american investment banking and trading operations as well as its new york headquarters 12not only was lehman brothers mentioned but the firm s leadership at the time of its bankruptcy was portrayed in several financial themed movies since 2008 such as in margin call too big to fail and the big short the 2019 showtime series black monday is a dark comedy about a financial crisis the show features larry and lenny lehman two fictional siblings who were inspired by the real lehman brothers in 2016 erin montella former lehman chief financial officer cfo who resigned in 2008 published an autobiography full circle a memoir of leaning in too far and the journey back the book was about her experiences in the financial world 13most notably the lehman trilogy is a three act play by italian novelist and playwright stefano massini it follows the lives of three immigrant brothers from when they arrive in america and establish their dry goods business up through the collapse of the company in 2008 the production made its broadway debut in march of 2020 and performed briefly before the covid 19 pandemic and resumed performances in the fall of 2021 the production received universal critical acclaim and eight tony award nominations winning five awards including for best play best direction of a play for sam mendes and best actor in a play for simon russell beale | |
why did lehman brothers file bankruptcy | lehman brothers was forced to file for bankruptcy after its subprime mortgage portfolio was exposed to be worth far less than people had thought clients began to abandon lehman as its stock price plummeted and soon creditors would not lend the bank money on sept 15 2008 lehman declared bankruptcy 1 | |
why was lehman brothers not bailed out | regulators claimed they could not have rescued lehman because it did not have adequate collateral to support a bailout loan under the federal reserve s emergency lending powers 14 furthermore the financial system was by then more fragile compared to when the fed saved bear stearns this was one reason why the government was not able to find a private sector buyer for lehman some have alternatively speculated that regulators wanted to make an example out of lehman to show the cost of fiscal irresponsibility and excessive risk taking on wall st however if true this proved disastrous as contagion from lehman s failure rippled throughout the global economy 10who were the lehman brothers a new immigrant from germany to the u s henry lehman opened a dry goods store in montgomery alabama with the subsequent arrival of his two brothers emmanuel and mayer the store became known as lehman bros during the u s civil war cotton became an increasingly important domestic commodity the lehman brothers decided to capitalize on this by provisioning raw cotton at the dry goods store and then engaging in cotton trading in new york the firm eventually abandoned the south entirely relocating its headquarters to new york where it focused almost entirely on commodities trading and brokerage in the following decades the operations expanded into a full service financial firm | |
what is the lehman formula | the lehman formula is a compensation formula developed by lehman brothers to determine the commission on investment banking or other business brokering services lehman brothers developed the lehman formula also known as the lehman scale formula in the 1960s while raising capital for corporate clients understanding the lehman formulaas a provider of global investment banking services lehman brothers needed a way to clearly convey to its potential clients the fees they would charge for their services it typically involved a sliding scale of percentages applied to different dollar amounts so that different tiers of money would receive different rates the advantage of the lehman formula is that it s easy to understand and easy for the client to quickly get a ballpark estimate on how much their transaction might cost them in fees it s not uncommon for large investment banking firms to assist clients with transactions worth hundreds of millions or billions of dollars the lehman formula structures the investment banking fee on a percentage of the transaction amount with a set of tiered fees | |
how investment banks earn their fees | investment banks work with companies governments and agencies to raise money by issuing securities an investment bank might help a company that has never issued stock to successfully complete its initial public offering ipo other typical services that investment bankers provide include offering merger and acquisition m a advice developing reorganization strategies or helping a company through a spinoff investment banks make money in various ways the can charge flat fees for each transaction earn commissions based on the dollar amount of the transaction or a combination of both in the case of an ipo an investment bank might provide underwriting services the bank might buy stock in the ipo and then sell the shares to investors the difference between what the bank purchased the ipo shares for and what they earn selling them to investors is the bank s profit some investment banks that underwrite an ipo undertake the risk that they will not be able to sell the ipo shares for a higher price to investors thus losing money on the trade examples of the lehman formulathe original structure of the lehman formula is a 5 4 3 2 1 ladder as follows today and to keep up with inflation investment bankers often seek some multiple of the original lehman formula such as the double lehman formula 1 this structure is also more common in middle market transactions because of their complexity and longer close periods 2lehman formula base methodsthere are several different ways the lehman formula can be used in terms of deciding what baseline dollar amount to use each of the three primary ways are discussed below the million dollar amount method known as mda is the traditional approach where percentages are applied to distinct value brackets in a transaction this is the example demonstrated above to further illustrate imagine a substantial 12 million stock transaction in this case the total fee using the mda method for this 12 million transaction would be 520 000 as the mda method aggregates the fees for each tier notice that the percentages and tiers do not need to be aligned firms can adjust either based on the deal or client mda is often preferred when dealing with smaller transactions due to its potential for generating higher fees in such cases the total value amount method or tva takes a different approach by applying the highest percentage fee to the entire transaction value for example consider a substantial 18 million stock sale where the highest applicable fee is 4 in this scenario the 4 fee is applied to the entire 18 million resulting in a fee of 720 000 tva is more efficient and straightforward for transactions that surpass a certain threshold and it is clearly much more transparent on what the ultimate fee may be clients may prefer the simplicity of the fee structure it also provides a certain level of guarantee of what the fee may be consider a company that may not know whether a stock sale will be 15 million or 25 million should there be a higher fee rate at the higher end it may be more favorable for a company to stick to a single fixed rate for every tier to better lock in forecasted fee amounts last pertinent value amount or pva functions similarly to tva but introduces a tiered fee structure for transactions exceeding a specified threshold this method really only works with larger deals that appear to cross over this threshold otherwise there is little incentive for the firm implementing the fee structure to agree to the deal let s take an example of a 10 million stock sale under the pva method the first 4 million might incur a 2 fee amounting to 80 000 the remaining 6 million may be subject to a 1 fee resulting in an additional 60 000 the total fee using the pva method for this 10 million transaction would be 140 000 in this situation it may not be known what the ultimate sale value will be a company may be wary to agree to fees without knowing what the base cost will be in this case the company can be assessed a higher rate on a lower dollar threshold then a single lower rate on a higher tier this method blends the two methods above by having both a tier structure but also a simplified more straightforward approach the concept of the lehman formula can be found in other industries for example financial advisors for personal investors may charge different fees for different services that may scale based on dollar amounts advantages and disadvantages of the lehman formulainvestment banking compensation is often performance based which means that a significant portion of an investment banker s earnings is tied to their individual and team performance this structure incentivizes bankers to work diligently generate revenue and create value for their clients and their firms by directly linking compensation to results the lehman formula encourages bankers to excel in their roles and strive for positive large outcomes investment bankers play a crucial role in helping clients achieve their financial objectives whether it s raising capital executing mergers and acquisitions or entering capital markets this compensation structure is designed to align with these client goals for example if an investment banker successfully advises a client on a large merger that enhances shareholder value their compensation is reflective of the value created for the client investment banking compensation structures can be flexible allowing firms to tailor packages to the unique needs and preferences of their employees and the specific demands of their business for example the lehman formula can be adjusted with different fee rates for different dollar tiers for different clients this flexibility enables firms to adapt to changing market conditions and evolving business strategies while still striving to land large clients performance based compensation can encourage a short term focus on immediate revenue generation and deal completion bankers may prioritize transactions that yield quick financial rewards over long term strategic considerations this can potentially lead to decisions that neglect the broader interests of clients and the firm as long as the upfront fee can be collected regardless of performance monitoring the pursuit of substantial fees and commissions may also create misaligned incentives individuals may prioritize their own financial interests over those of clients potentially resulting in conflicts of interest unethical behavior or lack of incentive to perform well as fees may not be based on outcomes the performance based compensation structures in investment banking have faced regulatory scrutiny particularly following the 2008 financial crisis regulatory reforms have been introduced to address concerns about excessive risk taking and incentive misalignment including the possibility of bonuses incentivizing risky behavior in the context of an ipo an investment firm deploying the lehman formula must be mindful of not only the fee they are to collect but the longer term market repercussions of its actions motivates higher performance and revenue generationaligns some client objectives with firm objectivesmay retain talent based on incentive compensationmay be flexible based on deal or clientmay encourage shorter term focus that derails true long term valuemay generate misalignment of incentivesmay come under further scrutiny in the face of financial downturnsa brief history of lehman brotherslehman brothers was previously considered one of the major players in the global banking and financial services industries however on sept 15 2008 the firm declared bankruptcy largely due to its exposure to subprime mortgages lehman brothers also had a reputation for short selling in the market a subprime mortgage is a type of mortgage that is normally issued by a lending institution to borrowers with relatively poor credit ratings these borrowers will generally not receive conventional mortgages given their larger than average risk of default due to this risk lenders will often charge higher interest rates on subprime mortgages lenders began issuing ninja loans a step beyond subprime mortgages to people with no income no job and no assets many issuers also required no down payment for these mortgages when the housing market began to decline many borrowers found their home values lower than the mortgage they owed interest rates associated with these loans called teaser rates were variable meaning they started low and ballooned over time making it very hard for borrowers to pay down the principal of the mortgage these loan structures resulted in a domino effect of defaults the bankruptcy of lehman brothers was one of the largest bankruptcy filings in u s history although the stock market was in modest decline prior to these events the lehman bankruptcy coupled with the prior collapse of bear stearns significantly depressed the major u s indexes in late sept and early oct 2008 after the fall of lehman brothers the public became more knowledgeable about the forthcoming credit crisis and the recession of the late 2000s | |
why is incentive compensation important in investment banking | incentive compensation is crucial in investment banking as it motivates employees to perform at their best it aligns their interests with those of clients and the firm attracts and retains top talent and offers flexibility in structuring compensation packages | |
is the lehman formula flexible | the lehman formula operates by applying specific percentages to different value brackets within a stock transaction it calculates fees accordingly and each can be tailored to specific transaction sizes and structures | |
what are the risks associated with incentive compensation | risks include the potential for excessive risk taking to boost short term performance a short term focus that may neglect long term considerations conflicts of interest when individual and firm goals misalign and the possibility of unethical behavior to meet performance targets in the context of the lehman formula a company should not simply strive to perform a deal for the short term financial benefit it must be mindful of longer term and market implications of its actions | |
is the lehman formula only used in investment banking | while it s most commonly associated with investment banking the lehman formula can be applied in various financial contexts where transaction based compensation is determined based on value it s also used in private placements and acquisitions a similar fee type structure may also be used in litigation where a legal firm may receive certain compensation based on the award amount broken into tiers |
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