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what are the 4 main types of economic systems | the four main types of economic systems are a pure market economy a pure command economy a mixed economy and a traditional economy | |
which countries have a mixed economy | countries that have a mixed economy include the united states the united kingdom sweden iceland and india 6the bottom linea mixed economy features many of the desirable qualities of both capitalism and socialism as well as some of their drawbacks this type of economy allows the government to provide public goods and a basic safety net while enjoying the productivity of a market based economy in practice most countries of the world are mixed economies although some are more market oriented and others are more state led | |
what is a mixed economic system | a mixed economic system is one that combines aspects of both capitalism and socialism a mixed economic system accepts private property and permits economic freedom in the use of capital but also allows for governments to interfere in economic activities in order to achieve social aims according to neoclassical theory mixed economies are less efficient than pure free markets however proponents of government intervention argue that the base conditions required for efficiency in free markets such as equal information and rational market participants cannot be achieved in practical application investopedia nez riazunderstanding mixed economic systemsmost modern economies feature elements of multiple different economic systems in mixed economies the public sector works alongside the private sector though they may compete for the same limited resources mixed economic systems do not block the private sector from profit seeking but they do regulate business and may nationalize industries that provide a public good for example the united states is a mixed economy as it leaves ownership of the means of production in mostly private hands but incorporates elements such as subsidies for agriculture regulation on manufacturing and partial or full public ownership of some industries like letter delivery and national defense in fact all known historical and modern economies fall somewhere on the continuum between pure socialism and pure capitalism which represent theoretical constructs 1mixed economy vs free marketsmixed economic systems are not laissez faire systems because the government is involved in planning the use of some resources and can exert control over businesses in the private sector governments may seek to redistribute wealth by taxing the private sector and by using funds from taxes to promote social objectives trade protection subsidies targeted tax credits fiscal stimulus and public private partnerships are common examples of government intervention in mixed economies these unavoidably generate economic distortions but they are instruments aimed to achieve specific goals countries may also intervene in markets to promote targeted industries such as by creating agglomerations or reducing barriers to entry this was common among east asian countries in the 20th century which saw a development strategy known as export led growth today the region has turned into a global manufacturing center some nations have come to specialize in textiles while others are known for machinery and others are hubs for electronic components these sectors rose to prominence after governments protected young companies as they achieved competitive scale and promoted adjacent services such as shipping mixed economy vs socialisma key element of socialism is common or centralized ownership of the means of production 2 proponents of socialism believe that central planning can achieve a greater good for a larger number of people socialists do not trust that the free market outcomes will achieve the efficiency and optimization posited by classical economists so socialists advocate the nationalization of all industries and the expropriation of privately owned capital goods lands and natural resources mixed economies rarely go to this extreme instead they identify only select instances in which intervention could achieve outcomes unlikely to be achieved in free markets such measures can include price controls income redistribution and intense regulation of production and trade this also includes the socialization of specific industries known as public goods that are considered essential and that economists believe the free market might not supply adequately such as public utilities military and police forces and environmental protection unlike pure socialism however mixed economies usually otherwise maintain private ownership and control of the means of production characteristics of a mixed economya mixed economy typically combines the features of a market based economy with a strong public sector while most prices are set by supply and demand the government may intervene in the economy by enforcing price floors or ceilings for certain goods or by directing public funds to certain industries at the expense of others 3the following are common examples of mixed economy policiesmost mixed economies even heavily market oriented ones offer benefits to those living at or near the poverty level in the united states the federal government provides snap benefits medicaid and public housing to low income individuals while many state governments provide their own benefits many countries in western europe have extremely generous social welfare programs as well as government provided health care and strong labor protections while prices in a mixed economy are generally set by the market the government may intervene to prevent the prices of certain commodities from rising or falling below a certain level for example most mixed economies have minimum wage laws to prevent exploitation of the workforce and they may use subsidies to support farmers or other key industries while most business activity is guided by the free market governments may use regulations to protect the public from dangerous products pollution or monopolistic business practices many mixed economies have anti trust laws to ensure that the marketplace remains competitive advantages and disadvantages of a mixed economya mixed economy combines several of the desirable qualities of both capitalist and socialist economic systems the capitalist principles of free enterprise market based prices and private property create incentives for innovation and efficiency while elements of a welfare state and price controls guarantee a minimum standard of living however social welfare programs can create a high tax burden and distort the market price controls such as minimum wage laws can have the unintended effects of reducing employment according to the philips curve other interventions such as housing guarantees or free healthcare can sometimes result in shortages because pricing does not reflect availability a mixed economy also allows the government to set its strategic priorities through selective interventions in the economy for example the united states gives favorable tax treatments to certain agricultural and manufacturing industries because they are considered crucial for the country s long term economic health mixed economies can also result in less competition or regulatory capture as private interests lobby for favorable regulations and tax treatment this can have the perverse effect of regulations being determined by industries rather than policymakers increased efficiency and productivity due to market based incentives welfare protections for the poorest members of the population allows the government to set strategic priorities through economic policy | |
does not avoid the market distorting effects of government intervention | may succumb to regulatory capture as business interests campaign for favorable regulations higher taxes to pay for welfare state policies history and criticism of the mixed economythe term mixed economy gained prominence in the united kingdom after world war ii even though many of the policies associated with it at the time were first proposed in the 1930s many of the supporters were associated with the british labour party critics argued that there could be no middle ground between economic planning and a market economy and many even today question its validity when they believe it to be a combination of socialism and capitalism those who believe the two concepts don t belong together say either market logic or economic planning must be prevalent in an economy classical and marxist theorists say that either the law of value or the accumulation of capital is what drives the economy or that non monetary forms of valuation i e transactions without cash are what ultimately propel the economy these theorists believe that western economies are still primarily based on capitalism because of the continued cycle of accumulation of capital austrian economists starting with ludwig von mises have argued that a mixed economy is not sustainable because the unintended consequences of government intervention into the economy such as the shortages that routinely result from price controls will consistently lead to further calls for ever increasing intervention to offset their effects 4 this suggests that the mixed economy is inherently unstable and will always tend toward a more socialistic state over time beginning in the mid 20th century economists of the public choice school have described how the interaction of government policymakers economic interest groups and markets can guide policy in a mixed economy away from the public interest economic policy in the mixed economy unavoidably diverts the flow of economic activity trade and income away from some individuals firms industries and regions and toward others 5not only can this create harmful distortions in the economy by itself but it always creates winners and losers this sets up powerful incentives for interested parties to take some resources away from productive activities to use instead for the purpose of lobbying or otherwise seeking to influence economic policy in their own favor this non productive activity is known as rent seeking real world examplestechnically almost every country can be considered a mixed economy since it is difficult for a country to sustain economic activity without some degree of government intervention or free market activity even north korea allows a limited number of private markets but the best examples of mixed economies are those countries where the government takes a significant role in directing the course of the market economy many countries in western europe are considered mixed economies because the government offers generous welfare programs and tight regulations on business activity the united states for example has many social programs to benefit the poor as well as several government owned enterprises conversely many socialist oriented countries can be considered mixed economies because of their large private sectors both china and vietnam have successfully privatized many of their state owned enterprises while retaining a leading role for the government in economic affairs | |
what are the characteristics of a mixed economy | the characteristics of a mixed economy include allowing supply and demand to determine fair prices the protection of private property innovation being promoted standards of employment the limitation of government in business yet allowing the government to provide overall welfare and market facilitation by the self interest of the players involved | |
what are the disadvantages of a mixed economy | mixed economies stress profit above all else including the well being of citizens there tends to be mismanagement at various levels it creates economic inequality throughout the population as wealth is not distributed evenly inefficiency occurs due to government involvement and the working class can be exploited | |
what are the 4 main types of economic systems | the four main types of economic systems are a pure market economy a pure command economy a mixed economy and a traditional economy | |
which countries have a mixed economy | countries that have a mixed economy include the united states the united kingdom sweden iceland and india 6the bottom linea mixed economy features many of the desirable qualities of both capitalism and socialism as well as some of their drawbacks this type of economy allows the government to provide public goods and a basic safety net while enjoying the productivity of a market based economy in practice most countries of the world are mixed economies although some are more market oriented and others are more state led | |
what is mobile commerce | mobile commerce also known as m commerce involves using wireless handheld devices like cell phones and tablets to conduct commercial transactions online including the purchase and sale of products online banking and paying bills understanding mobile commercemobile commerce is a large subset of electronic commerce a model where firms or individuals conduct business over the internet as of 2023 nearly 97 of americans own a cell phone and 85 of them owned a smartphone this is up from 35 in 2011 1many products and services can be transacted via m commerce including banking investing and purchases of books plane tickets and digital music the rapid growth of mobile commerce has been driven by several factors including increased wireless handheld device computing power a proliferation of m commerce applications and the resolution of security issues m commerce vs e commerceelectronic commerce e commerce refers to buying and selling goods and services over the internet e commerce can be conducted via a desktop computer laptop smartphone or tablet but it s typically associated with a computer in which a user has to find a location with an internet connection conversely m commerce specifically refers to transactions done via a smartphone or mobile device m commerce users can transact anywhere provided that there s a wireless internet provider available in that area m commerce transactions tend to be accomplished with a few clicks e commerce is done via a tablet laptop or desktop and might involve more time and exploring a company s website benefits of mobile commercethe range of devices capable of mobile commerce has grown digital wallets like apple pay let customers make in store purchases without the inconvenience of swiping cards social media platforms such as facebook x formerly twitter pinterest and instagram launched buy buttons on their mobile platforms during the mid to late 2010s this enabled users to conveniently make purchases from other retailers directly from these social media sites 2345m commerce apps allow for location tracking via gps to offer customers help finding items in stores personalized shopping experiences can also connect retailers with their clients digital commerce transactions are likely to continue climbing as content delivery over wireless devices becomes more streamlined secure and scalable ways to improve mobile commercequick loading web pages are likely to win more sales because consumers can be impatient and demand instant gratification mobile checkouts must let buyers easily enter payment information preferably with mobile wallets that eliminate the use of manual entry thereby reducing human error and facilitating a smoother checkout experience mobile commerce videos and marketingmobile applications that use video to demonstrate a product s key features are likely to generate more revenue an online foreign exchange broker who sends video links illustrating its new mobile trading application will likely win more clients mobile web and mobile applicationsconsumers typically use google or social media promotions to initiate online shopping searches browsers tend to drive more transactions than mobile applications as a result consumers often pair the use of mobile applications with mobile websites for this reason to enhance their overall shopping experience 6 | |
what is m commerce most commonly used for | m commerce has streamlined the processes of shopping banking and bill payment many consumers can easily manage their financial lives on their phones digital wallets are also a common convenience | |
how much in the way of sales has m commerce generated | mobile commerce sales in the united states were an estimated 431 billion in 2022 according to the market research company statista 7 | |
are there risks associated with m commerce | anyone who owns a cell phone can tell you that they re easy enough to misplace and lose you might think your phone is safe in your pocket and break into a jog in the park only to realize 10 minutes later that it fell out somewhere along the way the phone s contents including your personal financial information passcodes and links might be easily accessed by anyone who finds it this could have disastrous results if you haven t taken safety precautions but security can be enhanced by setting up multi factor authentication including biometrics such as fingerprints and retina scans the bottom linem commerce provides numerous benefits to both businesses and consumers it s a rare individual who doesn t own some type of mobile device and businesses can reach them more easily with the advent of mobile commerce consumers can access coupons and discounts directly on their devices and accomplish banking tasks with ease it s a win win for both sides and advantages should continue to grow as new technology is discovered and advanced | |
what is a mobile wallet | a mobile wallet stores credit or debit card information on a mobile device such as a smartphone tablet or smartwatch mobile wallets are a convenient way for you to buy things online or in stores that are set up to take payments through the wallet they may also be more secure than physical payment cards because of the technology they use to protect your account information understanding mobile walletsa mobile wallet is either a built in feature or an app that can be installed onto smartphones a mobile wallet stores credit card debit card coupon or reward card information and can connect directly to bank accounts three of the main mobile built in wallets are apple wallet google wallet and samsung wallet these apps store your payment card information but can also hold other documents such as event tickets vaccination records or airline boarding passes they are integrated with their respective payment services apple pay google pay and samsung wallet which are used to make payments you as a user may not even notice the difference between say apple wallet and apple pay take note that p2p payments via google pay are no longer available for u s users although they may be available in certain other countries 1 | |
when you use it to make a purchase or payment the payment app uses a technology called near field communication nfc which uses radio frequencies to communicate between devices nfc uses the personal identification format created for the user to communicate the payment information to the merchant s point of service pos terminal the information transfer is usually triggered when the user waves or holds an nfc enabled mobile device over the store s nfc reader | let s say you add your debit card to apple pay and want to use it at mcdonald s you would hold your phone next to the card reader which uses nfc technology to communicate with your phone apple pay opens using a verification method such as face recognition or a passcode and asks you to click a button to confirm payment through the default payment method stored with the app you could also tap the app to use a different card you ve stored in the app 2 the payment information is sent through nfc technology 3the terms mobile wallet and mobile payments are often used interchangeably but there are slight differences between them special considerationssome of the most common concerns about mobile wallets include how card information is handled and whether they are secure your debit card information is never stored on the device instead when you sign up for the service the card information is encrypted and stored on a secure chip when you make a purchase apple uses a token a unique randomly generated number that can be mapped to your original data if a thief should get hold of the token it would be useless to them 3types of mobile wallet appsmost smartphones and mobile devices are equipped with nfc technology iphones have apple wallet and apple pay android phones are often equipped with google wallet and samsung galaxy phones are preloaded with their proprietary samsung wallet which includes samsung pay besides what comes preloaded on smartphones mobile wallets from other companies have also become very popular some apps developed by third parties include benefits of mobile walletsfraudulent activities such as identity theft are harder to initiate with mobile wallets though a user s credit card can easily be stolen or duplicated smartphones are not so easy to steal a smartphone that is stolen may be hard to access if there is an access password fingerprint check or facial recognition installed as discussed above mobile wallets don t store your card information on the phone and use encryption and tokenization for secure transactions 5using a mobile wallet can be faster than using a chip card for a payment and because mobile wallets are a digitized version of physical wallets almost every valuable card stored in a physical wallet can also be stored in a mobile wallet such as a driver s license social security card health insurance cards loyalty cards hotel key cards and bus or train tickets digital wallets vs mobile wallets and paymentsdigital wallet is another term used interchangeably with mobile wallet or mobile payments however they are implemented differently even though they both store payment information digital wallets are mostly used for online transactions and may not necessarily be used on mobile devices mobile wallets are used by people who would rather not carry a physical wallet when making in store purchases for this reason these wallets have to be used on mobile and easy to carry platforms apple pay samsung pay and google pay are examples of mobile payments that can be installed on a handheld or wearable device a regular paypal account is a form of a digital wallet but when used in conjunction with mobile payment services and mobile devices it functions as a mobile wallet | |
is a digital wallet the same as a mobile wallet | though digital wallets and mobile wallets are very similar they aren t the same digital wallets are typically meant for online transactions whereas mobile wallets are tied to a smartphone or wearable device both connect to bank accounts and credit cards for purchasing on the go can i use apple pay on an android phone most smartphone makers use proprietary mobile wallets on their phones only ios devices may use apple pay just as only samsung phones can use samsung pay 67 for universal use download a third party mobile wallet like paypal or venmo can i use my mobile wallet on my smartwatch many tech wearables are now capable of using mobile wallets depending on the device it may come preloaded with a mobile wallet such as apple pay on an apple watch the bottom linemobile wallets allow people to use their phones to pay for everyday services with complex encryption and security features using a mobile wallet can actually be safer than using a physical card most phones now come preloaded with the company s mobile wallet app but there are options such as venmo that work with all phone brands | |
what is the mode | the mode is the value that appears most frequently in a data set a set of data may have one mode more than one mode or no mode at all other popular measures of central tendency include the mean or the average of a set and the median the middle value in a set understanding the modein statistics data can be distributed in various ways the most often cited distribution is the classic normal bell curve distribution in this and some other distributions the mean average value falls at the midpoint which is also the peak frequency of observed values for such a distribution the mean median and mode are all the same values this means that this value is the average value the middle value and also the mode the most frequently occurring value in the data mode is most useful as a measure of central tendency when examining categorical data such as models of cars or flavors of soda for which a mathematical average median value based on ordering can not be calculated examples of the modefor example in the following list of numbers 16 is the mode since it appears more times in the set than any other number a set of numbers can have more than one mode this is known as bimodal if there are two modes if there are multiple numbers that occur with equal frequency and more times than the others in the set in the above example both the number 3 and the number 16 are modes as they each occur three times and no other number occurs more often if no number in a set of numbers occurs more than once that set has no mode a set of numbers with two modes is bimodal a set of numbers with three modes is trimodal and any set of numbers with more than one mode is multimodal | |
when scientists or statisticians talk about the modal observation they are referring to the most common observation | mode vs mean vs medianmean median and mode are all different ways of noting the center of a data set mode is the most common set of numbers while mean is the average and median is the midpoint the mean is the average of a set of numbers to calculate the mean begin by adding up all of the data points and dividing by the total number of data points for example suppose you have the following series of numbers added together you get 208 divide 208 by 11 the number of data points to get the mean which is 18 9 the median is the data point in the middle of a set to find the median the numbers in the set must be arranged from smallest to largest let s use the numbers in the example above the median is 16 the data point in the exact middle of the set this set has an odd number of data points which makes it easier to find the middle for a set with an even number of data points you d take the mean of the two middle numbers to find the median advantages and disadvantages of the modethe mode is easy to understand and calculate the mode is not affected by extreme values the mode is easy to identify in a data set and in a discrete frequency distribution the mode is useful for qualitative data the mode can be computed in an open ended frequency table the mode can be located graphically | |
what is model risk | model risk is a type of risk that occurs when a financial model is used to measure quantitative information such as a firm s market risks or value transactions and the model fails or performs inadequately and leads to adverse outcomes for the firm a model is a system quantitative method or approach that relies on assumptions and economic statistical mathematical or financial theories and techniques the model processes data inputs into a quantitative estimate type of output financial institutions and investors use models to identify the theoretical value of stock prices and to pinpoint trading opportunities while models can be useful tools in investment analysis they can also be prone to various risks that can occur from the usage of inaccurate data programming errors technical errors and misinterpretation of the model s outputs understanding model riskmodel risk is considered a subset of operational risk as model risk mostly affects the firm that creates and uses the model traders or other investors who use a given model may not completely understand its assumptions and limitations which limits the usefulness and application of the model itself in financial companies model risk can affect the outcome of financial securities valuations but it s also a factor in other industries a model can incorrectly predict the probability of an airline passenger being a terrorist or the probability or a fraudulent credit card transaction this can be due to incorrect assumptions programming or technical errors and other factors that increase the risk of a poor outcome | |
what does the concept of model risk tell you | any model is a simplified version of reality and with any simplification there is the risk that something will fail to be accounted for assumptions made to develop a model and inputs into the model can vary widely the use of financial models has become very prevalent in the past decades in step with advances in computing power software applications and new types of financial securities before developing a financial model companies will often conduct a financial forecast which is the process by which it determines the expectations of future results some companies such as banks employ a model risk officer to establish a financial model risk management program aimed at reducing the likelihood of the bank suffering financial losses due to model risk issues components of the program include establishing model governance and policies it also involves assigning roles and responsibilities to individuals who will develop test implement and manage the financial models on an ongoing basis real world examples of model riskthe long term capital management ltcm debacle in 1998 was attributed to model risk in this case a small error in the firm s computer models was made larger by several orders of magnitude because of the highly leveraged trading strategy ltcm employed 1 at its height the hedge fund managed over 100 billion in assets and reported annual returns of over 40 ltcm famously had two nobel prize winners in economics as principal shareholders but the firm imploded due to its financial model that failed in that particular market environment almost 15 years later jpmorgan chase jpm suffered massive trading losses from a value at risk var model that contained formula and operational errors risk managers use var models to estimate the future losses a portfolio could potentially incur in 2012 ceo jamie dimon s proclaimed tempest in a teapot turned out to be a 6 2 billion loss resulting from trades gone wrong in its synthetic credit portfolio scp 2 a trader had established large derivative positions that were flagged by the var model that existed at the time in response the bank s chief investment officer made adjustments to the var model but due to a spreadsheet error in the model trading losses were allowed to pile up without warning signals from the model this was not the first time that var models have failed in 2007 and 2008 var models were criticized for failing to predict the extensive losses many banks suffered during the global financial crisis 3 | |
what is the modern portfolio theory mpt | the modern portfolio theory mpt is a practical method for selecting investments in order to maximize their overall returns within an acceptable level of risk this mathematical framework is used to build a portfolio of investments that maximize the amount of expected return for the collective given level of risk american economist harry markowitz pioneered this theory in his paper portfolio selection which was published in the journal of finance in 1952 1 he was later awarded a nobel prize for his work on modern portfolio theory 2a key component of the mpt theory is diversification most investments are either high risk and high return or low risk and low return markowitz argued that investors could achieve their best results by choosing an optimal mix of the two based on an assessment of their individual tolerance to risk investopedia matthew collinsunderstanding the modern portfolio theory mpt the modern portfolio theory argues that any given investment s risk and return characteristics should not be viewed alone but should be evaluated by how it affects the overall portfolio s risk and return that is an investor can construct a portfolio of multiple assets that will result in greater returns without a higher level of risk as an alternative starting with a desired level of expected return the investor can construct a portfolio with the lowest possible risk that is capable of producing that return based on statistical measures such as variance and correlation a single investment s performance is less important than how it impacts the entire portfolio the mpt assumes that investors are risk averse meaning they prefer a less risky portfolio to a riskier one for a given level of return as a practical matter risk aversion implies that most people should invest in multiple asset classes the expected return of the portfolio is calculated as a weighted sum of the returns of the individual assets if a portfolio contained four equally weighted assets with expected returns of 4 6 10 and 14 the portfolio s expected return would be the portfolio s risk is a function of the variances of each asset and the correlations of each pair of assets to calculate the risk of a four asset portfolio an investor needs each of the four assets variances and six correlation values since there are six possible two asset combinations with four assets because of the asset correlations the total portfolio risk or standard deviation is lower than what would be calculated by a weighted sum benefits of the mptthe mpt is a useful tool for investors who are trying to build diversified portfolios in fact the growth of exchange traded funds etfs made the mpt more relevant by giving investors easier access to a broader range of asset classes for example stock investors can reduce risk by putting a portion of their portfolios in government bond etfs the variance of the portfolio will be significantly lower because government bonds have a negative correlation with stocks adding a small investment in treasuries to a stock portfolio will not have a large impact on expected returns because of this loss reducing effect similarly the mpt can be used to reduce the volatility of a u s treasury portfolio by putting 10 in a small cap value index fund or etf although small cap value stocks are far riskier than treasuries on their own they often do well during periods of high inflation when bonds do poorly as a result the portfolio s overall volatility is lower than it would be if it consisted entirely of government bonds moreover the expected returns are higher the modern portfolio theory allows investors to construct more efficient portfolios every possible combination of assets can be plotted on a graph with the portfolio s risk on the x axis and the expected return on the y axis this plot reveals the most desirable combinations for a portfolio for example suppose portfolio a has an expected return of 8 5 and a standard deviation of 8 assume that portfolio b has an expected return of 8 5 and a standard deviation of 9 5 portfolio a would be deemed more efficient because it has the same expected return but lower risk it is possible to draw an upward sloping curve to connect all of the most efficient portfolios this curve is called the efficient frontier investing in a portfolio underneath the curve is not desirable because it does not maximize returns for a given level of risk criticism of the mptperhaps the most serious criticism of the mpt is that it evaluates portfolios based on variance rather than downside risk that is two portfolios that have the same level of variance and returns are considered equally desirable under modern portfolio theory one portfolio may have that variance because of frequent small losses another could have that variance because of rare but spectacular declines most investors would prefer frequent small losses which would be easier to endure the post modern portfolio theory pmpt attempts to improve modern portfolio theory by minimizing downside risk instead of variance | |
what is the difference between the modern portfolio theory and the post modern portfolio theory | the modern portfolio theory mpt was a breakthrough in personal investing it suggests that a conservative investor can do better by choosing a mix of low risk and riskier investments than by going entirely with low risk choices more importantly it suggests that the more rewarding option does not add additional overall risk this is the key attribute of portfolio diversification the post modern portfolio theory pmpt does not contradict these basic assumptions however it changes the formula for evaluating risk in an investment in order to correct what its developers perceived as flaws in the original followers of both theories use software that relies on either mpt or pmpt to build portfolios that match the level of risk that they seek | |
what are the benefits of the modern portfolio theory | the modern portfolio theory can be used to diversify a portfolio in order to get a better return overall without a bigger risk another benefit of the modern portfolio theory and of diversification is that it can reduce volatility the best way to do that is to choose assets that have a negative correlation such as u s treasuries and small cap stocks ultimately the goal of the modern portfolio theory is to create the most efficient portfolio possible | |
what is the importance of the efficient frontier in the mpt | the efficient frontier is a cornerstone of the modern portfolio theory it is the line that indicates the combination of investments that will provide the highest level of return for the lowest level of risk | |
what is the modified accelerated cost recovery system macrs | the modified accelerated cost recovery system macrs is a depreciation system used for tax purposes in the u s macrs depreciation allows the capitalized cost of an asset to be recovered over a specified period via annual deductions the macrs system puts fixed assets into classes that have set depreciation periods understanding the modified accelerated cost recovery system macrs as defined by the internal revenue service irs depreciation is an income tax deduction that allows a business to recover the cost basis of certain property deprecation is an annual allowance for the wear and tear deterioration or obsolescence of property most tangible assets are depreciable likewise certain intangible assets such as patents and copyrights are depreciable 1the modified accelerated cost recovery system macrs is the proper depreciation method for most assets macrs allows for greater accelerated depreciation over longer time periods this is beneficial since faster acceleration allows individuals and businesses to deduct greater amounts during the first few years of an asset s life and relatively less later 2for property placed into service after 1986 the irs requires businesses to use macrs for depreciation 3depreciation using macrs can be applied to assets such as computer equipment office furniture automobiles fences farm buildings racehorses and so on 4now there are things for which macrs cannot be used for notably intangible property films video tapes and recordings other property excluded from macrs include certain corporate or partnership property acquired in nontaxable transfers 5types of macrsthere are two key macrs depreciation systems the first is the general depreciation system gds while the second is the alternative depreciation system ads these two systems have different recovery periods and depreciation methods for the most part gds is used although in special cases ads can be used 6the general depreciation system uses the declining balance method which allows for a larger depreciation expense to be recorded in the early years and smaller amounts in the later years the alternative depreciation system allows depreciation to be taken over a longer period of time 7the gds is best used for assets that depreciate quickly such as computers and other technology meanwhile the ads must be used in certain instances such as property used in a farming business property that is exempt from taxation or any property used outside the u s ads must also be used for any listed property used 50 or less in a business during the tax year 8now businesses can elect to use ads instead of gds the election must cover all property in the same property class and once made that election can never be changed 6property classificationsthe irs publishes the useful lives of various classes of assets this information is used to compute the depreciation for a given type of qualified asset a few examples of some assets and their useful lives in years as published by the irs include 9the irs s publication 946 how to depreciate property has a full breakdown of asset classes and their useful lives since the tax rules for macrs are complex the 100 plus pages of the irs publication 946 provide complete guidance on depreciating assets with macrs the nine asset classes presented above are for gds there are more asset classes for ads and the recovery life is longer for example the useful life of residential rental property under ads is 30 years and for commercial property it is 40 years 7based on the information provided in the table a business can determine its tax depreciation for assets the basis for depreciation of macrs property is the property s cost basis multiplied by the percentage of business investment use the amount derived is recognized in the company s income tax return and used to determine taxable income by factoring in any tax credits and deductions that can be claimed on the property 10note that the derived tax depreciation is not recorded in the financial statements as these statements calculate depreciation using the straight line depreciation method or some other form of accelerated cost depreciation method macrs is used for tax purposes and not for financial statements as it s not approved by u s generally accepted accounting principles gaap for example a company may use macrs for tax depreciation and straight line depreciation for creating financial statements | |
what is irs publication 946 | irs publication 946 is a publication by the irs that details how to depreciate property in particular it explains how to recover the cost of property such as business equipment or income producing assets via deprecation | |
what are the tax benefits of depreciation | depreciation expenses lower the amount of income on which taxes are based thereby reducing the amount of taxes owed the benefit of accelerated depreciation is that you are getting a greater tax reduction in the earlier years of an asset s useful life | |
what does useful life mean | useful life is the accounting estimate of the number of years an asset is likely to remain in service for the purpose of producing income the irs determines the useful life for various assets laying out the length of time in which they can be depreciated for example the useful life according to the irs for automobiles is five years while residential rental properties have a useful life of 27 5 years 11the bottom linethe modified accelerated cost recovery system macrs is a depreciation method used for tax purposes and is more beneficial than other methods of depreciation the irs outlines two types of macrs gds and ads ads is usually only used in unique circumstances | |
what is modified accrual accounting | modified accrual accounting is an alternative bookkeeping method that combines accrual basis accounting with cash basis accounting it recognizes revenues when they become available and measurable and with a few exceptions records expenditures when liabilities are incurred modified accrual accounting is commonly used by government agencies understanding modified accrual accountingto understand how modified accrual accounting works it is first essential to break down how the traditional bookkeeping practices are influenced by function modified accrual accounting borrows elements from both cash and accrual accounting depending on whether assets are long term such as fixed assets and long term debt or short term such as accounts receivable ar and inventory recording short term eventsthe modified accrual practice follows the cash method of accounting when economic events affecting the short term have occurred an economic event is recorded in the short term when the cash balance has been affected the result of this rule is that almost all items recorded on the income statement are recorded using the cash basis and items including accounts receivable and inventory are not recorded on the balance sheet recording long term eventseconomic events expected to impact multiple reporting periods are recorded using rules similar to the accrual method this directly impacts the way fixed assets and long term debt are documented under the modified accrual method these long term items are recorded on the balance sheet and depreciated depleted or amortized over the life of the asset or liability this systematic distribution of expenses or revenues allows future financial statements to have more comparability special considerationsa modified accrual accounting system combines the simplicity of cash accounting with the more sophisticated ability of accrual accounting to match related revenues with expenses it is not commonly used by public companies however as it does not comply with international financial reporting standards ifrs or the generally accepted accounting principles gaap which outline what procedures companies must follow when preparing their officially reported financial statements 1 businesses that wish to use this method must do so for internal purposes and then convert transactions recorded under a cash basis to accrual accounting to get them signed off by auditors 2under gaap if a public company has average gross receipts for the past three years of 26 million or less they can then choose which accounting method they would like 3for governments it is a different story the government accounting standards board gasb which is recognized as the official source of gaap for state and local governments establishes modified accrual accounting standards 4modified accrual accounting is used and accepted by governmental agencies because they focus on current year obligations governmental agencies have two key objectives to report whether current year revenues are sufficient enough to finance current year expenses and to demonstrate whether resources are being used according to legally adopted budgets 5modified accrual accounting ticks those boxes it enables government agencies to focus on short term financial assets and liabilities it also permits them to divide available funds into separate entities within the organization to ensure that money is being spent where it was intended companies may also use a modified cash basis method for internal record keeping | |
what is modified adjusted gross income magi | modified adjusted gross income magi is individual s adjusted gross income agi after taking into account certain allowable deductions and tax penalties magi is an important number to understand since it is used in several different tax concepts investopedia michela buttignolunderstanding modified adjusted gross income magi modified adjusted gross income can be defined as your household s agi after any tax exempt interest income and after factoring in certain tax deductions 1 knowing your magi can help reduce an individual s taxable income to account for your retirement account contributions factor in the eligibility for benefits like the student loan interest deduction and the child tax credit and establish eligibility for income based medicaid coverage or health insurance subsidies the internal revenue service irs uses magi to establish whether you qualify for certain tax benefits magi notably determines you can contribute to a traditional ira no matter how much you earn 2 in addition you can typically deduct the ira contribution amount reducing your taxable income for that tax year however you can t deduct contributions when you file your tax return if your magi exceeds limits set by the irs and you and or your spouse have a retirement plan at work 3magi and its usesyour magi is an important figure not only for understanding your taxable income but also for qualifying for certain tax credits or deductions several such credits and deductions have thresholds that look at your magi not your unadjusted gross income magis above those thresholds will see those credits or deductions phase out or disappear magi is also used to determine eligibility for healthcare waivers and incentives under the affordable care act aca for states health insurance marketplaces it is also used as a threshold for qualifying for state medicaid programs 4magi is also used to determine your eligibility to contribute to a roth ira roth accounts use after tax dollars and grow tax exempt unlike traditional retirement accounts that are instead tax deferred 2to contribute to a roth ira your magi must be below the limits specified by the irs if you re within the income threshold the actual amount you can contribute is also determined by your magi your contributions are phased out if your magi exceeds the allowed limits here s a rundown of roth ira income limits for 2023 and 2024 67you have to remove the excess contributions if you contribute more than you re allowed otherwise you ll face a tax penalty excess contributions are taxed at a rate of 6 per year for as long as the extra amount remains in your ira 8your magi and whether you and your spouse have retirement plans at work determine whether you can deduct traditional ira contributions if neither spouse is covered by a plan at work then you can take the full deduction up to the amount of your contribution limit however if either spouse has a plan at work then your deduction may be limited 3here s a rundown of traditional ira income limits for 2023 910tax laws are complicated and change periodically if you need help figuring out your magi or if you have any questions about ira contribution and income limits contact a trusted tax professional many deductions are not commonly used so your magi and agi could be similar or identical calculating your magithere are several different ways to calculate magi based on how magi is to be used in the broadest sense determining your magi is a three step process additional ways to calculate magi for more specific reasons are in the subsequent section in most cases magi is calculated in three steps your gross income includes everything you earned during the year from there are two scenarios in which alimony payments are not considered gross income the first is if your divorce agreement was executed after 2018 the second is if your divorce agreement was executed before 2019 but later modified to expressly state that such payments are not deductible for the payer 14your gross income appears on line 9 of form 1040 15your agi is important because it s the total taxable income calculated before itemized or standard deductions exemptions and credits are taken into account 16 it dictates how you can use various tax credits and exemptions your agi is equal to your gross income minus certain tax deductible expenses including you can do the math to figure out your agi or you can find it on line 11 of form 1040 15to find your magi take your agi and add back various magi calculationsas mentioned earlier magi is used to determine eligibility for certain tax benefits subsidies and assistance programs in a number of different ways the specific calculations can vary depending on the context as magi is used in different scenarios below is a brief list of programs taxes or benefits that may serve for a magi calculation however the magi calculation will vary across each item as you are asked to calculate magi for any tax credit or government program be mindful that you are aware of which magi calculation is required as not all formulas are the same several examples include but are not limited to strategies to minimize magifrom a tax planning and strategy perspective it s best to minimize your magi here are several tips on how to reduce your magi in the eyes of tax agencies | |
what purpose does magi serve | the irs uses magi to determine whether you qualify for specific tax programs and benefits for instance it helps to determine the allowed amount of your roth ira contributions knowing your magi can also help you avoid tax penalties because over contributing to these programs and others like them can trigger interest payments and fines 8 your magi can also determine eligibility for certain government programs such as the subsidized insurance plans available on the health insurance marketplace 4 | |
what is the difference between magi and agi | your modified adjusted gross income magi is your adjusted gross income agi plus additional items such as student loan interest qualified education expenses passive income or losses ira contributions and foreign income among others can magi and agi be the same yes magi and agi can be the same for many people the list of deductions that need to be added back to agi to calculate magi will not be relevant for instance those who did not earn any foreign income would have no reason to use that deduction and would have none of those earnings to add back to their agi the bottom linemodified adjusted gross income magi is important for your tax returns to determine what you owe the irs it takes your gross income and adjusts and modifies it for certain exemptions qualifications and allowances your magi will differ from your adjusted gross income agi if you have foreign income qualified education expenses or passive losses among other items correction april 10 2024 a previous version of this article incorrectly stated that in order to calculate magi with ira deductions you have to subtract the deductions related to traditional ira contributions it has been updated to state that these deductions should be added back | |
what is modified cash basis | modified cash basis is an accounting method that combines elements of the two primary bookkeeping practices cash and accrual accounting it seeks to get the best of both worlds recording sales and expenses for long term assets on an accrual basis and those of short term assets on a cash basis the goal here is to provide a clearer financial picture without dealing with the costs of switching to full blown accrual accounting understanding modified cash basisto understand how a modified cash basis works it is first essential to break down how traditional bookkeeping practices are influenced by function cash basis accounting recognizes income when it is received and expenses when they are paid for its most significant advantage is its simplicity in contrast accrual accounting recognizes income when a sale is fulfilled rather than when it is paid for and records expenses incurred irrespective of cash movement accrual accounting is a slightly more complicated method still it does benefit from enabling a company to match revenue and its associated expenses and understand what it costs to run the business each month and how much it makes the modified cash basis borrows elements from both cash and accrual accounting depending on the nature of the asset it consists of the following features advantages and disadvantages of modified cash basisthe modified cash basis method can better balance short term and long term accounting items by borrowing elements from both techniques short term items like a regular monthly utility expense a bill are recorded according to the cash basis as there is a related inflow or outflow of cash which results in an income statement populated mainly with items based on the cash basis long term items that do not change within a given financial year such as a long term investment property plant and equipment are recorded using the accrual basis accrual basis methods produce a clearer picture of business performance while using cash basis records for other items helps keep costs down where possible maintaining a set of complete accrual accounting records is more time consuming if financial statements are subject to formal reviews such as an analysis performed by auditors investors or a bank the modified cash basis method will prove inadequate the modified cash method may only be used for internal purposes because it does not comply with international financial reporting standards ifrs or the generally accepted accounting principles gaap which outline what procedures companies must follow when preparing their officially reported financial statements 1this makes a modified cash basis accounting popular with private companies it also means that publicly traded companies using this method cannot get their financial statements signed off by auditors consistency is required so transactions recorded on a cash basis must be converted to accrual this is so because under ifrs and gaap public companies are required to report their financials using only the accrual method of accounting because of its matching principle 2for tax reporting purposes companies with average annual gross receipts of less than 25 million for the last three consecutive years may choose either the cash or accrual accounting method 3 | |
what is a modified endowment contract mec | a modified endowment contract mec is a cash value life insurance policy that has lost its tax benefits because it contains too much cash once the internal revenue service irs relabels your life insurance policy as an mec it loses the tax breaks for withdrawals and loans that you make from the policy this permanent change can happen when you pay excess premiums in too short a period permanent life insurance contracts in general are granted generous tax advantages in the u s but if you put too much cash into one it loses its status as insurance and becomes an investment vehicle instead the mec limits for a policy will depend on its terms and death benefit amount your insurance company will warn you if a policy is about to become or has become an mec investopedia ryan oakleyunderstanding modified endowment contracts mecs a modified endowment contract comes about when the irs no longer recognizes a policy as a life insurance contract because the total collected premiums and cash value exceed federal tax law limits the limit is set based on irs rules about the maximum amount of premiums that can be paid into the policy in its first seven years 1 this classification seeks to combat the opportunity to call a financial product life insurance to avoid taxes in the 1970s many life insurers took advantage of the tax free growth of many of their products by offering policies that featured substantial cash value accumulation policyholders could withdraw interest and principal in the form of a tax free loan which made the policies de facto tax shelters federal legislation passed in 1988 limited this type of use 2some life insurance policyholders often high net worth individuals choose to overfund a policy with a cash value component then take periodic loans from it while living effectively turning the policy into an investment but doing this reduces the policy s death benefit for heirs if your children are grown and your retirement resources are adequate this approach may appeal but be aware of the cash value limits that might push your policy into mec status specifically a life insurance policy is considered an mec by the irs if it meets three criteria the irs requires a life insurance policy to comply with a strict set of criteria to avoid becoming an mec the seven pay test determines whether the total amount of premiums paid into a life insurance policy within the first seven years is more than what you d need to pay it up in full for those seven years 3 policies become mecs when the premiums paid to the policy are more than what was needed to be paid within that seven year time frame 4life insurance policies entered into before june 20 1988 aren t subject to restrictions on the payment of premiums over the money allowed under federal laws however the renewal of an older life insurance policy after this date is considered a new policy and must be subjected to the seven pay test a life insurance policy can avoid triggering mec status as long as the amount of cash held in the policy remains a certain amount below the death benefit amount known as the corridor 5if you use a policy to accumulate cash value one solution to avoid mec status is to increase the death benefit through paid up additional insurance pua which raises the corridor s ceiling pua insurance is added whole life insurance coverage purchased with the policy s dividends it s like small packets of life insurance that are entirely paid for tax implications of an mecthe cost basis within the mec and withdrawals from one aren t subject to taxation in the case of insurance the cost basis equals the total amount you paid into an asset such as a permanent life insurance policy it usually is figured as the premiums you paid any cash value balance above what you paid in premiums counts as your interest gains northwestern cost basis citation unlike traditional life insurance policies taxes on gains are considered regular income for mec withdrawals under last in first out lifo accounting methodology this taxation of payouts is worse for an mec policyholder because it provides for taxable interest to be distributed first rather than the tax free principal as with first in first out fifo methodology fifo to lifo citation in addition the taxation of withdrawals under an mec is similar to that of non qualified annuity withdrawals for withdrawals before the age of 59 1 2 you may need to pay the irs a premature withdrawal penalty of 10 67another serious drawback with an mec is that it removes the tax benefits for policy loans in a traditional life insurance policy you can borrow your cash value including your earnings above premiums paid without owing income tax in an mec taking out your gains through a loan counts as a taxable withdrawal the 10 premature penalty also applies before the age of 59 1 2 once again loans operate under lifo so gains come out first after you ve taken out your gains you could borrow the remaining cash value representing your premiums paid without owing taxes thrivent as with traditional life insurance policies mec death benefits aren t subject to taxation modified endowment contracts usually are purchased by individuals who are interested in tax sheltered investment rich policies and who don t intend to make pre death policy withdrawals the tax free death benefit makes mecs useful for estate planning purposes provided the estate can meet qualifying criteria furthermore policy owners who don t take withdrawals can pass on a significant sum of money to their beneficiaries pros and cons of mecsoffers higher yield on low risk funds than some alternativesallows for smooth tax free asset transfer after the holder s deathcash value can be borrowed against though taxes applyerases tax advantages for withdrawals and loanscash value in the policy becomes less accessibleborrowing may reduce the death benefit for heirspros explainedsome individuals may benefit from purchasing an mec even if not for life insurance because it often offers a higher yield on effectively riskless money a better return than savings accounts or certificates of deposit cds mecs allow for the tax free shifting of assets to beneficiaries without probate proceedings upon the owner s death mecs still provide a way to borrow against the cash value component while living however taxes apply for taking out the policy earnings even through a loan a major downside of mecs is that once one is triggered it can t be undone cons explainedwith an mec withdrawals and loans are taxed and possibly penalized if early just like withdrawals from non qualified annuities however death benefits remain tax free the funds inside an mec will become far less accessible than in a life insurance policy partly because of the potential tax assessed on withdrawals and loans while borrowing against the cash value may continue with an mec doing this will lower the amount of the eventual benefit paid to heirs at the policy owner s death | |
how are taxes on gains figured in an mec | taxes on gains are regular income for mec withdrawals under last in first out accounting methodology meaning interest is disbursed before principal however the cost basis or the total amount of premiums paid in the mec withdrawals aren t subject to taxation for withdrawals 8 | |
what triggers an mec | an mec is triggered if the amount of cash in a permanent life insurance policy exceeds the legal limits for it to be classified as insurance the irs uses a seven pay test to determine mec status it looks at whether the premiums paid during the first seven years of the policy would exceed the amount for the policy to be paid up after seven years 3 | |
how can you avoid mec status | a life insurance policy can avoid triggering mec status as long as the amount of cash held in the policy remains beneath the required corridor below the death benefit 5 if you use a policy to accumulate cash value one solution is to increase the death benefit through paid up additional insurance pua which raises the corridor s ceiling | |
what are the likely tax consequences of an early withdrawal under an mec | withdrawals are taxed similarly to those of a non qualified annuity for withdrawals before the age of 59 a penalty of 10 may apply 6 as with traditional life insurance policies mec death benefits aren t subject to taxation | |
is a modified endowment contract a good thing | generally speaking converting a life insurance policy to an mec isn t good this is because the mec loses many of its prior tax advantages in place when it was classified as life insurance however purposefully creating an mec can be an estate planning tool under certain circumstances the bottom linean mec is a cash value life insurance policy that has been stripped of its tax benefits because it contains too much cash once reclassified by the irs as an mec the policy s withdrawals and loans are taxed it s a permanent change and usually disadvantageous for most policyholders but mecs may be useful for some because they provide higher low risk yields than savings accounts and can ease the transfer of assets upon the owner s death investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal investors should consider engaging a financial professional to determine a suitable retirement savings tax and investment strategy | |
what is the modified dietz method | the modified dietz method is a way to measure a portfolio s historical return that is based on a weighted calculation of its cash flow the method takes into account the timing of cash flows and assumes that there is a constant rate of return over a specified period of time the modified dietz method is considered to be more accurate than the simple dietz method which assumes that all cash flows come from the middle of the period of time being evaluated understanding the modified dietz methodthe modified dietz method is considered an accurate reflection of an individual s personal rate of return from an investment it takes into account the market value of the holdings at the beginning of a period its market value at the end of the period all cash flows during that period and the length of time that each cash flow event was maintained in the account the number achieved by using the modified dietz method is sometimes called the modified internal rate of return mirr which is a metric often used in capital budgeting decisions whatever its use the point of measuring internal rate of return is to exclude external factors that could skew the results financial industry watchdogs and investors are increasingly seeking greater transparency into how investment returns are calculated and reported the modified dietz method is widely recognized as a step toward improved investment portfolio attribution reporting and it is now commonly used in the investment management industry the result of using the modified dietz method is sometimes referred to as the modified internal rate of return the method is a dollar weighted analysis of a portfolio s return that makes it is a more accurate way to measure the return on a portfolio than the simpler geometric return method though it can run into problems during periods of heavy volatility or if there are multiple cash flows within a particular period this approach to return calculation is similar to the dollar weighted return method but has the advantage of not requiring its solver to find the exact rate of return the method is named after peter o dietz an academic and author of influential works during the 1960s on measuring the returns of pension fund investments his original idea was to find a quicker way of calculating an irr than the methods that were then available which relied on computers that were primitive by today s standards today it s relatively easy to calculate a true time weighted return by calculating a daily return and geometrically linking to get a return for a month a quarter or any other time period however the modified dietz method remains useful because of its performance attribution calculation benefits which are unavailable with time weighted calculation methods this method for return calculation is a signature of modern portfolio management it is one of the methodologies of calculating returns recommended by the investment performance council ipc as part of their global investment performance standards gips these standards are intended to provide consistency in the way portfolio returns are calculated internationally | |
what is modified duration | modified duration is a formula that expresses the measurable change in the value of a security in response to a change in interest rates modified duration follows the concept that interest rates and bond prices move in opposite directions this formula is used to determine the effect that a 100 basis point 1 change in interest rates will have on the price of a bond formula and calculation of modified durationmodified duration macaulay duration 1 n ytm where macaulay duration weighted average term to maturity of the cash flows from a bond ytm yield to maturity n number of coupon periods per year begin aligned text modified duration frac text macaulay duration 1 overset text ytm n textbf where text macaulay duration text weighted average term to qquad text maturity of the cash flows from a bond text ytm text yield to maturity n text number of coupon periods per year end aligned modified duration 1 nytmmacaulay duration where macaulay duration weighted average term tomaturity of the cash flows from a bondytm yield to maturityn number of coupon periods per year modified duration is an extension of the macaulay duration which allows investors to measure the sensitivity of a bond to changes in interest rates macaulay duration calculates the weighted average time before a bondholder receives the bond s cash flows in order to calculate modified duration the macaulay duration must first be calculated the formula for the macaulay duration is macaulay duration t 1 n pv cf t market price of bond where pv cf present value of coupon at period t t time to each cash flow in years n number of coupon periods per year begin aligned text macaulay duration frac sum n t 1 text pv times text cf times text t text market price of bond textbf where text pv times text cf text present value of coupon at period t text t text time to each cash flow in years n text number of coupon periods per year end aligned macaulay duration market price of bond t 1n pv cf t where pv cf present value of coupon at period tt time to each cash flow in yearsn number of coupon periods per year here pv cf is the present value of a coupon at period t and t is equal to the time to each cash flow in years this calculation is performed and summed for the number of periods to maturity | |
what modified duration can tell you | modified duration measures the average cash weighted term to maturity of a bond it is a very important number for portfolio managers financial advisors and clients to consider when selecting investments because all other risk factors equal bonds with higher durations have greater price volatility than bonds with lower durations there are many types of duration and all components of a bond such as its price coupon maturity date and interest rates are used to calculate duration here are some principles of duration to keep in mind first as maturity increases duration increases and the bond becomes more volatile second as a bond s coupon increases its duration decreases and the bond becomes less volatile third as interest rates increase duration decreases and the bond s sensitivity to further interest rate increases goes down example of how to use modified durationassume a 1 000 bond has a three year maturity pays a 10 coupon and that interest rates are 5 this bond following the basic bond pricing formula would have a market price of market price 100 1 05 100 1 0 5 2 1 100 1 0 5 3 market price 95 24 90 70 950 22 market price 1 136 16 begin aligned text market price frac 100 1 05 frac 100 1 05 2 frac 1 100 1 05 3 phantom text market price 95 24 90 70 950 22 phantom text market price 1 136 16 end aligned market price 1 05 100 1 052 100 1 053 1 100 market price 95 24 90 70 950 22market price 1 136 16 next using the macaulay duration formula the duration is calculated as macaulay duration 95 24 1 1 136 16 90 70 2 1 136 16 950 22 3 1 136 16 2 753 begin aligned text macaulay duration bigg 95 24 times frac 1 1 136 16 bigg quad bigg 90 70 times frac 2 1 136 16 bigg quad bigg 950 22 times frac 3 1 136 16 bigg 2 753 end aligned macaulay duration 95 24 1 136 161 90 70 1 136 162 950 22 1 136 163 2 753 this result shows that it takes 2 753 years to recoup the true cost of the bond with this number it is now possible to calculate the modified duration to find the modified duration all an investor needs to do is take the macaulay duration and divide it by 1 yield to maturity number of coupon periods per year in this example that calculation would be 2 753 1 05 1 or 2 62 this means that for every 1 movement in interest rates the bond in this example would inversely move in price by 2 62 | |
what is a modified gross lease | a modified gross lease is a type of real estate rental agreement where the tenant pays base rent at the lease s inception but it takes on a proportional share of some of the other costs associated with the property as well such as property taxes utilities insurance and maintenance modified gross leases are typically used for commercial spaces such as office buildings where there is more than one tenant this type of lease typically falls between a gross lease where the landlord pays for operating expenses and a net lease which passes on property expenses to the tenant all agreements should be carefully reviewed by both parties even if the lease uses common terminology it should be treated as though it s a unique document for your own situation | |
how a modified gross lease works | commercial real estate leases can be categorized by two rent calculation methods gross and net the modified gross lease at times referred to as a modified net lease is a combination of a gross lease and a net lease modified gross leases are a hybrid of these two leases as operating expenses are both the landlord s and the tenant s responsibility with a modified gross lease the tenant takes over expenses directly related to his or her unit including unit maintenance and repairs utilities and janitorial costs while the owner landlord continues to pay for the other operating expenses the extent of each party s responsibility is negotiated in the terms of the lease which expenses the tenant is responsible for can vary significantly from property to property so a prospective tenant must ensure that a modified gross lease clearly defines which expenses are the tenant s responsibility for example under a modified gross lease a property s tenants may be required to pay their proportional share of an office tower s total heating expense | |
when modified gross leases are common | modified gross leases are common when multiple tenants occupy an office building in a building with a single meter where the monthly electric bill is 1 000 the cost would be split evenly between the tenants if there are 10 renters they each pay 100 or each may pay a proportional share of the electric bill based on the percentage of the building s total square footage that the tenant s unit occupies alternatively if each unit has its own meter each tenant pays the exact electrical expense it incurs whether 50 or 200 the landlord may generally pay other costs related to the building under a modified gross lease such as taxes and insurance pros and cons of modified gross leaseslike any other business transaction there are both pros and cons to modified gross leases for tenants and landlords since maintenance and other related costs are borne by the landlord the tenant stands to benefit the tenant has more control over budgeting for costs directly related to its business including rent business taxes salaries etc but if the landlord is lax in general maintenance this may be a problem for tenants especially those who rely on the appearance of their office or retail space to allure and retain clients by using a gross modified lease landlords can rest assured their property is maintained to the degree they see fit especially since some tenants may not be as reliable when it comes to doing repairs or improvements such as maintaining the exterior space one disadvantage though is undervaluing the operating costs so a landlord may be in trouble if the rent they charge is too little for a space that requires a lot of upkeep gross and net leasesunder a gross lease the owner landlord covers all the property s operating expenses including real estate taxes property insurance structural and exterior maintenance and repairs common area maintenance and repairs unit maintenance and repairs utilities and janitorial costs landlords who issue gross leases typically calculate a rental amount that covers the cost of rent and other expenses such as utilities and or maintenance the amount payable is normally issued as a flat fee which the tenant pays to the landlord each month for the exclusive use of the property this can be beneficial for a tenant because it allows them to budget properly especially when they have limited resources a net lease on the other hand is more common in single tenant buildings and passes the responsibility of property expenses through to the tenant net leases are generally used in conjunction with tenants like national restaurant chains many commercial real estate investors who purchase properties but don t want the aggravation that comes with ownership tend to use net leases because they pass on the costs associated with the building insurance maintenance property taxes to the tenant through a net lease most landlords will charge a lower amount of rent | |
what is the difference between a gross lease modified gross lease and net lease | gross lease is where the landlord pays for operating expenses while a net lease means the tenant takes on the property expenses a modified gross lease means that the operative expenses are borne by the tenant and the landlord | |
is modified gross or net lease better | investors prefer net lease properties due to property expenses being the responsibility of the tenants if a landlord has gross leases or modified gross leases with tenants this can make it more difficult to sell the property as an investment | |
when is a modified gross lease used | modified gross leases are common when multiple tenants occupy an office building the tenants will split utility bills but the landlord will generally pay other costs related to the building under a modified gross lease such as taxes and insurance the bottom linemodified gross leases are rental agreements where the tenant pays base rent at the lease s inception as well as a proportional share of other costs like utilities a gross lease is where the landlord pays for operating expenses while a net lease means the tenant takes on the property expenses other costs related to the property such as maintenance and upkeep are generally the responsibility of the landlord modified gross leases are common in the commercial real estate industry especially office spaces where there is more than one tenant | |
what is modified internal rate of return mirr | the modified internal rate of return mirr assumes that positive cash flows are reinvested at the firm s cost of capital and that the initial outlays are financed at the firm s financing cost by contrast the traditional internal rate of return irr assumes the cash flows from a project are reinvested at the irr itself the mirr therefore more accurately reflects the cost and profitability of a project formula and calculation of mirrgiven the variables the formula for mirr is expressed as m i r r f v positive cash flows cost of capital p v initial outlays financing cost n 1 where f v c f c the future value of positive cash flows at the cost of capital for the company p v c f f c the present value of negative cash flows at the financing cost of the company n number of periods begin aligned mirr sqrt n frac fv text positive cash flows times text cost of capital pv text initial outlays times text financing cost 1 textbf where fvcf c text the future value of positive cash flows at the cost of capital for the company pvcf fc text the present value of negative cash flows at the financing cost of the company n text number of periods end aligned mirr npv initial outlays financing cost fv positive cash flows cost of capital 1where fvcf c the future value of positive cash flows at the cost of capital for the companypvcf fc the present value of negative cash flows at the financing cost of the companyn number of periods meanwhile the internal rate of return irr is a discount rate that makes the net present value npv of all cash flows from a particular project equal to zero both mirr and irr calculations rely on the formula for npv investopedia julie bang | |
what mirr can tell you | the mirr is used to rank investments or projects of unequal size the calculation is a solution to two major problems that exist with the popular irr calculation the first main problem with irr is that multiple solutions can be found for the same project the second problem is that the assumption that positive cash flows are reinvested at the irr is considered impractical in practice 1 with the mirr only a single solution exists for a given project and the reinvestment rate of positive cash flows is much more valid in practice 2the mirr allows project managers to change the assumed rate of reinvested growth from stage to stage in a project the most common method is to input the average estimated cost of capital but there is flexibility to add any specific anticipated reinvestment rate 3the difference between mirr and irreven though the internal rate of return irr metric is popular among business managers it tends to overstate the profitability of a project and can lead to capital budgeting mistakes based on an overly optimistic estimate the modified internal rate of return mirr compensates for this flaw and gives managers more control over the assumed reinvestment rate from future cash flow an irr calculation acts like an inverted compounding growth rate it has to discount the growth from the initial investment in addition to reinvested cash flows however the irr does not paint a realistic picture of how cash flows are actually pumped back into future projects 4cash flows are often reinvested at the cost of capital not at the same rate at which they were generated in the first place irr assumes that the growth rate remains constant from project to project it is very easy to overstate potential future value with basic irr figures 5another major issue with irr occurs when a project has different periods of positive and negative cash flows in these cases the irr produces more than one number causing uncertainty and confusion mirr solves this issue as well 6the difference between mirr and fmrrthe financial management rate of return fmrr is a metric most often used to evaluate the performance of a real estate investment and pertains to a real estate investment trust reit the modified internal rate of return mirr improves on the standard internal rate of return irr value by adjusting for differences in the assumed reinvestment rates of initial cash outlays and subsequent cash inflows fmrr takes things a step further by specifying cash outflows and cash inflows at two different rates known as the safe rate and the reinvestment rate safe rate assumes that funds required to cover negative cash flows are earning interest at a rate easily attainable and can be withdrawn when needed at a moment s notice i e within a day of account deposit in this instance a rate is safe because the funds are highly liquid and safely available with minimal risk when needed the reinvestment rate includes a rate to be received when positive cash flows are reinvested in a similar intermediate or long term investment with comparable risk the reinvestment rate is higher than the safe rate because it is not liquid i e it pertains to another investment and thus requires a higher risk discount rate 7limitations of using mirrthe first limitation of mirr is that it requires you to compute an estimate of the cost of capital in order to make a decision a calculation that can be subjective and vary depending on the assumptions made 8as with irr the mirr can provide information that leads to sub optimal decisions that do not maximize value when several investment options are being considered at once mirr does not actually quantify the various impacts of different investments in absolute terms npv often provides a more effective theoretical basis for selecting investments that are mutually exclusive it may also fail to produce optimal results in the case of capital rationing 7mirr can also be difficult to understand for people who do not have a financial background moreover the theoretical basis for mirr is also disputed among academics example of how to use mirra basic irr calculation is as follows assume that a two year project with an initial outlay of 195 and a cost of capital of 12 will return 121 in the first year and 131 in the second year to find the irr of the project so that the net present value npv 0 when irr 18 66 n p v 0 1 9 5 1 2 1 1 i r r 1 3 1 1 i r r 2 npv 0 195 frac 121 1 irr frac 131 1 irr 2 npv 0 195 1 irr 121 1 irr 2131 to calculate the mirr of the project assume that the positive cash flows will be reinvested at the 12 cost of capital therefore the future value of the positive cash flows when t 2 is computed as 1 2 1 1 1 2 1 3 1 2 6 6 5 2 121 times 1 12 131 266 52 121 1 12 131 266 52 next divide the future value of the cash flows by the present value of the initial outlay which was 195 and find the geometric return for two periods finally adjust this ratio for the time period using the formula for mirr given m i r r 2 6 6 5 2 1 9 5 1 2 1 1 1 6 9 1 1 1 6 9 1 mirr frac 266 52 195 1 2 1 1 1691 1 16 91 mirr 195 266 52 1 2 1 1 1691 1 16 91 in this particular example the irr gives an overly optimistic picture of the potential of the project while the mirr gives a more realistic evaluation of the project | |
what is the modigliani miller theorem m m | the modigliani miller theorem m m states that the market value of a company is correctly calculated as the present value of its future earnings and its underlying assets and is independent of its capital structure 1at its most basic level the theorem argues that with certain assumptions in place it is irrelevant whether a company finances its growth by borrowing by issuing stock shares or by reinvesting its profits developed in the 1950s the theory has had a significant impact on corporate finance 1understanding the modigliani miller theoremcompanies have only three ways to raise money to finance their operations and fuel their growth and expansion they can borrow money by issuing bonds or obtaining loans they can re invest their profits in their operations or they can issue new stock shares to investors investopedia candra huffthe modigliani miller theorem argues that the option or combination of options that a company chooses has no effect on its real market value merton miller one of the two originators of the theorem explains the concept behind the theory with an analogy in his book financial innovations and market volatility think of the firm as a gigantic tub of whole milk the farmer can sell the whole milk as is or he can separate out the cream and sell it at a considerably higher price than the whole milk would bring that s the analog of a firm selling low yield and hence high priced debt securities but of course what the farmer would have left would be skim milk with low butterfat content and that would sell for much less than whole milk that corresponds to the levered equity the m and m proposition says that if there were no costs of separation and of course no government dairy support programs the cream plus the skim milk would bring the same price as the whole milk merton miller and franco modigliani conceptualized and developed this theorem and published it in an article the cost of capital corporation finance and the theory of investment which appeared in the american economic review in the late 1950s 2at the time both modigliani and miller were professors at the graduate school of industrial administration at carnegie mellon university both were required to teach corporate finance to business students but unhappily neither had any experience in corporate finance after reading the course materials that they were to use the two professors found the information inconsistent and the concepts flawed so they worked together to correct them 3the result was the groundbreaking article published in the economic journal the information was eventually compiled and organized to become the m m theorem early on the two economists realized that their initial theorem left out a number of relevant factors it left out such matters as taxes and financing costs effectively arguing its point in the vacuum of a perfectly efficient market later versions of their theorem addressed these issues including corporate income taxes and the cost of capital a correction published in the 1960s 4 | |
what is modus operandi m o | modus operandi is a latin term used in english speaking circles to describe an individual s or group s habitual way of operating which forms a discernible pattern the term is primarily used when discussing criminal behavior but it is not exclusively uttered in this context modus operandi can also be defined as a specific method of operation for example military strategists refer to an enemy s modus operandi when predicting the next threatening move in an armed conflict synonymous with the term operating mode modus operandi is routinely shortened to the initials m o in both written and verbal usage understanding modus operandigroups of people or different societies often exhibit thought patterns or behavioral patterns that are specific to those cultures these m o s may vary widely across cultural or geographic boundaries furthermore m o s are fluid in that they may change as values evolve or as demographic breakdowns shift within a particular society individuals also often behave in the same way that they have done before exhibiting similar patterns throughout their lifetime studying individuals and their decisions over time can lead one to predict an individual or business s next move for example warren buffett has stuck to a similar investing pattern his whole life which he has made well known through speaking engagements interviews and books he has written if one were to study all of this material and eventually understand buffett s investing m o they would be able to guess his investing moves in certain economic conditions and perhaps apply the same strategies to their own portfolios m o however is most often attributed to criminals and crime syndicates and used to stop crime investigators the fbi and police organizations can utilize patterns in preventing crime and apprehending those that have or seek to commit it utilizing modus operandian enemy s m o can be used by security experts to prevent an attack while it s still in the preparation stages known as predictive profiling this behavior is an extension of an m o that was developed by israeli security forces in an effort to predict terrorist behavior based on observing a group s or an individual s behavioral patterns predictive profiling is successful after observing potential threats examining situations or objects surrounding said threats and developing an operational profile security forces then use the operational profile to predict the next threat if a person regularly meets with a known criminal element at a certain house at a particular time of day the operational profile may predict the time and location of that person s next visit predictive profiling s logical conclusion is the prevention of a crime undercover security forces may confront criminal personalities at locations far from their houses to gather more information if someone who poses a threat comes face to face with an authoritarian figure they may become too scared to execute their intended criminal activity modus operandi in business | |
when a company is operating at business as usual it is in its modus operandi for investors and other stakeholders this means stability in this state employees are carrying out their routines customers are making purchases and vendors are being paid | disruptions to the modus operandi instead introduce question marks and increases volatility predictions and forecasts are harder to make when the modus operandi is interrupted and losses may be incurred as a result modus operandi can also be taken with a negative connotation in business if a company is merely operating habitually it cannot grow innovate and adapt as such there needs to be a balance between maintaining business as usual and seeking new opportunities businesses can utilize predictive profiling to identify potential customer segments and create targeted advertising and marketing campaigns based on their m o s examples of modus operandias an example a ponzi scheme s m o involves taking money from new investors and using it to pay off existing investors to create the appearance that the latter group of individuals is drawing impressive returns on their capital investments a straight a student s m o might be to complete homework assignments before they are due achieve a perfect attendance record and visit with professors weekly during their office hours an individual s daily routine may be considered an m o where someone follows the same order of activities in an effort to regulate their lifestyles and live as efficiently as possible m o s may also apply to business protocol for example when meeting a new contact an m o might be to shake hands and make eye contact in order to establish a connection | |
what does modus operandi mean | modus operandi is latin where it may be translated literally as way of operating | |
what is the abbreviation for modus operandi | modus operandi is sometimes abbreviated as m o therefore one s m o refers to their usual patterns of behaviors or habits | |
does the word modus operandi have a negative connotation | modus operandi or m o was popularized in the context of criminal investigations suspects could be identified and captured based on understanding their usual habits hangouts and contacts because of that the phrase may still carry negative connotations that said a modus operandi can also be neutral or even positive when used to describe non criminal activities the bottom linemodus operandi refers to the typical patterns of behavior interactions and locales of an individual or organization from the latin meaning way of operating modus operandi can be used to predict outcomes based on these patterns of behavior and has been used by law enforcement and regulators to identify criminal activities predictive profiling can also be used by businesses to identify potential customer segments and create targeted advertising and marketing campaigns | |
what is a mom and pop establishment | mom and pop is a colloquial term used to describe a small family owned or independent business 1 mom and pop stores are often operations that struggle to compete with more substantial establishments such as big box retailers which generally boast more buying power than smaller players in the last few years shop local and shop small have been used as slogans in marketing campaigns to support these smaller establishments 23 the term mom and pop can also refer to inexperienced investors who casually play the market 4understanding mom and pop entitiesmom and pop stores historically were local family owned and operated general stores or drugstores today mom and pop establishments are synonymous with various different types of businesses including restaurants bookstores automotive repair shops and insurance agencies in many ways mom and pop businesses stand at a steep disadvantage to large corporations e commerce companies technology platforms and franchise businesses which enjoy bigger economies of scale greater access to capital for investments larger advertising budgets higher brand awareness and greater access to talent pools for hiring this collectively gives larger players an edge over mom and pop businesses which frequently lose ground and find themselves driven out of business when forced to compete fortunately there are signs of hope for mom and pop stores more than ever before consumers are demanding more personalized products and services when shoppers ask where can i find a mom and pop shop near me they don t need to look any further than the internet small businesses can expand their target audience and broaden their geographical reach through the use of e commerce and social media 5mom and pop shops also benefit from a phenomenon known as small business saturday which was founded by american express in 2010 and is cosponsored by the u s small business administration sba the idea was to encourage shopping locally on the saturday following thanksgiving and it appears to have worked u s consumers spent an estimated 17 9 billion at independent retailers and restaurants on small business saturday in 2022 6this shopping holiday was established in response to black friday when large retailers offer enticing discounts to consumers on the day after thanksgiving mom and pop business owners tend to have a vested interest in the community its citizens and the local economy consequently they offer highly interactive and personalized services that large corporations cannot replicate for this reason mom and pop stores often win increased brand loyalty among consumers mom and pop drugstores are typically owned and operated by the same family for generations where the druggist or pharmacist would also be the proprietor of the store mom and pop investors vs mom and pop establishments mom and pop is also used to refer to inexperienced investors who minimally invest in the stock market despite limited capital commitments mom and pop investors often count on significant returns on their trades in order to supplement their income however many mom and pop investors are unfamiliar with market research and so react impulsively to market changes and fluctuations they rashly dump their positions rather than riding out rough patches some mom and pop investors combat their inexperience by hiring brokers to facilitate trades or using one of the many online trading platforms to place their investments national mom and pop business owners day is march 29 7 the holiday was founded by rick and margie segel in 1939 as a way to honor the hat shop started by their parents that year 8 | |
what is momentum | momentum is the rate of acceleration of a security s price that is the speed at which the price is changing momentum trading is a strategy that seeks to capitalize on momentum to enter a trend as it is picking up steam simply put momentum refers to the inertia of a price trend to continue either rising or falling for a particular length of time usually taking into account both price and volume information in technical analysis momentum is often measured via an oscillator and is used to help identify trends understanding momentumthink of it as the momentum of a train when a train starts up as it accelerates it moves very slowly once it gets up to speed it stops accelerating but remains traveling at a higher velocity at the end of the trip the train decelerates as it slows down but it can take many miles of track to apply the brakes before finally coming to a complete stop for the momentum investor the best part of the train ride is in the middle when the train is moving at its highest velocity momentum investors like to chase performance they attempt to achieve alpha returns by investing in stocks that trend one way or another stocks trending up are referred to as hot stocks some are hotter than others as measured by growth over a period of time a stock that is trending down is cold 1investors can use momentum as a trading technique that seeks to profit from the herding behavior of market psychology rather than buy low sell high momentum trading follows a strategy of buy high sell higher once a momentum trader sees acceleration in a stock s price earnings or revenues the trader will often take a long or short position in the stock in the hope that its momentum will continue in either an upward or downward direction this strategy relies on short term movements in a stock s price rather than fundamental value 2 | |
when applied an investor can buy or sell based on the strength of the trends in an asset s price if a trader wants to use a momentum based strategy he takes a long position in a stock or asset that has been trending up if the stock is trending down he takes a short position instead of the traditional philosophy of trading buy low sell high momentum investing seeks to sell low and buy lower or buy high and sell higher instead of identifying the continuation or reversal pattern momentum investors focus on the trend created by the most recent price break | special considerationssome tools for momentum investors help to define the trend such as the trend line a trend line is a line drawn from the high price to the low price or vice versa over a given time period if the line is up the trend is up and the momentum investor buys the stock if the trend line is down the trend is down and the momentum investor sells the stock 3in this way momentum investing is purely a technical indicator though momentum can refer to fundamental measures of performance such as revenue and earnings it is most commonly used in reference to historical asset prices as a technical indicator 4just like any other trading style there are risks that come with momentum trading by using this technique you should know that you are trading on the backs of other people in the market and price trends are never guaranteed and always be prepared for unexpected reversals or corrections that take place this can happen because of unexpected news or changes in investor sentiment in the market | |
what is momentum investing | momentum investing is a strategy that aims to capitalize on the continuance of an existing market trend it is a trading strategy in which investors buy securities that are already rising and look to sell them when they look to have peakedmomentum in markets refers to the capacity for a price trend to sustain itself going forward understanding momentum investingmomentum investing involves going long on stocks futures market exchange traded funds etfs or any financial instrument showing upward trending prices and short the respective assets with downward trending prices momentum investing holds that trends can persist for some time and that it s possible to profit by staying with a trend until its conclusion no matter how long that may be for example momentum investors that entered the u s stock market in 2009 generally enjoyed an uptrend until december 2018 although he wasn t the first to use the strategy fund manager and businessman richard driehaus is often credited as being the father of momentum investing 1momentum investing methodsmomentum investing usually involves abiding by a strict set of rules based on technical indicators that dictate market entry and exit points for particular securities momentum investors sometimes use two longer term moving averages mas one a bit shorter than the other for trading signals some use 50 day and 200 day mas for example in this case the 50 day crossing above the 200 day creates a buy signal while a 50 day crossing back below the 200 day creates a sell signal a few momentum investors prefer to use even longer term mas for signaling purposes another type of momentum investing strategy involves following price based signals to go long on sector etfs with the strongest momentum while shorting the sector etfs with the weakest momentum then rotating in and out of the sectors accordingly other momentum strategies involve cross asset analysis for example some equity traders closely watch the treasury yield curve and use it as a momentum signal for equity entries and exits a 10 year treasury yield above the two year yield generally is a buy signal whereas a two year yield trading above the 10 year yield is a sell signal notably the two year versus 10 year treasury yields tend to be a strong predictor of recessions and also has implications for stock markets in addition some strategies involve both momentum factors and some fundamental factors one such system is can slim made famous by william o neill founder of investor s business daily 2 since it emphasizes quarterly and annual earnings per share eps some may argue it s not a momentum strategy per se however the system generally seeks stocks with both earnings and sales momentum and tends to point to stocks with price momentum as well if you intend to practice momentum investing make sure you choose the proper securities and consider their liquidity and trading volume like other momentum systems can slim also includes rules for when to enter and exit stocks based mainly on technical analysis the debate over momentum investingfew professional investment managers make use of momentum investing believing that individual stock picking based on an analysis of discounted cash flows dcfs and other fundamental factors tend to produce more predictable results and is a better means of beating index performance over the long term as an investment strategy it s a thumb in the eye of the efficient market hypothesis emh one of the central tenets of modern finance to quote a ucla anderson review article momentum investing it works but why 3however momentum investing has its advocates a 1993 study published in the journal of finance documented how strategies of buying recent stock winners and selling recent losers generated significantly higher near term returns than the u s market overall from 1965 to 1989 43more recently the american association of individual investors aaii found that can slim can beat the s p 500 when looking at trailing five year and 10 year periods and has beaten it soundly over an even longer time frame 5 | |
what technical indicators can momentum traders use | there are several momentum indicators that technical analysts can use in momentum trading among the most popular include the relative strength indicator rsi price rate of change roc stochastics and moving average convergence divergence macd | |
what is the formula for market momentum | generally market momentum can be defined from the following equation m v vxwhere v the latest pricevx the closing price x number of days ago begin aligned m v v x textbf where v text the latest price v x text the closing price x text number of days ago end aligned m v vx where v the latest pricevx the closing price x number of days ago | |
what is the market psychology behind momentum trading | momentum traders benefit from herd mentality greed and fear of missing out this can lead bull markets to rise higher than fundamentals might predict fear of losses and panic can likewise lead selloffs to become crashes | |
what is monetarism | monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply essentially it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth understanding monetarismmonetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth as the availability of money in the system increases aggregate demand for goods and services goes up an increase in aggregate demand encourages job creation which reduces the rate of unemployment and stimulates economic growth monetary policy an economic tool used in monetarism is implemented to adjust interest rates that in turn control the money supply when interest rates are increased people have more of an incentive to save than to spend thereby reducing or contracting the money supply contrarily when interest rates are lowered following an expansionary monetary scheme the cost of borrowing decreases which means people can borrow more and spend more thereby stimulating the economy milton friedman and monetarismmonetarism is closely associated with economist milton friedman who argued based on the quantity theory of money that the government should keep the money supply fairly steady expanding it slightly each year to allow for the natural growth of the economy due to the inflationary effects that can be brought about by the excessive expansion of the money supply friedman who formulated the theory of monetarism asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability in his book a monetary history of the united states 1867 1960 friedman proposed a fixed growth rate called the k percent rule suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product gdp and be expressed as a fixed percentage per year this way the money supply woud be expected to grow moderately businesses would be able to anticipate the changes to the money supply every year and plan accordingly the economy would grow at a steady rate and inflation would be kept at low levels the quantity theory of moneycentral to monetarism is the quantity theory of money which monetarists adopted from earlier economic theories and integrated into the general keynesian framework of macroeconomics the quantity theory of money can be summarized in the equation of exchange formulated by john stuart mill which states that the money supply multiplied by the rate at which money is spent per year equals the nominal expenditures in the economy the formula is given as m v p q where m money supply v velocity rate at which money changes hands p average price of a good or service q quantity of goods and services sold begin aligned mv pq textbf where m text money supply v text velocity rate at which money changes hands p text average price of a good or service q text quantity of goods and services sold end aligned mv pqwhere m money supplyv velocity rate at which money changes hands p average price of a good or serviceq quantity of goods and services sold a key point to note is that monetarists believe that changes to m money supply are the driver of the equation in short a change in m directly affects and determines employment inflation p and production q in the original version of the quantity theory of money v is held to be constant but this assumption was dropped by john maynard keynes and is not assumed by the monetarists who instead believe that v is easily predictable economic growth is a function of economic activity q and inflation p if v is constant or at least predictable then an increase or decrease in m leads to an increase or decrease in either p or q an increase in p denotes that q remains constant while an increase in q means that p remains relatively constant according to monetarism variations in the money supply affect price levels over the long term and economic output in the short term a change in the money supply therefore directly determines prices production and employment monetarism vs keynesian economicsthe view that velocity is constant is a source of contention among keynesians some of whom believe that velocity is not so since the economy is volatile and subject to periodic instability instead keynes liquidity preference theory emphasizes how changes in money demand and thus velocity influence the price level and aggregate demand monetarism builds on the keynesian theory by assuming the same macroeconomic framework and integrating the equation of exchange with v swinging cyclically as keynes argued but instead focuses on the role played by money supply because they believe that v can be relatively easily predicted monetarists argue that the equation of exchange could be resuscitated as an approach to stabilization policy and they favor the use of monetary policy to do so proponents of monetarism generally believe that controlling an economy through fiscal policy is a poor decision because it necessarily introduces microeconomic distortions that reduce economic efficiency they prefer monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in markets history of monetarismmonetarism gained prominence in the 1970s a decade characterized by high and rising inflation and slow economic growth the policies of monetarism were responsible for bringing down inflation in the united states and the united kingdom after u s inflation peaked at 20 in 1979 the federal reserve the fed switched its operating strategy to reflect monetarist theory during this time period economists governments and investors eagerly jumped at every new money supply statistic in general monetary policy can be characterized as contractionary or expansionary contractionary monetary policy is when the fed reduces inflation by raising the federal funds rate or decreasing the money supply expansionary monetary policy works by expanding the money supply faster than usual or lowering short term interest rates in the years that followed however monetarism fell out of favor with many economists as the link between different measures of money supply and inflation proved to be less clear than most monetarist theories had suggested in addition monetarism s ability to explain the u s economy waned in the following decades many central banks today have stopped setting monetary targets and instead have adopted strict inflation targets although most modern economists reject the emphasis on money growth that monetarists purported in the past some core tenets of the theory have become a mainstay in non monetarist analysis one of the most important of these ideas is that inflation cannot continue indefinitely without increases in the money supply in addition it is the responsibility although not the primary goal of the central bank to control inflation that being said monetarist interpretations of past economic events are still relevant today ben bernanke former fed chairman cited the work of friedman in his decision to lower interest rates and increase the u s money supply in order to boost the economy during the global recession that began in 2007 in the united states 1real world examples of monetarismin friedman s seminal work a monetary history of the united states 1867 1960 which he wrote with fellow economist anna schwartz the two economists argued that failed monetary policy executed by the fed was responsible for the great depression in the u s in the 1930s in the view of friedman and schwartz the fed failed to relieve downward pressure on the money supply and their eventual actions to reduce the money supply were the opposite of what they should have done according to friedman and schwartz markets tend towards a stable center markets behave erratically if the money supply is not properly set in 1979 when paul volcker became the chairman of the fed he made combatting inflation the primary goal of the central bank in keeping with friedman and schwartz s recommendations volcker restricted the money supply in order to do this he raised the federal funds rate to 20 in 1980 at this time this strategy for fighting stagflation a state of high inflation combined with high unemployment and stagnant demand was successful volcker s policies drastically reduced the money supply consumers stopped purchasing as much and businesses stopped raising prices however while this caused inflation to greatly decline it resulted in the recessionary periods between 1980 and 1982 during the same time period britain was also struggling with severe inflation when margaret thatcher was elected prime minister in 1979 she also implemented a set of monetarist policies to combat the rising prices in the country by 1983 inflation in britain had been halved from 10 to 5 however the popularity of monetarism was relatively brief in the 1980s and 1990s the link between the money supply and nominal gdp broke down and the quantity theory of money the backbone of monetarism was called into question many economists who had recommended the policies of monetarism in the 1970s abandoned the approach 23 | |
what is the main idea of monetarism | the main idea in monetarism is that money supply is the central factor in determining demand in an economy by extension economic performance can be controlled by regulating monetary supply such as by implementing expansionary monetary policy or contractionary monetary policy | |
what is an example of monetarism | as mentioned above monetary policy can be expansionary or contractionary when a central bank lowers interest rates or reduces reserve requirements it is engaging in expansionary monetary policy these moves increase the money supply encouraging borrowing among individuals companies and banks the opposite increasing reserve requirements or raising rates would be an example of contractionary monetary policy | |
what is the difference between monetarism and keynesianism | in simple terms monetarism posits that policymakers can best control the economy through management of the money supply whereas keynesianism believes this is better achieved through government spending in practice governments use both monetary policy and fiscal spending to shape the economy the bottom linemonetarism is an economic school of thought that emphasizes the role of monetary policy in the economy it s associated with the economist milton friedman and gained prominence in the second half of the 20th century monetarism is commonly distinguished from keynesianism which emphasizes the importance of aggregate demand in the economy | |
what is a monetarist | a monetarist is an economist who holds the strong belief that money supply including physical currency deposits and credit is the primary factor affecting demand in an economy consequently the economy s performance its growth or contraction can be regulated by changes in the money supply the key driver behind this belief is the impact of inflation on an economy s growth or health and the idea that by controlling the money supply one can control the inflation rate understanding monetaristsat its core monetarism is an economic formula it states that money supply multiplied by its velocity the rate at which money changes hands in an economy is equal to nominal expenditures in the economy goods and services multiplied by price while this makes sense monetarists say velocity is generally stable which has been debated since the 1980s the most well known monetarist is milton friedman who wrote the first serious analysis using monetarist theory in his 1963 book a monetary history of the united states 1867 1960 in the book friedman along with anna jacobson schwartz argued in favor of monetarism as a way to combat the economic impacts of inflation they argued that a lack of money supply amplified the financial crisis of the late 1920s and led to the great depression and that a steady increase in the money supply in line with growth in the economy would produce growth without inflation 1the monetarist view was a minority view in both academic and applied economics until the financial troubles of the 1970s as unemployment and inflation soared the dominant economic theory keynesian economics was unable to explain the current economic puzzle presented by economic contraction and simultaneous inflation keynesian economics said that high unemployment and economic contraction would lead to deflation through a collapse in demand and conversely that inflation was the result of demand outstripping supply in an over heated economy the final collapse of the gold standard in 1971 the oil shocks of the mid 1970s and the beginning of de industrialization in the united states in the late 1970s all contributed to stagflation a new phenomenon that was difficult for keynesian economics to explain 2monetarism however argued that restricting the money supply would kill inflation which would be a necessary step to regulating the economy even if it came at the cost of a short term recession that is exactly what paul volcker the head of the federal reserve from 1979 to 1987 did 3 the result was a final vindication of monetarism in the eyes of economists and policymakers examples of monetarists and monetarismmost monetarists opposed the gold standard in that the limited supply of gold would stall the amount of money in the system which would lead to inflation something monetarists believe should be controlled by the money supply which is not possible under the gold standard unless gold is continually mined milton friedman is the most famous monetarist other monetarists include former federal reserve chair alan greenspan and former british prime minister margaret thatcher | |
what is monetarist theory | the monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle when monetarist theory works in practice central banks which control the levers of monetary policy can exert much power over economic growth rates the competing theory to the monetarist theory is keynesian economics understanding monetarist theoryaccording to monetarist theory if a nation s supply of money increases economic activity will increase and vice versa monetarist theory is governed by a simple formula mv pq where m is the money supply v is the velocity number of times per year the average dollar is spent p is the price of goods and services and q is the quantity of goods and services assuming constant v when m is increased either p q or both p and q rise general price levels tend to rise more than the production of goods and services when the economy is closer to full employment when there is slack in the economy q will increase at a faster rate than p under monetarist theory in the u s the federal reserve fed sets monetary policy without government interference the fed operates on a monetarist theory that focuses on maintaining stable prices low inflation promoting full employment and achieving steady gross domestic product gdp growth controlling money supplyin the u s it is the job of the fed to control the money supply the fed has three main levers example of monetarist theoryformer federal reserve chair alan greenspan was a proponent of monetarist theory during his initial years at the fed in 1988 he increased interest rates decreasing growth and raising inflation rates which almost touched five percent 1the u s economy tipped into recession during the early 1990s in response chair greenspan boosted economic prospects by commencing on a rate cutting spree that resulted in the longest period of economic expansion in the history of the u s economy 1 a loose monetary policy of low interest rates made the u s economy prone to bubbles culminating in the 2008 financial crisis and the great recession | |
what are monetary aggregates | monetary aggregates are the various measurements of the money supply in an economy in the united states they are used to evaluate the economic health and stability of the nation in addition the federal reserve uses them to implement its monetary policy in the u s the monetary aggregates are labeled as a legacy aggregate known as m3 which is all of m2 plus large time deposits over 100 000 and institutional money market funds repo agreements and large liquid assets has not been tracked by the federal reserve since 2006 but is still calculated by some analysts understanding monetary aggregatesthe monetary base or m0 is a monetary aggregate that is not widely observed and differs from the money supply but is nonetheless very important it includes the total supply of currency in circulation in addition to the stored portion of commercial bank reserves within the central bank this is sometimes known as high powered money hpm since it can be multiplied through the process of fractional reserve banking m1 is a narrow measure of the money supply that includes physical currency demand deposits traveler s checks and other checkable deposits m2 is a calculation of the money supply that includes all elements of m1 as well as near money near money refers to savings deposits money market securities mutual funds and other time deposits these assets are less liquid than m1 and not as suitable as exchange mediums but they can be converted into cash or checking deposits quickly 1the federal reserve fed uses monetary aggregates as a metric for how open market operations such as trading in treasury securities or changing the discount rate affect the economy investors and economists observe the aggregates closely to try to predict actions that the fed might take they also watch them because they offer a more accurate depiction of the actual size of a country s working money supply by reviewing weekly reports of m1 and m2 data investors can measure the monetary aggregates rate of change and monetary velocity overall that knowledge may provide an idea of whether the fed might raise or lower interest rates the size of the u s monetary base as of may 2024 2the impact of monetary aggregatesstudying monetary aggregates can generate substantial information on the financial stability and overall health of a country for example monetary aggregates that grow too rapidly may raise concern for an increase in inflation if there is a greater amount of money in circulation than what is needed to pay for the same amount of goods and services prices are likely to rise if inflation increases substantially central banking groups may be forced to raise interest rates or stop the growth in the money supply for decades monetary aggregates were essential for understanding a nation s economy and were key in establishing central banking policies in general the past few decades have revealed that there is less of a connection between fluctuations in the money supply and significant metrics such as inflation gross domestic product gdp and unemployment the amount of money that the fed releases into the economy is a clear indicator of the central bank s monetary policy when compared with gdp growth m2 is still a useful indicator of potential inflation the m2 money supply contracted 4 1 from 21 7 trillion in july 2022 to 20 8 trillion in may 2023 in february 2024 it had dropped further to 20 75 trillion 23examplesince 2022 the u s money supply has experienced a reduction greater than any seen since world war ii 4reductions in the money supply aren t common when they occur they can be a sign of problems to come related to economic growth employment and inflation in fact an m2 that isn t growing could presage a recession a growth in unemployment and deflation however gdp growth in the fourth quarter of 2023 increased by 3 2 a figure that surpassed expectations 5 this was seen as good news for the economy by the biden administration 6 | |
why are monetary aggregates important | they re important to the fed policymakers economists and investors because they can signal potential for slowing economic growth inflation deflation unemployment and recession | |
when did the fed start reporting monthly data on monetary aggregates | in 1944 the fed began to release monthly reports on what was to become the m1 aggregate years later in 1971 it added monthly reports for two additional aggregates called m2 and m3 7 | |
where do we find data on our monetary aggregates | the fed releases the money stock measures h 6 release on the fourth tuesday of every month it shows the latest and past figures for the monetary base m1 and m2 2the bottom linemonetary aggregates are measurements of a nation s money supply in the u s the money aggregates studied are the monetary base or m0 m1 and m2 monetary aggregates can provide insight into the economic health and well being of a nation and the stability of its financial markets correction july 20 2024 this article has been corrected to state that the m1 monetary aggregate contains currency held by the public and transaction deposits at u s depository institutions and foreign bank branches operating in the u s plus traveler s checks | |
what is the monetary base | the monetary base is the total amount of a currency in circulation or held in reserves money in circulation is anything that is held and used by the general public while reserves refer to commercial bank deposits and any money held in reserves by these institutions at the central bank this measure of the money supply is not often cited since it excludes other forms of non currency money that are prevalent in a modern economy understanding the monetary basethe monetary base is a component of a nation s money supply it refers strictly to highly liquid funds including notes coinage and current bank deposits when the federal reserve creates new funds to purchase bonds from commercial banks the banks see an increase in their reserve holdings which causes the monetary base to expand the monetary base is a monetary aggregate that is not widely cited and differs from the money supply but it is nonetheless very important it includes the total supply of currency in circulation in addition to the stored portion of commercial bank reserves within the central bank this is sometimes known as high powered money since it can be multiplied through the process of fractional reserve banking the monetary base is most commonly divided into levels listed as m0 through m3 or m4 depending on the system with each representing a different facet of a nation s assets 1the monetary base s funds are generally held within the lower levels of the money supply such as m1 or m2 which encompasses cash in circulation and specific liquid assets including but not limited to checking and savings accounts the federal reserve stopped publishing data on m3 as of 2006 2monetary base and the money supplythe money supply expands beyond the monetary base to include other assets that may be less liquid in form the funds must be considered a final settlement of a transaction in order to qualify for example if a person uses cash to pay a debt that transaction is final additionally writing a check against money in a checking account or using a debit card may also be considered final since the transaction is backed by actual cash deposits once they have cleared in contrast using credit to pay a debt does not qualify as part of the monetary base as this is not the final step in the transaction that s because using credit just transfers a debt owed from one party the person or business receiving the credit based payment and the credit issuer the monetary base consists of all notes and coins in the possession of the household at that level as well as any funds in deposit accounts the money supply of a household may be extended to include any available credit open on credit cards unused portions of lines of credit and other accessible funds that translate into a debt that must be repaid the monetary base in the united states as of july 2023 m1 stood at 18 45 trillion while m2 hit about 20 9 trillion 1managing monetary basesmost monetary bases are controlled by one national institution usually a country s central bank this body can usually change the monetary base through open market operations or monetary policies this can be accomplished by implementing expansionary or contractionary policies for many countries the government can maintain a measure of control over the monetary base by buying and selling government bonds in the open market example of a monetary basehere s a hypothetical example to show how a monetary base works let s suppose that country z has 600 million units of currency circulating in the public and its central bank has 10 billion currency units in reserve as part of deposits from many commercial banks in this case the monetary base for country z is 10 6 billion currency units | |
what is the definition of a monetary base | a country s monetary base is the total amount of money that its central bank creates this includes any money that is printed and in circulation as well as any money held in reserves at commercial banks this base also includes money held in reserves by banks at the central bank | |
what is the difference between the m1 and m2 money supplies | the term money supply refers to the total amount of currency and liquid assets in a country s economy it includes any money found in circulation as well as any bank deposits that can be converted to cash the money supply is divided into categories based on the type of currency for instance m1 is classified as any physical money banknotes and coins as well as money held in liquid vehicles like bank accounts m2 is a broader category that includes everything in m1 as well as money market funds and short term time deposit such as a certificate of deposit cd | |
what is the total monetary base of the united states | the monetary base of the united states was estimated to be 5 52 trillion as of july 2023 according to the federal reserve 1 | |
what is the monetary base formula | the formula to calculate a country s monetary base is by adding together the currency in circulation and its reserves or mb cc r so if there s a 1 billion worth of currency in circulation and 2 billion in reserves the monetary base is 3 billion | |
what s the difference between monetary base and money supply | a country s monetary base includes any currency in circulation as well as money held in reserves at banks and with the central bank the money supply of a country on the other hand refers to the total amount of money in circulation this includes banknotes coins and money held by consumers at bank accounts the bottom linecentral banks have a variety of functions for their economies one of the primary functions is to provide money and bank reserves the money that they provide and inject into their economies is called the monetary base the monetary base is important in any economy because it is used to complete and settle transactions and pay off debt | |
what is monetary policy | monetary policy is a set of tools used by a nation s central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements in the united states the federal reserve bank implements monetary policy through a dual mandate to achieve maximum employment while keeping inflation in check 1xiaojie liu investopediaunderstanding monetary policymonetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied economic statistics such as gross domestic product gdp the rate of inflation and industry and sector specific growth rates influence monetary policy strategy a central bank may revise the interest rates it charges to loan money to the nation s banks as rates rise or fall financial institutions adjust rates for their customers such as businesses or home buyers additionally it may buy or sell government bonds target foreign exchange rates and revise the amount of cash that the banks are required to maintain as reserves types of monetary policymonetary policies are seen as either expansionary or contractionary depending on the level of growth or stagnation within the economy a contractionary policy increases interest rates and limits the outstanding money supply to slow growth and decrease inflation where the prices of goods and services in an economy rise and reduce the purchasing power of money 2during times of slowdown or a recession an expansionary policy grows economic activity by lowering interest rates saving becomes less attractive and consumer spending and borrowing increase 1goals of monetary policycontractionary monetary policy is used to temper inflation and reduce the level of money circulating in the economy expansionary monetary policy fosters inflationary pressure and increases the amount of money in circulation an expansionary monetary policy decreases unemployment as a higher money supply and attractive interest rates stimulate business activities and expansion of the job market the exchange rates between domestic and foreign currencies can be affected by monetary policy with an increase in the money supply the domestic currency becomes cheaper than its foreign exchange tools of monetary policyin open market operations omo the federal reserve bank buys bonds from investors or sells additional bonds to investors to change the number of outstanding government securities and money available to the economy as a whole 3the objective of omos is to adjust the level of reserve balances to manipulate the short term interest rates and that affect other interest rates 3the central bank may change the interest rates or the required collateral that it demands in the u s this rate is known as the discount rate 4 banks will loan more or less freely depending on this interest rate the federal reserve commonly uses three strategies for monetary policy including reserve requirements the discount rate and open market operations authorities can manipulate the reserve requirements the funds that banks must retain as a proportion of the deposits made by their customers to ensure that they can meet their liabilities lowering this reserve requirement releases more capital for the banks to offer loans or buy other assets increasing the requirement curtails bank lending and slows growth monetary policy vs fiscal policymonetary policy is enacted by a central bank to sustain a level economy and keep unemployment low protect the value of the currency and maintain economic growth by manipulating interest rates or reserve requirements or through open market operations a central bank affects borrowing spending and savings rates fiscal policy is an additional tool used by governments and not central banks while the federal reserve can influence the supply of money in the economy and impact market sentiment the u s treasury department can create new money and implement new tax policies 5 it sends money directly or indirectly into the economy to increase spending and spur growth 6both monetary and fiscal tools were coordinated efforts in a series of government and federal reserve programs launched in response to the covid 19 pandemic 7 | |
how often does monetary policy change | the federal open market committee of the federal reserve meets eight times a year to determine changes to the nation s monetary policies 8 the federal reserve may also act in an emergency as was evident during the 2007 2008 economic crisis and the covid 19 pandemic | |
how has monetary policy been used to curb inflation in the united states | a contractionary policy can slow economic growth and even increase unemployment but is often seen as necessary to level the economy and keep prices in check during double digit inflation in the 1980s the federal reserve raised its benchmark interest rate to 20 9 though the effect of high rates spurred a recession inflation was reduced to a range of 3 to 4 over the following years 10 | |
why is the federal reserve called a lender of last resort | the fed also serves the role of lender of last resort providing banks with liquidity and regulatory scrutiny to prevent them from failing and creating financial panic in the economy 11the bottom linemonetary policy employs tools used by central bankers to keep a nation s economy stable while limiting inflation and unemployment expansionary monetary policy stimulates a receding economy and contractionary monetary policy slows down an inflationary economy a nation s monetary policy is often coordinated with its fiscal policy | |
what is it to monetize | monetize refers to the process of turning a non revenue generating item into cash in many cases monetization looks to novel methods of creating income from new sources such as embedding ad revenues inside of social media video clips to pay content creators sometimes monetization is due to privatization called commodification whereby a previously free or public asset is turned into a profit center such as a public road being converted into a private tollway the term monetize may also refer to liquidating an asset or object for cash | |
what is money | money is a system of value that facilitates the exchange of goods in an economy using money allows buyers and sellers to pay less in transaction costs compared to barter trading the first types of money were commodities their physical properties made them desirable as a medium of exchange in contemporary markets money can include government issued legal tender or fiat money money substitutes fiduciary media or electronic cryptocurrencies | |
how money works | money is a liquid asset used to facilitate transactions of value it is used as a medium of exchange between individuals and entities it s also a store of value and a unit of account that can measure the value of other goods prior to the invention of money most economies relied on bartering where individuals would trade the goods they had directly for those that they needed this raised the problem of the double coincidence of wants a transaction could only take place if both participants had something that the other needed money eliminates this problem by acting as an intermediary good the first known forms of money were agricultural commodities such as grain or cattle these goods were in high demand and traders knew that they would be able to use or trade these goods again in the future cocoa beans cowrie shells and agricultural tools have also served as early forms of money 1as economies became more complex money was standardized into currencies this reduced transaction costs by making it easier to measure and compare value also the representations of money became increasingly abstract from precious metals and stamped coins to paper notes and in the modern era electronic records during world war ii cigarettes became a de facto currency for soldiers in prisoner of war camps the use of cigarettes as money made tobacco highly desirable even among soldiers who did not smoke 2 | |
what are the properties of money | in order to be most useful money should be fungible durable portable recognizable and stable these properties reduce the transaction cost of using money by making it easy to exchange the word fungible refers to a quality that allows one thing to be exchanged substituted or returned for another thing under the assumption of equivalent value thus units of money should be interchangeable with one another for example metal coins should have a standard weight and purity commodity money should be relatively uniform in quality trying to use a non fungible good as money results in transaction costs that involve individually evaluating each unit of the good before an exchange can take place money should be durable enough to retain its usefulness for many future exchanges a perishable good or a good that degrades quickly due to various exchanges will be less useful for future transactions trying to use a non durable good as money conflicts with money s essential future oriented use and value money should be easy to carry and divide so that a worthwhile quantity can be carried on one s person or transported for example trying to use a good that s difficult or inconvenient to carry as money could require physical transportation that results in transaction costs the authenticity and quantity of the good should be readily apparent to users so that they can easily agree to the terms of an exchange using a non recognizable good as money can result in transaction costs relating to authenticating the goods and agreeing on the quantity needed for an exchange the supply of the item used as money should be relatively constant over time to prevent fluctuations in value using a non stable good as money produces transaction costs due to the risk that its value might rise or fall because of scarcity or over abundance before the next transaction | |
how is money used | money primarily functions as the good people use for exchanges of items of value however it also has secondary functions that derive from its use as a medium of exchange due to money s use as a medium of exchange for buying and selling and as a value indicator for all kinds of goods and services money can be used as a unit of account that means money can keep track of changes in the value of items over time and multiple transactions people can use it to compare the values of various combinations or quantities of different goods and services money as a unit of account makes it possible to account for profits and losses balance a budget and value the total assets of a company money s usefulness as a medium of exchange in transactions is inherently future oriented as such it provides a means to store a monetary value for use in the future without having that value deteriorate so when people exchange items for money that money retains a particular value that can be used in other transactions this ability to function as a store of value facilitates saving for the future and engaging in transactions over long distances to the extent that money is accepted as a medium of exchange and serves as a useful store of value it can be used to transfer value over different time periods in the form of credits and debts one person can borrow a quantity of money from someone else for an agreed upon period of time and repay a different agreed upon quantity of money at a future date different types of moneymoney can originate out of the spontaneous order of markets as traders barter for various goods some goods will prove more convenient than others because they have the best combination of the five properties of money listed above over time these goods may become desirable as objects of exchange rather than for practical use eventually people may come to desire a good solely for future trading historically precious metals such as gold and silver were often used as market determined monies they were highly prized across many different cultures and societies today people in cashless economies frequently turn to cigarettes instant noodles or other nonperishable goods as a market determined money substitute 2 | |
when a certain type of money is widely accepted throughout an economy government bodies may begin regulating it as a currency they may issue standardized coins or notes to further reduce transaction costs | a government may also recognize some money as a legal tender meaning that courts and government bodies must accept that form of money as a final means of payment issuing money allows the government to benefit from seigniorage the difference between the face value of a currency and the cost to produce it for example if the cost of printing a 100 bill is only 10 the government will earn a 90 profit for each bill it prints however governments that rely too heavily on seigniorage may inadvertently debase their currency the total value of the m1 money supply in the united states as of august 2023 this is more than a 10 reduction in m1 compared to may 2022 where it stood at 20 6 trillion this illustrates the variable nature of the money supply 3many countries issue fiat currency which is currency that does not represent any type of commodity instead fiat money is backed by the economic strength of the issuing government it derives its value from supply and demand and the stability of the government fiat money allows the issuing government to conduct economic policy by increasing or reducing the money supply in the u s the federal reserve and the treasury department monitor several types of money supplies for the purpose of regulating and mitigating monetary issues 4since fiat money does not represent a real commodity it falls to the issuing government to ensure that it meets the five properties of money outlined above the international monetary fund imf and world bank serve as global watchdogs for the exchange of international currencies 56 governments may enact capital controls or establish pegs in order to stabilize their currency on the international market to reduce the burden of carrying large quantities of currency merchants and traders sometimes exchange money substitutes such as written statements of debt that can be redeemed later these statements can themselves adopt some of the properties of money particularly if traders use them in lieu of actual currency for example ancient banks issued bills of exchange to their depositors stating the amount that had been deposited and the terms for redemption rather than withdraw money from the bank to make payments depositors would simply trade their bills allowing the recipient to redeem or trade them at will 7this use of money substitutes can increase the portability and durability of money as well as reduce the cost of storage however there are risks involved with money substitutes banks may print more bills than they have money to redeem a practice known as fractional reserve banking if too many people try to make withdrawals at the same time the bank may suffer from a bank run fiduciary media are types of money substitutes introduced into circulation that aren t fully backed by the base money held to back money substitutes 8 for example paper checks token coins and electronic credit represent contemporary examples of fiduciary media in recent years digital currencies that do not exist in physical form such as bitcoin have been introduced unlike electronic bank records or payment systems these virtual currencies are not issued by a government or other central body cryptocurrencies have some of the properties of money and are sometimes used in online transactions although cryptocurrencies are rarely used in everyday transactions they have achieved some utility as a speculative investment or a store of value some jurisdictions have recognized cryptocurrencies as a payment medium including the government of el salvador | |
what are the 4 types of money | money can be something determined by market participants to have value and be exchangeable money can be currency bills and coins issued by a government a third type of money is fiat currency which is fully backed by the economic power and good faith of the issuing government the fourth type of money is money substitutes which are anything that can be exchanged for money at any time for example a check written on a checking account at a bank is a money substitute | |
what is the difference between hard and soft money | hard money is money that is based on a valuable commodity such as gold or silver since the supply of these metals is limited these currencies are less susceptible to inflation than soft money such as printed banknotes with no guarantee that extra notes will not be printed soft money may be considered risky by some | |
is cryptocurrency money | cryptocurrency has many of the properties of money and is sometimes used as a medium of exchange for transactions many governments consider cryptocurrency to be a taxable asset but very few give it the same legal treatment as a foreign currency some jurisdictions notably el salvador have embraced cryptocurrency the bottom linemoney is some item of value that allows people and institutions to engage in transactions that result in an exchange of goods or services money has to be exchangeable convenient to carry recognized as legitimate by all physically long lasting and have a value that s stable money comes in various forms including precious metals currencies and money substitutes at this time though cryptocurrencies have some of the properties of money they function without a central authority and aren t backed by governments while cryptocurrencies such as bitcoin are considered property for tax purposes by the irs they aren t considered legal tender by the u s government 9 | |
what are money center banks | a money center bank is similar in structure to a standard bank however it s borrowing and lending activities are with governments large corporations and regular banks these types of financial institutions or designated branches of these institutions generally do not borrow from or lend to consumers understanding money center banksmoney center banks are usually located in major economic centers such as london hong kong tokyo and new york with their large balance sheets these banks are involved in national and international financial systems money center banks and the 2008 financial crisisfour examples of large money center banks in the united states include bank of america citi jp morgan and wells fargo among others during the 2008 financial crisis these banks struggled financially however the u s federal reserve stepped in with three phases of quantitative easing qe and bought back mortgages in 2004 u s homeownership peaked at 70 during the last quarter of 2005 home prices started to fall which led to a 40 decline in the u s home construction index during 2006 at this point subprime borrowers were not able to withstand the higher interest rates and began defaulting on their loans in 2007 multiple subprime lenders were filing for bankruptcy this had a ripple effect throughout the entire u s financial services industry of course hitting many money center banks hard during the period of qe these financial institutions had a steady stream of cash with which they were able to originate new mortgages and loans supporting overall economic recovery once the qe programs ceased many were concerned that money center banks would not be able to grow organically without support this is because the banks primary sources of income were loan and mortgage interest charges however u s interest rates did begin to rise and with them money center banks net interest income also rose money center banks and dividend incomemost money center banks raise funds from domestic and international money marks as opposed to relying on depositors like traditional banks the dividend yields of these institutions are enviable for some who like to collect such securities for income the formula for calculating dividend yield is as follows annual dividends per share price per share displaystyle frac text annual dividends per share text price per share price per shareannual dividends per share estimated current year yields often use the previous year s dividend yield or take the latest quarterly yield and then multiply this by four adjusting for seasonality and divide it by the current share price quarterly rates of return are often annualized for comparative purposes a stock or bond might return 5 in q1 we could annualize the return by multiplying 5 by the number of periods or quarters in a year the investment would have an annualized return of 20 because there are four quarters in one year or 5 4 20 | |
what is money factor | money factor is a method for determining the financing charges on a lease with monthly payments a money factor can be translated into the more common annual percentage rate apr by multiplying the money factor by 2 400 money factor is also known as a lease factor lease fee or lease money factor | |
how the money factor is used | an individual who takes out a lease on a car pays for the amount by which the value of the vehicle depreciates during the time he is in possession of it the monthly lease payments made on the car include depreciation taxes and interest if the car is expected to depreciate in value by 5 000 annually this amount will be factored into the monthly payments sales taxes are charged on both depreciation and interest and are included in the monthly payments of the lessee to determine the interest portion of monthly lease payments the money factor is used in effect the money factor is the interest rate that is paid for the duration of a lease term it is similar to the interest rate paid on a loan but the value of the money factor is expressed differently unlike apr which is expressed as a percentage the money factor is expressed in a decimal format either way the interest rate and money factor can be obtained by contacting the car dealer or checking with the credit union the money factor is directly determined by a customer s credit score the higher the credit score the lower the money factor on a lease and vice versa calculating the money factorthe money factor can be calculated in two ways one method relies on knowing the apr of the lease while the other method requires leasing information such as payments residual value and the duration of the lease first the money factor can be converted to the equivalent apr by multiplying by 2 400 in the same vein if the car dealer uses an interest rate this can be converted to a money factor by dividing by 2 400 for example if quoted a money factor of 002 the interest rate on that loan would be approximately 0 002 x 2 400 4 8 likewise if the car dealer quotes a lease apr of 4 8 a lessee can figure out the money factor of 002 by dividing the apr by 2 400 the second method of calculating the money factor is using the lease charge if instead of an interest rate the car dealer quotes a lease charge the money factor can be calculated as the lease charge of this formula is the sum of all future monthly finance costs over the entire life of the lease the capitalized cost is the agreed upon cost you agree to pay for the vehicle while the residual value is the agreed upon value of the vehicle at the end of the lease the lease term is expressed as the total number of months of the lease special considerationsa money factor may also be presented as a factor of 1 000 such as 2 0 rather than 002 while the decimal version is more common a money factor that is a whole number can still be converted to an apr by multiplying it by 2 4 for example a money factor of 2 0 translates to an apr of 4 8 when the money factor is multiplied by 2 4 it is important to remember the 2 0 figure depicted above is not the apr on the lease the money factor will always be lower than the apr even when displayed as an integer greater than 1 in addition to being determined by the borrower s credit history the money factor is also affected by the financing company s rates as well as the dealer s markup the money factor for a lease has historically been comparable to the national average for new car loans | |
what is a good money factor | the money factor is the interest assessment on a lease for this reason a lower money factor is more favorable to a borrower as it signifies a lower financing charge a good money factor will largely depend on borrower credit and prevailing market conditions but a fairly good money factor of 25 0 0025 and below translates to an imposed 6 apr | |
how is money factor calculated | there are several ways to calculate the money factor first the money factor can be multiplied by 2 400 to arrive at an apr alternatively the formula below can be used as a substitute can you negotiate money factor the negotiability of the money depends on the dealer some dealers may explicitly state the money factor is not negotiable while others are open to negotiating the money factor to align to current market interest rates | |
what is a high money factor | each borrower will have their own opinion regarding what constitutes a high money factor in general a money factor of at least 35 0 0035 translates to at least an 8 4 apr for many a money factor of at least 35 would be considered high | |
is money factor based on credit | a borrower s money factor is largely based on the borrower s credit score borrowers with higher credit scores will often have a lower money factor on a lease while lower credit borrowers will have higher money factors | |
what is money flow | money flow is calculated by averaging the high low and closing prices and multiplying by the daily volume comparing that result with the number for the previous day tells traders whether money flow was positive or negative for the current day positive money flow indicates that prices are likely to move higher while negative money flow suggests prices are about to fall the below example shows negative money flow between day one and day two day one high 6 5 low 6 0 close 6 3 daily volume 5 0 0 0 0 0 shares 5 0 0 0 0 0 6 5 6 0 6 3 3 3 1 3 3 3 3 3 3 day two high 6 6 low 5 8 close 6 5 daily volume 3 0 0 0 0 0 shares 3 0 0 0 0 0 6 6 5 8 6 5 3 1 8 9 0 0 0 0 0 begin aligned textbf day one text high 65 text low 60 text close 63 text daily volume 500 000 text shares 500 000 times frac 65 60 63 3 31 333 333 textbf day two text high 66 text low 58 text close 65 text daily volume 300 000 text shares 300 000 times frac 66 58 65 3 18 900 000 end aligned day one high 65low 60close 63daily volume 500 000 shares500 000 3 65 60 63 31 333 333day two high 66low 58close 65daily volume 300 000 shares300 000 3 66 58 65 18 900 000 breaking down money flowpositive money flow occurs when a stock is purchased at a higher price an uptick negative money flow occurs when the next trade is purchased at a lower price a downtick if more shares were bought throughout the day on the uptick than the downtick net money flow is positive because more investors were willing to pay a premium for the stock if money flow is negative when a stock s price is rising this could indicate a pending price reversal investors monitor money flow because trading volume is typically considered to lead price which could help identify early trading opportunities money flow and money flow indicatorsmany traders use the chaikin money flow oscillator when they want to incorporate money flow into their trading decisions the indicator created by marc chaikin produces values for buying and selling pressure like other money flow indicators but also uses two exponential moving averages to determine momentum in a similar way that the moving average convergence divergence macd indicator does traders also frequently use the money flow index mfi when they want to analyze price and volume this indicator divides the net positive money flow by the net negative money flow and plots the value as a line that traders can compare to the price of a security to identify overbought and oversold levels if the indicator is above 80 prices are considered overbought a value below 20 indicates oversold conditions other technical indicators should be used in conjunction with money flow indicators to improve their effectiveness and reduce false trading signals | |
what is the money flow index mfi | the money flow index mfi is a technical oscillator that uses price and volume data for identifying overbought or oversold signals in an asset it can also be used to spot divergences which warn of a trend change in price the oscillator moves between 0 and 100 unlike conventional oscillators such as the relative strength index rsi the money flow index incorporates both price and volume data as opposed to just price for this reason some analysts call mfi the volume weighted rsi image by sabrina jiang investopedia 2021the formulas for the money flow index are money flow index 100 1001 money flow ratiowhere money flow ratio 14 period positive money flow14 period negative money flowraw money flow typical price volumetypical price high low close3 begin aligned text money flow index 100 frac 100 1 text money flow ratio textbf where text money flow ratio frac text 14 period positive money flow text 14 period negative money flow text raw money flow text typical price volume text typical price frac text high low close 3 end aligned money flow index 100 1 money flow ratio100 where money flow ratio 14 period negative money flow14 period positive money flow raw money flow typical price volumetypical price 3high low close |
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