instruction
stringlengths 5
1.05k
| output
stringlengths 6
22.3k
| input
stringclasses 1
value |
|---|---|---|
the swap rate | the swap rate is a special kind of interest rate that is utilized for the calculation of fixed payments in a derivative instrument called an interest rate swap an interest rate swap is a financial contract between two parties who agree to exchange interest rate cash flows based on a notional amount for an interest rate swap there are two 2 types of interest rates required a fixed interest rate and a floating interest rate the fixed rate is the predetermined rate that one party agrees to pay while the floating rate is based on a reference rate such as a government bond yield the swap rate specifically refers to the fixed rate that is agreed upon in the swap contract it is the interest rate at which one party will make fixed payments to the other party over the life of a swap the swap rate remains constant throughout the duration of the swap agreement generally swap rates are determined by market forces such as supply and demand as well as expectations of future interest rate movements swap rates are influenced by factors such as prevailing interest rates credit risk liquidity conditions and market participants expectations swap rates are used in various financial applications one example involves companies and investors entering into an interest rate swap to manage interest rate risk by swapping fixed and floating rate cash flows parties can effectively convert their exposure to interest rate fluctuations swap rates also play a role in pricing other financial instruments such as structured products bonds and loans 1key components of a swap ratebelow shows the components of a swap rate key steps in a swapthese steps are generic and swap details may vary depending on the type of swap the jurisdiction and the needs of the parties 2examples of a swapassume that there are two 2 parties company apricot and company beetle they have reviewed the terms and conditions and agree to enter into an interest rate swap the terms of the swap are company apricot is the fixed rate payer and agrees to pay a fixed rate of 4 per annum on the notional amount while company beetle the floating rate payer agrees to pay a floating rate based on 3 month euribor plus a spread of 1 at the initiation date of the swap the 3 month euribor rate is 2 and the payment frequency is quarterly on each payment date which is every three months the following cash flows occur company apricot pays company beetle the fixed interest payment fip fr na pf fip 0 04 10 000 000 4 100 000 where fip fixed interest payment fr fixed rate na notional amount pf payment frequency begin aligned bullet text fip frac text fr times text na text pf bullet text fip frac 0 04 times 10 000 000 4 100 000 textbf where text fip text fixed interest payment text fr text fixed rate text na text notional amount text pf text payment frequency end aligned fip pffr na fip 40 04 10 000 000 100 000where fip fixed interest paymentfr fixed ratena notional amountpf payment frequency company beetle pays company apricot the floating interest payment flip 3 month euribor spread na pf flip 0 02 0 01 10 000 000 4 75 000 where flip floating interest payment na notional amount pf payment frequency begin aligned bullet text flip frac 3 text month euribor text spread times text na text pf bullet text flip frac 0 02 0 01 times 10 000 000 4 75 000 textbf where text flip text floating interest payment text na text notional amount text pf text payment frequency end aligned flip pf 3 month euribor spread na flip 4 0 02 0 01 10 000 000 75 000where flip floating interest paymentna notional amountpf payment frequency these cash flows continue for the duration of the swap tenor which is 5 years at each payment date the fixed rate payer company apricot pays a fixed interest amount and the floating rate payer company beetle pays a floating interest amount based on the reference rate 3 month euribor plus the spread there are three types of interest rate exchanges for a currency swap the swap can include or exclude a full exchange of the principal amount of the currency at both the beginning and the end of the swap the interest rate payments are not netted because they are calculated and paid in different currencies regardless of whether or not the principal is exchanged a swap rate for the conversion of the principal must be set if there is no exchange of principal then the swap rate is simply used for the calculation of the two notional principal currency amounts on which the interest rate payments are based if there is an exchange where the swap rate is set can have a financial impact since the exchange rate can change between the start of the agreement and its conclusion | |
what are the different types of swaps | the common types of swaps are interest rate swaps currency swaps credit default swaps cds commodity swaps equity swaps total return swaps and volatility swaps | |
what are benefits of using swaps | swaps offer several benefits they help market participants to manage portfolio risks they are flexible and customizable to the market participant s needs also swaps help manage cash flows by converting variable cash flows into fixed cash flows or vice versa moreover swaps can be used for arbitrage and speculation and they also help manage liquidity | |
what are the risks and limitations of using swaps | swaps have counterparty risk market risk liquidity risk operational risk and regulatory legal risks swaps may not be readily available for all market participants and like most derivatives they are complex instruments | |
what is a swaption swap option | a swaption also known as a swap option refers to an option to enter into an interest rate swap or some other type of swap in exchange for an options premium the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date | |
what does a swaption swap option tell you | swaptions come in two main types a payer swaption and a receiver swaption in a payer swaption the purchaser has the right but not the obligation to enter into a swap contract where they become the fixed rate payer and the floating rate receiver a receiver swaption is the opposite i e the purchaser has the option to enter into a swap contract where they will receive the fixed rate and pay the floating rate swaptions are over the counter contracts and are not standardized like equity options or futures contracts thus the buyer and seller need to both agree to the price of the swaption the time until expiration of the swaption the notional amount and the fixed floating rates beyond these terms the buyer and seller must also agree whether the swaption style will be bermudan european or american these style names have nothing to do with geography instead referring to the methodology in which the swaption will be executed | |
what is sweat equity | the term sweat equity refers to a person or company s contribution toward a business venture or other project sweat equity is generally not monetary and in most cases comes in the form of physical labor mental effort and time sweat equity is commonly found in real estate and the construction industry as well as in the corporate world especially for startups | |
how sweat equity works | sweat equity originally referred to the value enhancing improvements generated from the sweat of one s brow so when people say they use sweat equity they mean their physical labor mental capacity and time to boost the value of a specific project or venture the term is commonly used in the real estate and construction industries sweat equity can be used by homeowners to lower the cost of homeownership real estate investors who flip houses for profit can also use sweat equity to their advantage by doing repairs and renovations on properties before putting them on the market paying carpenters painters and contractors can get extremely pricey so a do it yourself renovation using sweat equity can be profitable when it comes time to sell sweat equity is also an important part of the corporate world creating value from the effort and toil contributed by a company s owners and employees in cash strapped startups owners and employees typically accept salaries that are below their market values in return for a stake in the company which they hope to profit from when the business is eventually sold cash strapped businesses may provide compensation for an employee s sweat equity in another form such as shares in the company special considerationsin many cases people have to use sweat equity their time and effort to contribute to the success of a company that s because there s very little capital to pay salaries unless you re the owner everyone expects to be paid for their time and energy after all no one wants to work for free while a company may not yet have enough capital to pay its employees it can provide compensation in other forms for instance startups may provide key employees with an equity stake in the company other more established companies may provide their employees with shares in the corporation as a reward for their sweat equity example of sweat equityhabitat for humanity homeowners must contribute from 200 to 400 hours of labor to build their own homes as well as those of their neighbors before they can move in 12 besides increasing home affordability the program also gives homeowners a sense of accomplishment and pride in their community sweat equity can also be found in the relationship between landlords and their tenants in exchange for maintenance work building owners and landlords may provide an equity stake in the property or in the case of a superintendent free housing but what about the business world let s say an entrepreneur who invested 100 000 in their start up sells a 25 stake to an angel investor for 500 000 which gives the business a valuation of 2 million or 500 000 0 25 their sweat equity is the increase in the value of the initial investment from 100 000 to 1 5 million or 1 4 million shares may be issued at a discount to directors and employees to retain talent while performance shares are awarded if certain specified measures are met such as an earnings per share eps target return on equity roe or the total return of the company s stock in relation to an index typically performance periods are over a multiyear time horizon for instance private equity pe firms may reserve a significant minority stake in acquired companies to incentivize management and align their interests with the pe investors | |
how do you calculate the value of sweat equity in a business | new businesses generally determine their valuation based on the sale of equity capital for example if an investor provides 1 million for a 20 equity stake the company would be worth 5 million valuing a company can be more complicated without equity funding in which case accountants will use the company s existing assets brands and the value of similar companies to estimate the total value of a company s equity | |
how do you calculate the value of sweat equity in a house | in homes or other types of construction sweat equity is based on the increase in a property s value that can be attributed to the owner s work which would otherwise be paid out to professional contractors for example if you buy a starter for 100 000 perform repairs and sell it for 150 000 your sweat equity would cost 50 000 less the cost of any tools materials or other expenses | |
what are the downsides of sweat equity | the biggest downside of sweat equity is the risk that the final value of your equity might be worth less than the work you put in for new companies workers take the risk that the company might fail making their sweat equity worthless likewise homeowners who perform their own construction assume the risks of poor workmanship that would otherwise fall to their contractors | |
how can you use sweat equity to reduce taxes on your home | if you make significant improvements to your home you may be able to exclude any profit that can be attributed to sweat equity such as construction plumbing or electrical work when you sell the home you add the cost of home improvements including costs for material and labor except your own labor to the tax basis of your home increasing the basis reduces the taxable amount of your profit 34 | |
what are the tax implications for sweat equity in a business | the irs considers sweat equity to be a form of income this means that if an employee receives part of their compensation in sweat equity that equity must be included in the employee s gross income and can be taxed as such 5the bottom linesweat equity refers to the value of work performed in lieu of payment homeowners can build sweat equity by making their own repairs rather than hiring a contractor in a business owners and employees may receive part of their compensation in sweat equity rather than a conventional salary | |
what is a sweep account | a sweep account is a bank or brokerage account that automatically transfers amounts that exceed a certain level into a higher interest earning investment option at the close of each business day commonly the excess cash is swept into a money market fund 1understanding sweep accountsusing a sweep vehicle like a sweep fund works by providing the customer with the greatest amount of interest with the minimum amount of personal intervention by transferring money at the end of the day into a high interest account in a sweep program a bank s computers analyze customer use of checkable deposits and sweep funds into money market deposit accounts some brokerage accounts have similar features that enable investors to gain some additional return for unused cash sweep accounts are simple mechanisms that allow any money above or below a set threshold in a checking account to be swept into a better investment vehicle sweep accounts were needed historically because federal banking regulations prohibited interest on checking accounts 12sweep accounts were originally devised to get around a government regulation that limited banks from offering interest on commercial checking accounts 3sweep accounts whether for business or personal use provide a way to ensure money is not sitting idly in a low interest account when it could be earning higher interest rates in better liquid cash investment vehicles these investment vehicles that provide higher interest rates while still offering liquidity include money market mutual funds high interest investment or savings accounts and even short term certificates with 30 60 or 90 day maturities for known layovers in investments businesses and individuals need to keep an eye on the costs of sweep accounts as the benefit from higher returns from investment vehicles outside the checking account can be offset by the fees charged for the account many brokerages or banking institutions charge flat fees while others charge a percentage of the yield sweep accounts may not be free and broker fees may make the account less attractive on a net basis 1personal sweeps vs business sweepssweep accounts for individual investors are typically used by brokerages to park money waiting to be reinvested such as dividends incoming cash deposits and money from sell orders these funds are typically swept into high interest holding accounts or money market funds until an investor decides on future investments or until the broker can execute already standing orders within the portfolio sweep accounts are a typical business tool especially for small businesses that rely on daily cash flow but want to maximize earning potential on sitting cash reserves a business sets a minimum balance for its main checking account over which any funds are swept into a higher interest investment product the business might also use a credit sweep to move the excess funds over to pay down pending lines of credit if the balance ever dips below the threshold the funds are swept back into the checking account from the investment account depending on the institution and investment vehicle the sweep process is generally set daily from the checking account while the return of funds can experience delays with the changes in regulations on checking accounts some banking institutions also offer high interest rates on amounts over certain balances | |
how do sweep accounts work | a sweep account is a type of bank or brokerage account that is linked to an investment account and automatically transfers funds when the balance is above or below a preset minimum typically this is used to sweep excess cash into a money market fund where it will earn more interest than an ordinary bank account sweep accounts can also work the other way around moving funds from an investment account to a checking account when the owner s balance falls below a set threshold | |
what is the difference between personal and business sweeps | individual sweeps are typically used by brokerages to store client funds until the owner decides how to invest the money for example a sweep account might move excess cash to a money market fund where it will earn greater returns than an ordinary checking account business sweep accounts are often used by small companies with large cash flows they allow the company to earn interest on excess cash reserves while ensuring that they have enough cash on hand to pay for business expenses | |
why are sweep accounts useful | sweep accounts whether for business or personal use are an easy way to ensure that money is earning a return rather than sitting in a low interest bank account some institutions offer an auto sweep feature whereby the sweep account is linked to the non sweep account and the transfers are initiated automatically when the defined thresholds upper and lower are crossed the bottom linesweep accounts are bank brokerage accounts that move excess money between a client s cash account and an investment account when the monetary level in the cash account exceeds the required amount the excess is moved into the higher interest bearing investment account automatically this allows the client account to earn interest on money that isn t being used | |
what is swing trading | swing trading is a style of trading that attempts to capture short to medium term gains in a stock or any financial instrument over a period of a few days to several weeks swing traders primarily use technical analysis to look for trading opportunities swing traders may utilize fundamental analysis in addition to analyzing price trends and patterns understanding swing tradingtypically swing trading involves holding a position either long or short for more than one trading session but usually not longer than several weeks or a couple of months this is a general time frame as some trades may last longer than a couple of months yet the trader may still consider them swing trades swing trades can also occur during a trading session though this is a rare outcome that is brought about by extremely volatile conditions the goal of swing trading is to capture a chunk of a potential price move while some traders seek out volatile stocks with lots of movement others may prefer more sedate stocks in either case swing trading is the process of identifying where an asset s price is likely to move next entering a position and then capturing a chunk of the profit if that move materializes successful swing traders are only looking to capture a chunk of the expected price move and then move on to the next opportunity madelyn goodnight investopediaswing trading is one of the most popular forms of active trading where traders look for intermediate term opportunities using various forms of technical analysis swing trading and technical analysisidentifying swing trading opportunities relies heavily on technical analysis techniques one of the fundamental tools in a swing trader s arsenal is chart analysis where patterns and trends are studied to anticipate future price movements chart patterns such as head and shoulders double tops and bottoms triangles and flags can signal potential swing trading opportunities we ll talk more about these later another aspect of technical analysis for swing trading is the use of indicators these mathematical calculations applied to price and volume data help traders gauge the strength and direction of a trend popular indicators among swing traders include moving averages relative strength index rsi stochastic oscillator and moving average convergence divergence macd for example a swing trader may enter into a position when a stock s macd hits a certain target then the trader will sell that position if the macd hits a different target finally support and resistance levels play a role in identifying swing trading opportunities support represents a price level where buying interest is strong enough to prevent the price from declining further while resistance is a level where selling interest is strong enough to prevent the price from rising further swing traders often look for price to bounce off support or break through resistance as confirmation of a potential trade setup advantages and disadvantages of swing tradingmany swing traders assess trades on a risk reward basis by analyzing the chart of an asset they determine where they will enter where they will place a stop loss order and then anticipate where they can get out with a profit if they are risking 1 per share on a setup that could reasonably produce a 3 gain that is a favorable risk reward ratio on the other hand risking 1 only to make 0 75 isn t quite as favorable swing traders primarily use technical analysis due to the short term nature of the trades that said fundamental analysis can be used to enhance the analysis for example if a swing trader sees a bullish setup in a stock they may want to verify that the fundamentals of the asset look favorable or are improving swing traders will often look for opportunities on the daily charts and may watch one hour or 15 minute charts to find precise entry stop loss and take profit levels swing trading requires less time to trade than day trading it maximizes short term profit potential by capturing the bulk of market swings swing traders can rely exclusively on technical analysis simplifying the trading process swing trade positions are subject to overnight and weekend market risk abrupt market reversals can result in substantial losses swing traders often miss longer term trends in favor of short term market moves day trading vs swing tradingthe distinction between swing trading and day trading is usually the holding time for positions swing trading often involves at least an overnight hold whereas day traders close out positions before the market closes to generalize day trading positions are limited to a single day while swing trading involves holding for several days to weeks by holding overnight the swing trader incurs the unpredictability of overnight risk such as gaps up or down against the position by taking on the overnight risk swing trades are usually done with a smaller position size compared to day trading assuming the two traders have similarly sized accounts day traders typically utilize larger position sizes and may use a day trading margin of 25 12swing traders also have access to a margin or leverage of 50 this means that if the trader is approved for margin trading they only need to put up 25 000 in capital for a trade with a current value of 50 000 for example 3swing trading tacticsa swing trader tends to look for multiday chart patterns some of the more common patterns involve moving average crossovers cup and handle patterns head and shoulders patterns flags and triangles key reversal candlesticks may be used in addition to other indicators to devise a solid trading plan ultimately each swing trader devises a plan and strategy that gives them an edge over many trades this involves looking for trade setups that tend to lead to predictable movements in the asset s price this isn t easy and no strategy or setup works every time with a favorable risk reward winning every time isn t required the more favorable the risk reward of a trading strategy the fewer times it needs to win to produce an overall profit over many trades 4real world example of swing tradingimage by sabrina jiang investopedia 2020using a historical example the chart above shows a period where apple aapl had a strong price move higher this was followed by a small cup and handle pattern which often signals a continuation of the price rise if the stock moves above the high of the handle in this case aside from risk reward the trader could also utilize other exit methods such as waiting for the price to make a new low with this method an exit signal wasn t given until 216 46 when the price dropped below the prior pullback low this method would have resulted in a profit of 23 76 per share or thought of another way a 12 profit in exchange for less than 3 risk this swing trade took approximately two months other exit methods could be when the price crosses below a moving average not shown or when an indicator such as the stochastic oscillator crosses its signal line | |
what are the swings in swing trading | swing trading tries to identify entry and exit points into a security on the basis of its daily or weekly movements between cycles of optimism and pessimism | |
how does swing trading differ from day trading | day trading as the name suggests involves making dozens of trades in a single day based on technical analysis and sophisticated charting systems day trading seeks to scalp small profits multiple times a day and close out all positions at the end of the day swing traders do not close their positions on a daily basis and instead may hold onto them for weeks months or even longer swing traders may incorporate both technical and fundamental analysis whereas a day trader is more likely to focus on using technical analysis | |
what are some indicators of tools used by swing traders | swing traders will use tools like moving averages overlaid on daily or weekly candlestick charts momentum indicators price range tools and measures of market sentiment swing traders are also on the lookout for technical patterns like the head and shoulders or cup and handle | |
which types of securities are best suited for swing trading | while a swing trader can enjoy success in any number of securities the best candidates tend to be large cap stocks which are among the most actively traded stocks on the major exchanges in an active market these stocks will often swing between broadly defined high and low points and the swing trader will ride the wave in one direction for a couple of days or weeks and then switch to the opposite side of the trade when the stock reverses direction swing trades are also viable in actively traded commodities and forex markets the bottom lineswing trading refers to a trading style that attempts to exploit short to medium term price movements in a security using favorable risk reward metrics swing traders primarily rely on technical analysis to determine suitable entry and exit points but they may also use fundamental analysis as an added filter large cap stocks make suitable swing trading candidates as they often oscillate in well established predictable ranges that frequently provide long and short trading opportunities swing trading offers advantages such as maximizing short term profit potential minimal time commitment and flexibility of capital management key disadvantages include being subject to overnight and weekend market risk along with missing longer term trending price moves | |
what is a swingline loan | a swingline loan is a short term loan made by financial institutions that provides businesses with access to funds to cover debt commitments a swingline loan can be a sub limit of an existing credit facility or a syndicated credit line which is financing offered by a group of lenders swingline loans typically have short operating durations that can range from five to 15 days on average 1swingline loans are helpful to companies since they provide much needed cash relatively quickly however swingline loans often carry higher interest rates than traditional lines of credit and the funds are limited to covering debt obligations | |
how a swingline loan works | financial institutions make swingline loans to both businesses and individuals a swingline loan for individuals is similar to a payday loan providing cash quickly however fast access to credit comes at a cost in the form of a significantly higher interest rate than other forms of credit such as bank issued personal loans companies can use swingline loans to cover temporary shortfalls in cash flow and in that sense they are similar to other lines of credit in how they function however the funds provided by this type of loan are meant to be used only for paying down existing debts in other words the funds cannot be used for expanding the business acquiring new assets or investments in research and development the limitation of the use of funds differentiates swingline loans from traditional lines of credit which can be used for almost any purpose including buying goods and debt repayments swingline loans can be tapped or drawn down on the same day a request is made to the lender and be issued for smaller amounts than the existing credit facility a swingline loan can take the form of revolving credit which is a line of credit that the borrower can repeatedly draw on and pay back though the loan normally has an upward limit as long as the funds are paid back as agreed they can be withdrawn as needed on very short notice often borrowers can receive funds on the same day that they are requested and the cycle of repayment and withdrawal can continue as long as all the conditions of borrowing are met and both parties choose to keep the line open revolving credit lines including swingline loans can be closed at the discretion of either the borrower or the lender lenders have the option to close any line of credit that they consider to be too risky swingline loans are best suited for use in cases where normal processing delays make other forms of loans impractical pros and cons of swingline loansas with any borrowing facility there are pros and cons to each credit product company executives must weigh the benefits and drawbacks to determine if a swingline loan is a viable option a swingline loan can give the borrower access to a large sum of cash swingline loans can be accessed on very short notice swingline loans help companies with cash flow shortfalls and keep their debt payments current swingline loans need to be repaid quickly swingline loans often carry higher interest rates than traditional lines of credit the use of funds from swingline loans is often limited to paying debt obligations | |
what is a swingline loan | a swingline loan is a type of loan for business owners or individuals to access a large sum of credit for a brief period of time they are often a sub limit of a revolving line of credit | |
what can i use a swingline loan for | uses for swingline loans are typically limited to paying debt obligations can a swingline loan be used more than once yes the cycle of repayment and withdrawal on a swingline loan can continue indefinitely as long as all the conditions of borrowing are met and neither party chooses to close the line the bottom lineswingline loans can be made to both businesses and individuals and provide fast access to a large amount of cash however these loans can come with significantly higher interest rates than other forms of credit such as personal loans be sure to compare all options available to you before taking out a swingline loan | |
what are switching costs | switching costs are the costs that a consumer incurs as a result of changing brands suppliers or products although most prevalent switching costs are monetary in nature there are also psychological effort based and time based switching costs switching can also refer to the process of rebalancing or changing investments investopedia michela buttignol | |
how switching costs work | a switching cost can manifest itself in the form of significant time and effort necessary to change suppliers the risk of disrupting normal operations of a business during a transition period high cancellation fees or a failure to obtain similar replacements of products or services successful companies typically try to employ strategies that incur high switching costs on the part of consumers to dissuade them from switching to a competitor s product brand or services for example many cellular phone carriers charge very high cancellation fees for canceling contracts in hopes that the costs involved with switching to another carrier will be high enough to prevent their customers from doing so however recent offers by numerous cell phone carriers to compensate consumers for cancellation fees nullified such switching costs switching costs are the building blocks of competitive advantage and the pricing power of companies firms strive to make switching costs as high as possible for their customers which lets them lock customers in their products and raise prices every year without worrying that their customers will find better alternatives with similar characteristics or at similar price points types of switching costsswitching costs can be broken down into two categories low and high cost switching the price difference depends mostly on the ease of transfer as well as the availability of similar products of the competitor companies that offer products or services that are very easy to replicate at comparable prices by competitors typically have low switching costs apparel firms have very limited switching costs among consumers who can find clothing deals easily and can quickly compare prices by walking from one store to another the rise of internet retailers and fast shipping has made it even easier for consumers to shop for apparel at their homes across multiple online platforms companies that create unique products that have few substitutes and require significant effort to perfect their use enjoy significant switching costs consider intuit inc intu which offers its customers various bookkeeping software solutions because learning to use intuit s applications takes significant time effort and training costs few users are willing to switch away from intuit many of intuit s applications are interconnected which provides additional functionalities and benefits to users and few companies match the scale and usefulness of intuit s products small businesses which are the primary buyers of intuit s bookkeeping products can incur disruption in their operations and risk incurring financial error if they decide to move away from intuit s software these factors create high switching costs and stickiness of intuit s products allowing the company to charge premium prices on its products common switching coststhere are a variety of specific switching costs that companies can use to deter their customers from jumping ship and going to a competitor common ones include the following convenience a company may have many locations of its stores or products making it easy for customers to buy its goods if a competitor has cheaper products but is further away and difficult to get to customers may choose to stay with the higher cost product because of its convenience emotional many companies continue doing business with their current suppliers for example just because the emotional cost of finding a new supplier building a new relationship and getting to know new individuals might be high it is similar to why a person may choose to stay in one job versus leaving for another that might pay a slightly higher salary the individual knows their boss and their colleagues and therefore the emotional cost of switching might be too high exit fees many companies charge exit fees for leaving these fees are usually not necessary but a company tacks them on at the end just so a customer won t leave a company can classify these fees as they so choose including administrative fees for closing an account time based if it takes a long time to switch from one brand to another customers often forego doing so for example if an individual has to wait a long time on the phone to speak to someone to close an account and on top of that they have to fill out paperwork to close the account they may find that the time involved is not worth doing so | |
what is symmetrical distribution | a symmetrical distribution occurs when the values of variables appear at regular frequencies and often the mean median and mode all occur at the same point if a line were drawn dissecting the middle of the graph it would reveal two sides that mirror one other in graphical form symmetrical distributions may appear as a normal distribution i e bell curve symmetrical distribution is a core concept in technical trading as the price action of an asset is assumed to fit a symmetrical distribution curve over time symmetrical distributions can be contrasted with asymmetrical distributions which is a probability distribution that exhibits skewness or other irregularities in its shape | |
what does a symmetrical distribution tell you | symmetrical distributions are used by traders to establish the value area for a stock currency or commodity on a set time frame this time frame can be intraday such as 30 minute intervals or it can be longer term using sessions or even weeks and months a bell curve can be drawn around the price points hit during that time period and it is expected that most of the price action approximately 68 of price points will fall within one standard deviation of the center of the curve the curve is applied to the y axis price as it is the variable whereas time throughout the period is simply linear so the area within one standard deviation of the mean is the value area where price and the actual value of the asset are most closely matched if the price action takes the asset price out of the value area then it suggests that price and value are out of alignment if the breach is to the bottom of the curve the asset is considered to be undervalued if it is to the top of the curve the asset is to be overvalued the assumption is that the asset will revert to the mean over time when traders speak of reversion to the mean they are referring to the symmetrical distribution of price action over time that fluctuates above and below the average level the central limit theorem states that the distribution of sample approximates a normal distribution i e becomes symmetric as the sample size becomes larger regardless of the population distribution including asymmetric ones example of how symmetrical distribution is usedsymmetrical distribution is most often used to put price action into context the further the price action wanders from the value area one standard deviation on each side of the mean the greater the probability that the underlying asset is being under or overvalued by the market this observation will suggest potential trades to place based on how far the price action has wandered from the mean for the time period being used on larger time scales however there is a much greater risk of missing the actual entry and exit points image by julie bang investopedia 2019symmetrical distributions vs asymmetrical distributionsthe opposite of symmetrical distribution is asymmetrical distribution a distribution is asymmetric if it is not symmetric with zero skewness in other words it does not skew an asymmetric distribution is either left skewed or right skewed a left skewed distribution which is known as a negative distribution has a longer left tail a right skewed distribution or a positively skewed distribution has a longer right tail determining whether the mean is positive or negative is important when analyzing the skew of a data set because it affects data distribution analysis a log normal distribution is a commonly cited asymmetrical distribution featuring right skew skewness is often an important component of a trader s analysis of a potential investment return a symmetrical distribution of returns is evenly distributed around the mean an asymmetric distribution with a positive right skew indicates that historical returns that deviated from the mean were primarily concentrated on the bell curve s left side conversely a negative left skew shows historical returns deviating from the mean concentrated on the right side of the curve image by sabrina jiang investopedia 2020limitations of using symmetrical distributionsa common investment refrain is that past performance does not guarantee future results however past performance can illustrate patterns and provide insight for traders looking to make a decision about a position symmetrical distribution is a general rule of thumb but no matter the time period used there will often be periods of asymmetrical distribution on that time scale this means that although the bell curve will generally return to symmetry there can be periods of asymmetry that establish a new mean for the curve to center on this also means that trading based solely on the value area of a symmetrical distribution can be risky if the trades are not confirmed by other technical indicators | |
what is the relationship between mean median and mode in a symmetrical distribution | in a symmetrical distribution all three of these descriptive statistics tend to be the same value for instance in a normal distribution bell curve this also holds in other symmetric distributions such as the uniform distribution where all values are identical depicted simply as a horizontal line or the binomial distribution which accounts for discrete data that can only take on one of two values e g zero or one yes or no true or false etc on rare occasions a symmetrical distribution may have two modes neither of which are the mean or median for instance in one that would appear like two identical hilltops equidistant from one another | |
is the median symmetric | the median describes the point at which 50 of data values lie above and 50 lie below thus it is the mid point of the data in a symmetrical distribution the median will always be the mid point and create a mirror image with the median in the middle this is not the case for an asymmetric distribution | |
what is the shape of a frequency distribution | the shape of the frequency distribution of data is simply its graphical representation e g as a bell curve etc visualizing the shape of the data can help analysts quickly understand if it is symmetrical or not | |
what is symmetric vs asymmetric data | symmetric data is observed when the values of variables appear at regular frequencies or intervals around the mean asymmetric data on the other hand may have skewness or noise such that the data appears at irregular or haphazard intervals | |
what is a syndicate | a syndicate is a temporary alliance of businesses that joins together to manage a large transaction which would be difficult or impossible to effect individually syndication makes it easy for companies to pool their resources and share risks as when a group of investment banks works together to bring a new issue of securities to the market there are different types of syndicates such as underwriting syndicates banking syndicates and insurance syndicates understanding syndicatessyndicates are usually composed of companies in the same industry for example two pharmaceutical companies may combine their research and development r d teams by creating a syndicate to develop a new drug or several real estate companies may form a syndicate to manage a large development sometimes banks will form a syndicate to loan a very large amount of money to a single party companies also may form a syndicate to manage a specific business venture if the opportunity promises an attractive rate of return ror some projects are so large that no single company can have all of the expertise needed to do the job efficiently this is often the case with large construction projects such as building a stadium highway bridge or railroad in these situations companies may form a syndicate so that each firm may apply its specific expertise to the project for tax purposes syndicates are generally considered to be partnerships or corporations 1in financial services the underwriting syndicate plays a critically important role in bringing new securities to the market the amount of risk assumed by each syndicate member can vary for instance in an undivided account of an underwriting syndicate each member is responsible for selling an allotted amount of stock along with any excess shares not sold by the syndicate as a whole in this way an individual syndicate member may need to sell far more securities than they are allotted other types of syndicates however may limit the degree of risk for each member underwriting syndicatesin an initial public offering ipo a number of investment banks and broker dealers form a syndicate to sell new offerings of stock or debt securities to investors the underwriting group shares the risk and aids in the successful distribution of the new securities issue the lead underwriter for the new issue initiates and manages the underwriting syndicate the syndicate is compensated by the underwriting spread which is the difference between the price paid to the issuer and the price received from investors and other broker dealers an underwriting syndicate usually breaks up 30 days after the sale is complete or if the securities cannot be sold at the offering price there are other types of syndicates however that function jointly but are not temporary syndicates and insurance risksyndicates are often used in the insurance industry to spread insurance risk among several firms insurance underwriters evaluate the risk of insuring a specific person or a particular asset and use that evaluation to price an insurance policy for example an underwriter in the corporate health insurance field may evaluate the potential health risks of a company s employees the underwriter s actuary would then use statistics to assess the risk of illness for each employee in the company s workforce if the potential risk of providing health insurance is too great for a single insurance firm that company may form a syndicate to share the insurance risk | |
do companies in different industries form syndicates | no usually not companies in the same industry typically comprise syndicates | |
how do taxes apply to syndicates | syndicates are generally considered to be partnerships or corporations for tax purposes | |
where are syndicates frequently used | syndicates are often used in the insurance industry the alliance spreads insurance risk among several firms the bottom linea syndicate is a temporary alliance of businesses that forms to carry out a large transaction that would be difficult if not impossible to execute individually syndication makes it easy for companies to pool their resources and share risks | |
what is a syndicated loan | a syndicated loan is a form of financing that is offered by a group of lenders syndicated loans arise when a project requires too large a loan for a single lender or when a project needs a specialized lender with expertise in a specific asset class syndicating allows lenders to spread risk and take part in financial opportunities that may be too large for their individual capital base lenders are referred to as a syndicate which works together to provide funds for a single borrower the borrower can be a corporation a large project or a sovereign government the loan can involve a fixed amount of funds a credit line or a combination of the two investopedia candra huff | |
how syndicated loans work | there is typically a lead bank or underwriter with a syndicated loan this institution is known as the arranger the agent or the lead lender the lead bank may put up a proportionally bigger share of the loan or it may perform duties such as dispersing cash flows among the other syndicate members and administrative tasks the main goal of syndicated lending is to spread the risk of a borrower default across multiple lenders or banks or institutional investors such as pension funds and hedge funds because syndicated loans tend to be much larger than standard bank loans the risk of even one borrower defaulting could cripple a single lender syndicated loans are also used in the leveraged buyout community to fund large corporate takeovers with primarily debt funding syndicated loans can be made on a best efforts basis which means that if enough investors can t be found the amount the borrower receives is lower than originally anticipated these loans can also be split into dual tranches for banks that fund standard revolving credit lines and institutional investors that fund fixed rate term loans interest rates on this type of loan can be fixed or floating based on a benchmark rate such as the secured overnight financing rate sofr sofr is a dollar denominated interest rate used by banks for derivatives and loans this rate is based on transactions that take place in the treasury repurchase market 1because they involve such large sums syndicated loans are spread out among several financial institutions which mitigates the risk in case the borrower defaults types of syndicated loanswith a best efforts deal the lead bank does what it can by using its best efforts to arrange a syndicate for a loan this lead however isn t obligated to make any loans including in its entirety to the borrower itself rather it acts as an agent to approach other lenders to come together to finance the loan best efforts loans are commonly used when borrowers have poor credit histories and or when the economy is tough club deals typically involve loans of less than 150 million these loans are usually meant for a small group of lenders usually those with existing relationships with the borrower the lenders involved in this type of deal normally have an equal share of the loan including the interest rate and fees 2an underwritten deal is fully guaranteed by the lead bank if no other bank gets on board then this institution is fully responsible to finance the loan it may try to get investors later on down the road as an option to spread out the risk syndicated loans are also known as syndicated bank facilities example of a syndicated loansyndicated loans are usually too large for a single lender to handle for example china s tencent holdings signed a syndicated loan deal on march 24 2017 to raise 4 65 billion the loan deal included commitments from a dozen banks with citigroup acting as the coordinator mandated lead arranger and book runner which is the lead underwriter in a new debt offering that handles the books 3tencent previously increased the size of another syndicated loan to 4 4 billion on june 6 2016 that loan which was used to fund company acquisitions was underwritten by five large institutions citigroup australia and new zealand banking group bank of china hsbc holdings and mizuho financial group the organizations created a syndicated loan that encompassed a five year facility split between a term loan and a revolver 4 | |
why do banks syndicate loans | syndicated loans allow borrowers to raise money from different lenders these lenders form a group called a syndicate and provide varying amounts of capital based on how much risk they re willing to accept banks syndicate loans because it allows them to lessen the risk associated with lending to a borrower that s because one bank usually doesn t take the full responsibility for 100 of the loan | |
how risky are syndicated loans | lending at any level can be risky but the risks associated with lending in a syndicate can be a little lighter that s because each bank in a group is only responsible for guaranteeing a small portion of the total loan amount so if a company defaults on its syndicated loan one bank won t be out the full amount of the loan rather it will only lose out on the portion it agrees to finance so if five banks agree to join a syndicate to equally fund a 100 million loan each bank will only lose 20 million if the borrower defaults | |
what is a syndicated mortgage | a syndicated mortgage is a loan that is secured by a mortgage this type of loan involves multiple lenders this can range from a fairly simple loan with three parties or very complex situations involving multiple lenders who fund a very large real estate transaction syndicated mortgages commonly finance most of the initial phases of real estate development like planning and zoning 5the bottom linesyndicated loans allow multiple lenders to form a group and contribute a certain portion of a full loan these types of loans allow lenders to spread the risk among others so they aren t liable for the full amount in the event of a default | |
what is a syndicated loan | a syndicated loan is a form of financing that is offered by a group of lenders syndicated loans arise when a project requires too large a loan for a single lender or when a project needs a specialized lender with expertise in a specific asset class syndicating allows lenders to spread risk and take part in financial opportunities that may be too large for their individual capital base lenders are referred to as a syndicate which works together to provide funds for a single borrower the borrower can be a corporation a large project or a sovereign government the loan can involve a fixed amount of funds a credit line or a combination of the two investopedia candra huff | |
how syndicated loans work | there is typically a lead bank or underwriter with a syndicated loan this institution is known as the arranger the agent or the lead lender the lead bank may put up a proportionally bigger share of the loan or it may perform duties such as dispersing cash flows among the other syndicate members and administrative tasks the main goal of syndicated lending is to spread the risk of a borrower default across multiple lenders or banks or institutional investors such as pension funds and hedge funds because syndicated loans tend to be much larger than standard bank loans the risk of even one borrower defaulting could cripple a single lender syndicated loans are also used in the leveraged buyout community to fund large corporate takeovers with primarily debt funding syndicated loans can be made on a best efforts basis which means that if enough investors can t be found the amount the borrower receives is lower than originally anticipated these loans can also be split into dual tranches for banks that fund standard revolving credit lines and institutional investors that fund fixed rate term loans interest rates on this type of loan can be fixed or floating based on a benchmark rate such as the secured overnight financing rate sofr sofr is a dollar denominated interest rate used by banks for derivatives and loans this rate is based on transactions that take place in the treasury repurchase market 1because they involve such large sums syndicated loans are spread out among several financial institutions which mitigates the risk in case the borrower defaults types of syndicated loanswith a best efforts deal the lead bank does what it can by using its best efforts to arrange a syndicate for a loan this lead however isn t obligated to make any loans including in its entirety to the borrower itself rather it acts as an agent to approach other lenders to come together to finance the loan best efforts loans are commonly used when borrowers have poor credit histories and or when the economy is tough club deals typically involve loans of less than 150 million these loans are usually meant for a small group of lenders usually those with existing relationships with the borrower the lenders involved in this type of deal normally have an equal share of the loan including the interest rate and fees 2an underwritten deal is fully guaranteed by the lead bank if no other bank gets on board then this institution is fully responsible to finance the loan it may try to get investors later on down the road as an option to spread out the risk syndicated loans are also known as syndicated bank facilities example of a syndicated loansyndicated loans are usually too large for a single lender to handle for example china s tencent holdings signed a syndicated loan deal on march 24 2017 to raise 4 65 billion the loan deal included commitments from a dozen banks with citigroup acting as the coordinator mandated lead arranger and book runner which is the lead underwriter in a new debt offering that handles the books 3tencent previously increased the size of another syndicated loan to 4 4 billion on june 6 2016 that loan which was used to fund company acquisitions was underwritten by five large institutions citigroup australia and new zealand banking group bank of china hsbc holdings and mizuho financial group the organizations created a syndicated loan that encompassed a five year facility split between a term loan and a revolver 4 | |
why do banks syndicate loans | syndicated loans allow borrowers to raise money from different lenders these lenders form a group called a syndicate and provide varying amounts of capital based on how much risk they re willing to accept banks syndicate loans because it allows them to lessen the risk associated with lending to a borrower that s because one bank usually doesn t take the full responsibility for 100 of the loan | |
how risky are syndicated loans | lending at any level can be risky but the risks associated with lending in a syndicate can be a little lighter that s because each bank in a group is only responsible for guaranteeing a small portion of the total loan amount so if a company defaults on its syndicated loan one bank won t be out the full amount of the loan rather it will only lose out on the portion it agrees to finance so if five banks agree to join a syndicate to equally fund a 100 million loan each bank will only lose 20 million if the borrower defaults | |
what is a syndicated mortgage | a syndicated mortgage is a loan that is secured by a mortgage this type of loan involves multiple lenders this can range from a fairly simple loan with three parties or very complex situations involving multiple lenders who fund a very large real estate transaction syndicated mortgages commonly finance most of the initial phases of real estate development like planning and zoning 5the bottom linesyndicated loans allow multiple lenders to form a group and contribute a certain portion of a full loan these types of loans allow lenders to spread the risk among others so they aren t liable for the full amount in the event of a default | |
what is synthetic | synthetic is the term given to financial instruments that are engineered to simulate other instruments while altering key characteristics like duration and cash flow understanding syntheticoften synthetics will offer investors tailored cash flow patterns maturities risk profiles and so on synthetic products are structured to suit the needs of the investor there are many different reasons behind the creation of synthetic positions for example you can create a synthetic option position by purchasing a call option and simultaneously selling writing a put option on the same stock if both options have the same strike price let s say 45 this strategy would have the same result as purchasing the underlying security at 45 when the options expire or are exercised the call option gives the buyer the right to purchase the underlying security at the strike and the put option obligates the seller to purchase the underlying security from the put buyer if the market price of the underlying security increases above the strike price the call buyer will exercise their option to purchase the security at 45 realizing the profit on the other hand if the price falls below the strike the put buyer will exercise their right to sell to the put seller who is obligated to buy the underlying security at 45 so the synthetic option position would have the same fate as a true investment in the stock but without the capital outlay 1 this is of course a bullish trade the bearish trade is done by reversing the two options selling a call and buying a put understanding synthetic cash flows and productssynthetic products are more complex than synthetic positions as they tend to be custom builds created through contracts there are two main types of generic securities investments some securities straddle a line such as a dividend paying stock that also experiences appreciation for most investors a convertible bond is as synthetic as things need to get convertible bonds are ideal for companies that want to issue debt at a lower rate the goal of the issuer is to drive demand for a bond without increasing the interest rate or the amount it must pay for the debt the attractiveness of being able to switch debt for the stock if it takes off attracts investors that want steady income but are willing to forgo a few points of that for the potential of appreciation different features can be added to the convertible bond to sweeten the offer some convertible bonds offer principal protection other convertible bonds offer increased income in exchange for a lower conversion factor these features act as incentives for bondholders 2imagine however an institutional investor that wants a convertible bond for a company that has never issued one to fulfill this market demand investment bankers work directly with the institutional investor to create a synthetic convertible purchasing the parts in this case bonds and a long term call option to fit the specific characteristics that the institutional investor wants most synthetic products are composed of a bond or fixed income product which is intended to safeguard the principal investment and an equity component which is intended to achieve alpha types of synthetic assetsproducts used for synthetic products can be assets or derivatives but synthetic products themselves are inherently derivatives that is the cash flows they produce are derived from other assets there s even an asset class known as synthetic derivatives these are the securities that are reverse engineered to follow the cash flows of a single security synthetic cdos for example invest in credit default swaps the synthetic cdo itself is further split into tranches that offer different risk profiles to large investors these products can offer significant returns but the nature of the structure can also leave high risk high return tranche holders facing contractual liabilities that are not fully valued at the time of purchase the innovation behind synthetic products has been a boon to global finance but events like the financial crisis of 2007 09 suggest that the creators and buyers of synthetic products are not as well informed as one would hope | |
what is a systematic investment plan sip | a systematic investment plan sip is a plan in which investors make regular equal payments into a mutual fund trading account or retirement account such as a 401 k sips allow investors to save regularly with a smaller amount of money while benefiting from the long term advantages of dollar cost averaging dca by using a dca strategy an investor buys an investment using periodic equal transfers of funds to build wealth or a portfolio over time slowly | |
how systematic investment plans sips work | mutual funds and other investment companies offer investors a variety of investment options including systematic investment plans sips give investors a chance to invest small sums of money over a longer period of time rather than having to make large lump sums all at once most sips require payments into the plans on a consistent basis whether that s weekly monthly or quarterly the principle of systematic investing is simple it works on regular and periodic purchases of shares or units of securities of a fund or other investment dollar cost averaging involves buying the same fixed dollar amount of a security regardless of its price at each periodic interval sips allow investors to use smaller amounts of money with the benefits of dollar cost averaging as a result shares are bought at various prices and in varying amounts though some plans may let you designate a fixed number of shares to buy because the amount invested is generally fixed and doesn t depend on unit or share prices an investor ends up buying fewer shares when unit prices rise and more shares when prices drop sips tend to be passive investments because once you put money in you continue to invest in them regardless of how they perform that s why it s important to keep an eye on how much wealth you accumulate in your sip once you ve hit a certain amount or get to a point near your retirement you may want to reconsider your investment plans moving to a strategy or investment that s actively managed may allow you to grow your money even more but it s always a good idea to speak to a financial advisor or expert to determine the best situation for you special considerationsdca advocates argue that with this approach the average cost per share of the security decreases over time of course the strategy can backfire if you have a stock whose price rises steadily and dramatically that means investing over time costs you more than if you bought all at once at the outset overall dca usually reduces the cost of an investment the risk of investing a large amount of money into security also lessens because most dca strategies are established on an automatic purchasing schedule systematic investment plans remove the investor s potential for making poor decisions based on emotional reactions to market fluctuations for example when stock prices soar and news sources report new market records being set investors typically buy more risky assets in contrast when stock prices drop dramatically for an extended period many investors rush to unload their shares buying high and selling low is in direct contrast with dollar cost averaging and other sound investment practices especially for long term investors sips and dripsin addition to sips many investors use the earnings their holdings generate to purchase more of the same security via a dividend reinvestment plan drip reinvesting dividends means stockholders may purchase shares or fractions of shares in publicly traded companies they already own rather than sending the investor a quarterly check for dividends the company transfer agent or brokerage firm uses the money to purchase additional stock in the investor s name dividend reinvestment plans are also automatic the investor designates the treatment of dividends when they establish an account or first buy the stock and they let shareholders invest variable amounts in a company over a long term period company operated drips are commission free that s because no broker is needed to facilitate the trade some drips offer optional cash purchases of additional shares directly from the company at a discount with no fees because drips are flexible investors may invest small or large amounts of money depending on their financial situation advantages and disadvantages of sipssips provide investors with a variety of benefits the first and most obvious benefit is that once you set the amount you wish to invest and the frequency there s not much more to do since many sips are funded automatically you just have to make sure the funding account has enough money to cover your contributions it also allows you to use a small amount so you don t feel the effects of a big lump sum being withdrawn all at once because you re using dca there s very little emotion involved that cuts back some of the risk and uncertainty you re likely to experience with other investments like stocks and bonds and since it requires a fixed amount at regular intervals you re also implementing some discipline into your financial life although they can help an investor maintain a steady savings program formal systematic investment plans have several stipulations for example they often require a long term commitment this can be anywhere from 10 to 25 years while investors are allowed to quit the plan before the end date they may incur hefty sales charges sometimes as much as 50 of the initial investment if within the first year missing a payment can lead to plan termination 1systematic investment plans can also be costly to establish a creation and sales charge can run up to half of the first 12 months investments also investors should look out for mutual fund fees and custodial and service fees if applicable 1 set it and forget it imposes discipline avoids emotionworks with small amountsreduces overall cost of investmentsrisks less capitalrequires long term commitmentcan carry hefty sales chargescan have early withdrawal penalties | |
could miss buying opportunities and bargains | systematic investment plan vs lump sum investmentwhile sips are a systematic investment plan that involves investing a fixed amount at regular intervals lump sum investments involve investing a large sum of money at once into a particular investment or asset class sips help to average out the purchase price of investments over time reducing the impact of short term market volatility lump sum investments are made at a specific point in time so their performance depends on the market conditions prevailing at the time of investment lump sum investments are potentially subject to a higher risk of losses though that comes as potentially higher opportunities for example if the investment is made during a market downturn the investor may experience immediate losses however if the market performs well a lump sum investment can yield higher returns compared to sips should the underlying investments have been purchased over a period of time where prices increased sips also provide a disciplined approach to investing and enable investors to mitigate the impact of market fluctuations there is a psychological element to consider regarding committing to investing a certain amount of money each period though this amount may be auto drawn each period investors may find mental solace in that they are consistently and constantly putting money away towards an investing strategy example of a sipmost brokerages and mutual fund companies such as vanguard investments fidelity and t rowe price offer sips allowing investors to contribute quite small amounts although the payments can be made manually most sips are set up to be funded automatically either monthly quarterly or whatever period the investor chooses this means an investor should have a money market or other liquid account to fund their systematic investment plan t rowe price calls its sip product automatic buy after the initial investment to establish the account generally 1 000 or 2 500 though this usually varies depending on the type of account investors can make contributions of as little as 100 per month it is available for both ira and taxable accounts but only to purchase mutual funds not stocks 23the payments can be transferred directly from a bank account paycheck or even a social security check note that there may be certain restrictions with social security payments though the social security administration has guidance on what are acceptable types of accounts 4can i start a sip with a small amount of money yes sips allow individuals to start investing with small amounts making it accessible to a wide range of investors the minimum investment amount varies depending on the mutual fund or investment provider | |
what investment instruments can be used for sips | sips can be utilized to invest in various investment instruments such as mutual funds equity funds debt funds hybrid funds index funds etfs and other investment products offered by financial institutions can i pause or stop my sip investments yes investors have the flexibility to pause or stop their sip investments at any time they can choose to discontinue the sip or pause it temporarily and resume later based on their financial circumstances or investment goals | |
what are the costs associated with sip investments | sip investments may involve certain costs such as expense ratios which cover fund management expenses and transaction charges these costs are deducted from the invested amount or reflected in the nav net asset value of the investment instrument | |
what returns can i expect from sips | sip returns are influenced by the performance of the underlying investment instrument over the long term sips have the potential to generate attractive returns especially when invested in equity based funds but it is important to note that returns are subject to market fluctuations the bottom linesystematic investment plans are a disciplined investment approach that allows individuals to invest a fixed amount at regular intervals in selected investment instruments sips offer benefits such as regular investing flexibility the potential for dollar cost averaging and the opportunity to start with small amounts they provide individuals with a systematic and gradual way to invest reducing the impact of market volatility and potentially generating long term wealth accumulation | |
what is systemic risk | systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy systemic risk was a major contributor to the financial crisis of 2008 companies considered to be a systemic risk are called too big to fail 1these institutions are large relative to their respective industries or make up a significant part of the overall economy a company highly interconnected with others is also a source of systemic risk systemic risk should not be confused with systematic risk systematic risk relates to the entire financial system understanding systemic riskthe federal government uses systemic risk as a justification an often correct one to intervene in the economy the basis for this intervention is the belief that the government can reduce or minimize the ripple effect from a company level event through targeted regulations and actions although some companies are considered too big to fail they will if the government does not intervene during turbulent economic times however sometimes the government will choose not to intervene simply because the economy at that time had undergone a major rise and the general market needs a breather this is more often the exception than the rule since it can destabilize an economy more than projected due to consumer sentiment examples of systemic riskthe dodd frank act of 2010 fully known as dodd frank wall street reform and consumer protection act introduced an enormous set of new laws that are supposed to prevent another great recession from occurring by tightly regulating key financial institutions to limit systemic risk there has been much debate about whether changes need to be made to the reforms to facilitate the growth of small business 2lehman brothers size and integration into the u s economy made it a source of systemic risk when the firm collapsed it created problems throughout the financial system and the economy capital markets froze up while businesses and consumers could not get loans or could only get loans if they were extremely creditworthy posing minimal risk to the lender 3simultaneously aig was also suffering from serious financial problems like lehman aig s interconnectedness with other financial institutions made it a source of systemic risk during the financial crisis aig s portfolio of assets tied to subprime mortgages and its participation in the residential mortgage backed securities rmbs market through its securities lending program led to collateral calls a loss of liquidity and a downgrade of aig s credit rating when the value of those securities dropped 45while the u s government did not bail out lehman it decided to bail out aig with loans of more than 180 billion preventing the company from going bankrupt analysts and regulators believed that an aig bankruptcy would have caused numerous other financial institutions to collapse as well 6 | |
what is systematic sampling | systematic sampling is a probability sampling method in which sample members from a larger population are selected according to a random starting point but with a fixed periodic interval this sampling interval is calculated by dividing the population size by the desired sample size investopedia nez riazunderstanding systematic sampling | |
when carried out correctly on a large population of a defined size systematic sampling can help researchers including marketing and sales professionals obtain representative findings on a huge group of people without having to reach out to each and every one of them | since simple random sampling of a population can be inefficient and time consuming statisticians turn to other methods such as systematic sampling choosing a sample size through a systematic approach can be done quickly once a fixed starting point has been identified a constant interval is selected to facilitate participant selection systematic sampling is preferable to simple random sampling when there is a low risk of data manipulation if such a risk is high when a researcher can manipulate the interval length to obtain desired results then a simple random sampling technique would be more appropriate systematic sampling is popular with researchers and analysts because of its simplicity researchers generally assume the results are representative of most normal populations unless a random characteristic disproportionately exists with every nth data sample which is unlikely in other words a population needs to exhibit a natural degree of randomness along with the chosen metric if the population has a type of standardized pattern then the risk of accidentally choosing very common cases is more apparent within systematic sampling as with other sampling methods a target population must be selected prior to selecting participants a population can be identified based on any number of desired characteristics that suit the purpose of the study being conducted some selection criteria may include age gender race location education level or profession there are several methods of sampling a population for statistical inference systematic sampling is one form of random sampling | |
when to use systematic sample | one situation where systematic sampling may be best suited is when the population being studied exhibits a degree of order or regularity for example if you re surveying customers entering a store systematic sampling allows you to systematically select every nth customer ensuring representation across different times of the day or week this approach helps to avoid bias that may arise from selecting only customers who arrive during specific periods another scenario where systematic sampling can be good is when the population size is known and relatively large instead of having to list and randomly select individuals from the entire population systematic sampling simplifies the process by selecting samples at a set cadence this is particularly useful in large scale studies where time and resources are limited meaning you don t need to spend a large amount of energy planning out the sample systematic sampling can be used when researchers want to ensure that the sample is evenly spread across the entire population for example a company could select every nth person from the company directory filtered by last name other forms of sampling may accidentally cluster similar populations i e too many people from finance are selected based on how the sample is aggregated additionally systematic sampling offers the advantage of simplicity and ease of implementation compared to other sampling methods it requires minimal computation and can be easily executed using simple algorithms especially if the target sample size and total population size are known steps to create a systematic sampleyou can use the following steps to create a systematic sample 1examples of systematic samplingas a hypothetical example of systematic sampling assume that in a population of 10 000 people a statistician selects every 100th person for sampling the sampling intervals can also be systematic such as choosing a new sample to draw from every 12 hours as another example if you wanted to select a random group of 1 000 people from a population of 50 000 using systematic sampling all the potential participants must be placed on a list and a starting point would be selected once the list is formed every 50th person on the list starting the count at the selected starting point would be chosen as a participant since 50 000 1 000 50 for example if the selected starting point was 20 the 60th person on the list would be chosen followed by the 120th and so on once the end of the list is reached and if additional participants are required the count loops to the beginning of the list to finish the count to conduct systematic sampling researchers must first know the size of the target population types of systematic samplinggenerally there are three ways to generate a systematic sample this is the classic form of systematic sampling where the subject is selected at a predetermined interval for example if a researcher wants to select a sample of 100 students from a population of 1000 they could use systematic random sampling by selecting every 10th student from a list sorted in random order this approach ensures that each member of the population has an equal chance of being selected while still maintaining a systematic sampling pattern rather than randomly selecting the sampling interval this is when a skip pattern is created following a linear path this means that instead of selecting every nth member from the population the selection process follows a predetermined sequence such as selecting every 5th member then every 7th member then every 9th member and so on linear systematic sampling can be useful in situations where there is a specific order or sequence to the population such as geographical locations along a linear path this is when a sample starts again at the same point after ending this means that once the sampling interval reaches the last member of the population it wraps around to the beginning and continues the selection process circular systematic sampling is often used in situations where the population exhibits cyclical patterns or where there is no clear starting or ending point for example if researchers are studying tree growth in a forest they could use circular systematic sampling by selecting trees at regular intervals along a circular path ensuring comprehensive coverage of the forest area systematic sampling vs cluster samplingsystematic sampling and cluster sampling differ in how they pull sample points from the population included in the sample cluster sampling breaks the population down into clusters while systematic sampling uses fixed intervals from the larger population to create the sample systematic sampling selects a random starting point from the population then a sample is taken from regular fixed intervals of the population depending on its size cluster sampling divides the population into clusters and then takes a simple random sample from each cluster cluster sampling is considered less precise than other methods of sampling however it may save costs on obtaining a sample cluster sampling is a two step sampling procedure it may be used when completing a list of the entire population is difficult for example it could be difficult to construct the entire population of the customers of a grocery store to interview however a person could create a random subset of stores which is the first step in the process the second step is to interview a random sample of the customers of those stores this is a simple manual process that can save time and money mistakes to avoid when systematically samplingone common pitfall to watch out for when using systematic sampling is selecting an inappropriate sampling interval choosing a sampling interval that is too small may lead to oversampling and increased sampling error while selecting an interval that is too large may result in undersampling and decreased representativeness of the sample this error can be avoided by fully understanding the full scope of the population before you begin sampling another mistake to avoid is failing to account for potential biases introduced by the sampling frame if the sampling frame is not representative of the population of interest systematic sampling may lead to biased results for example if the sampling frame only includes individuals from certain demographic groups or geographic locations the sample won t reflect the diversity of the entire population this type of error is present in all forms of sampling another tip to be mindful of is to account for the presence of systematic patterns or cycles in the population if there is a periodic pattern or trend in the population that aligns with the sampling interval certain segments of the population may be systematically over or under represented for example imagine selecting random players from baseball rosters if those rosters are listed in order by position you may end up selecting players from the same positions across teams because the population has a cyclical pattern limitations of systematic samplingone risk that statisticians must consider when conducting systematic sampling involves how the list used with the sampling interval is organized if the population placed on the list is organized in a cyclical pattern that matches the sampling interval the selected sample may be biased for example a company s human resources department wants to pick a sample of employees and ask how they feel about company policies employees are grouped in teams of 20 with each team headed by a manager if the list used to pick the sample size is organized with teams clustered together the statistician risks picking only managers or no managers at all depending on the sampling interval | |
how do i perform systematic sampling | to conduct systematic sampling first determine the total size of the population you want to sample from then select a random starting point and choose every nth member from the population according to a predetermined sampling interval | |
when should i use systematic sampling | you should use systematic sampling when you need a simple and efficient method to select a representative sample from a large population with a known and evenly distributed structure and when randomization is not feasible or necessary for your research objectives | |
what are the advantages of systematic sampling | systematic sampling is simple to conduct and easy to understand which is why it s generally favored by researchers the central assumption that the results represent the majority of normal populations guarantees that the entire population is evenly sampled also systematic sampling provides an increased degree of control compared to other sampling methodologies because of its process systematic sampling also carries a low risk factor because there is a low chance that the data can be contaminated | |
what are the disadvantages of systematic sampling | the main disadvantage of systematic sampling is that the size of the population is needed without knowing the specific number of participants in a population systematic sampling does not work well for example if a statistician would like to examine the age of homeless people in a specific region but cannot accurately obtain how many homeless people there are then they won t have a population size or a starting point another disadvantage is that the population needs to exhibit a natural amount of randomness to it or else the risk of choosing similar instances is increased defeating the purpose of the sample | |
how does cluster sampling and systematic sampling differ | cluster sampling and systematic sampling differ in how they pull sample points from the population included in the sample cluster sampling divides the population into clusters and then takes a simple random sample from each cluster systematic sampling selects a random starting point from the population then a sample is taken from regular fixed intervals of the population depending on its size cluster sampling is susceptible to a larger sampling error than systematic sampling though it may be a cheaper process the bottom linesampling can be an effective way to draw conclusions about a broad group of people items or something else of interest systematic sampling is one of the most popular ways to go about this as it is cheaper and less time consuming than other options yes it isn t flawless however if you have a large data set without patterns between intervals systematic sampling is capable of providing reliable samples at a relatively low cost | |
t 1 t 2 t 3 are abbreviations that refer to the settlement period for security transactions the t stands for transaction date which is the day the transaction takes place the numbers 1 2 or 3 denote how many days after the transaction date the settlement or the transfer of money and security ownership takes place | understanding t 1 t 2 t 3 for determining the t 1 t 2 t 3 settlement period the only days counted are those on which the stock market is open t 1 means that if a transaction occurs on a monday settlement must occur by tuesday likewise t 3 means that a transaction occurring on a monday must be settled by thursday assuming no holidays occur between these days but if you sell a security with a t 3 settlement date on a friday ownership and money transfer do not have to take place until the following wednesday 1knowing the settlement date of a stock is also important for investors or strategic traders who are interested in dividend paying companies because the settlement date can determine which party receives the dividend that is the trade must settle before the record date for the dividend in order for the stock buyer to receive the dividend in the past security transactions were done manually rather than electronically investors would have to wait for the delivery of a particular security which was an actual certificate and they would not pay until receipt since delivery times could vary and prices could fluctuate market regulators set a period of time in which securities and cash must be delivered for many years the settlement date for stocks was traditionally t 5 or five business days after the transaction date 1 until recently the settlement was moved to t 3 and then it became t 2 in 2017 2 in 2024 stock settlement was shortened to t 1 3settlement dates vary according to the type of security all stocks are currently t 1 however bonds mutual funds and some money market funds will vary between t 1 t 2 and t 3 4the settlement date is the date on which the investor becomes a shareholder of record weekends and public holidays are not included in the day count investors should be aware of the settlement date as it determines when they officially become shareholders of record and this can impact their eligibility for dividends the t 1 settlement cycle for stocksin may of 2024 the u s stock market officially transitioned to a t 1 settlement cycle where securities transactions will settle one business day after the trade date this change which was initially adopted by the securities and exchange commission sec in february 2023 shortens the settlement cycle from the previous t 2 standard which had been in place since 2017 3 the last time the u s stock market had a one day settlement cycle was approximately 100 years ago 5the new t 1 settlement cycle applies to transactions for listed stocks bonds municipal securities exchange traded funds certain mutual funds and limited partnerships that trade on an exchange under the new rule if an investor sells shares of a stock on monday the transaction will settle on tuesday meaning the official transfer of securities to the buyer s account and cash to the seller s account will occur one business day after the trade the sec has noted that there may be a potential for a short term uptick in failed deals as a result of the shortened settlement cycle as dealers adjust 5 in rare cases investors may need to deliver securities certificates to their broker dealers earlier or through different means and those buying securities may need to pay for their transactions one business day earlier the change may also impact certain provisions of margin agreements so investors should consult with their broker dealers regarding any changes that may specifically affect their accounts the transition to the t 1 settlement cycle has also occurred in other jurisdictions including canada and mexico on the same day 5 this change is expected to bring the u s stock market in line with the faster settlement times that are in line with today s modern information and communication technologies note that the period between transaction and settlement is not flex time in which an investor can back out of a deal the deal is done on the transaction day it s only the transfer that does not take place until later example of t 1 settlementsay that on monday june 3 an investor named sarah decides to sell 100 shares of xyz corporation stock at 50 per share she places the order through her broker and the trade is executed the same day under a t 1 settlement cycle the settlement date for this transaction would be tuesday june 4 assuming no holidays this means that if the trade was executed under a t 2 settlement cycle the settlement date would have been wednesday june 5 instead meaning the transfer of securities and cash would have occurred two business days after the trade date and not one | |
what has been the history of u s stock settlement cycles | a century ago stocks were settled t 1 but by hand as interest in stock trading and volume of shares increased sharply so too did the need to streamline the settlement process the sec originally established a standard settlement cycle of five business days or t 5 for most securities transactions in order to provide sufficient time for the physical delivery of stock certificates and the corresponding payments 5 this was changed to t 3 in 1993 shortening the prevailing practice at the time of settling securities transactions within five business days of trade date in 2017 the sec shortened the standard settlement cycle from t 3 to t 2 and in 2024 from t 2 to t 1 3 | |
are there any exceptions to the new t 1 settlement cycle | yes certain types of securities and transactions may be exempt from the t 1 settlement cycle for example some primary offerings such as initial public offerings ipos may have different settlement periods as determined by the listing exchange additionally certain fixed income securities such as u s treasury securities and many money market instruments already settle on a t 1 or even a t 0 same day settlement basis | |
what is settlement risk | settlement risk is the possibility that one or more parties will fail to deliver on the terms of a contract at the agreed upon time settlement risk is a type of counterparty risk associated with default risk as well as with timing differences between parties settlement risk is also called delivery risk or herstatt risk the time period for a transaction to settlement is meant to reduce settlement risk by ensuring that all information and payments are available to all parties involved the bottom linethe settlement period for securities transactions abbreviated as t 1 t 2 or t 3 etc refers to the number of days after the transaction date when the actual settlement occurs as of 2024 the u s stock market has transitioned to a t 1 settlement cycle meaning that most stock transactions now settle one business day after the trade date this change aims to reduce settlement risk and align with modern technology and practices however it s important to note that certain securities and transactions in various markets or jurisdictions may have different settlement periods | |
what is a t distribution | the t distribution also known as the student s t distribution is a type of probability distribution that is similar to the normal distribution with its bell shape but has heavier tails it is used for estimating population parameters for small sample sizes or unknown variances t distributions have a greater chance for extreme values than normal distributions and as a result have fatter tails the t distribution is the basis for computing t tests in statistics | |
what does a t distribution tell you | tail heaviness is determined by a parameter of the t distribution called degrees of freedom with smaller values giving heavier tails and with higher values making the t distribution resemble a standard normal distribution with a mean of 0 and a standard deviation of 1 1image by sabrina jiang investopedia 2020 | |
when a sample of n observations is taken from a normally distributed population having mean m and standard deviation d the sample mean m and the sample standard deviation d will differ from m and d because of the randomness of the sample | a z score can be calculated with the population standard deviation as z x m d and this value has the normal distribution with mean 0 and standard deviation 1 but when using the estimated standard deviation a t score is calculated as t m m d sqrt n and the difference between d and d makes the distribution a t distribution with n 1 degrees of freedom rather than the normal distribution with mean 0 and standard deviation 1 2example of how to use a t distributiontake the following example for how t distributions are put to use in statistical analysis first remember that a confidence interval for the mean is a range of values calculated from the data meant to capture a population mean this interval is m t d sqrt n where t is a critical value from the t distribution for instance a 95 confidence interval for the mean return of the dow jones industrial average djia in the 27 trading days prior to sept 11 2001 is 0 33 2 055 1 07 sqrt 27 giving a persistent mean return as some number between 0 75 and 0 09 the number 2 055 the amount of standard errors to adjust by is found from the t distribution 3because the t distribution has fatter tails than a normal distribution it can be used as a model for financial returns that exhibit excess kurtosis which will allow for a more realistic calculation of value at risk var in such cases 4t distribution vs normal distributionnormal distributions are used when the population distribution is assumed to be normal the t distribution is similar to the normal distribution just with fatter tails both assume a normally distributed population t distributions thus have higher kurtosis than normal distributions the probability of getting values very far from the mean is larger with a t distribution than a normal distribution 5limitations of using a t distributionthe t distribution can skew exactness relative to the normal distribution its shortcoming only arises when there s a need for perfect normality the t distribution should only be used when the population standard deviation is not known if the population standard deviation is known and the sample size is large enough the normal distribution should be used for better results 6 | |
what is the t distribution in statistics | the t distribution is used in statistics to estimate the population parameters for small sample sizes or undetermined variances it is also referred to as the student s t distribution 5 | |
when should the t distribution be used | the t distribution should be used if the population sample size is small and the standard deviation is unknown if not then the normal distribution should be used | |
what does normal distribution mean | normal distribution is a term for a probability bell curve it is also called the gaussian distribution 7the bottom linethe t distribution is used in statistics to estimate the significance of population parameters for small sample sizes or unknown variations like the normal distribution it is bell shaped and symmetric unlike normal distributions it has heavier tails which result in a greater chance for extreme values | |
what is a t account | a t account is an informal term for a set of financial records that uses double entry bookkeeping the term describes the appearance of the bookkeeping entries first a large letter t is drawn on a page the title of the account is then entered just above the top horizontal line while underneath debits are listed on the left and credits are recorded on the right separated by the vertical line of the letter t a t account is also called a ledger account understanding t accountin double entry bookkeeping a widespread accounting method all financial transactions are considered to affect at least two of a company s accounts one account will get a debit entry while the second will get a credit entry to record each transaction that occurs the credits and debits are recorded in a general ledger where all account balances must match the visual appearance of the ledger journal of individual accounts resembles a t shape hence why a ledger account is also called a t account a t account is the graphical representation of a general ledger that records a business transactions it consists of the following example of t accountif barnes noble inc sold 20 000 worth of books it will debit its cash account 20 000 and credit its books or inventory account 20 000 this double entry system shows that the company now has 20 000 more in cash and a corresponding 20 000 less in inventory on its books the t account will look like this t account recordingfor different accounts debits and credits may translate to increases or decreases but the debit side must always lie to the left of the t outline and the credit entries must be recorded on the right side the major components of the balance sheet assets liabilities and shareholders equity se can be reflected in a t account after any financial transaction occurs the debit entry of an asset account translates to an increase to the account while the right side of the asset t account represents a decrease to the account this means that a business that receives cash for example will debit the asset account but will credit the account if it pays out cash the liability and shareholders equity se in a t account have entries on the left to reflect a decrease to the accounts and any credit signifies an increase to the accounts a company that issues shares worth 100 000 will have its t account show an increase in its asset account and a corresponding increase in its equity account t accounts can also be used to record changes to the income statement where accounts can be set up for revenues profits and expenses losses of a firm for the revenue accounts debit entries decrease the account while a credit record increases the account on the other hand a debit increases an expense account and a credit decreases it t account advantagest accounts are commonly used to prepare adjusting entries the matching principle in accrual accounting states that all expenses must match with revenues generated during the period the t account guides accountants on what to enter in a ledger to get an adjusting balance so that revenues equal expenses a business owner can also use t accounts to extract information such as the nature of a transaction that occurred on a particular day or the balance and movements of each account | |
what is a t test | a t test is an inferential statistic used to determine if there is a significant difference between the means of two groups and how they are related t tests are used when the data sets follow a normal distribution and have unknown variances like the data set recorded from flipping a coin 100 times the t test is a test used for hypothesis testing in statistics and uses the t statistic the t distribution values and the degrees of freedom to determine statistical significance investopedia sabrina jiangunderstanding the t testa t test compares the average values of two data sets and determines if they came from the same population in the above examples a sample of students from class a and a sample of students from class b would not likely have the same mean and standard deviation similarly samples taken from the placebo fed control group and those taken from the drug prescribed group should have a slightly different mean and standard deviation mathematically the t test takes a sample from each of the two sets and establishes the problem statement it assumes a null hypothesis that the two means are equal using the formulas values are calculated and compared against the standard values the assumed null hypothesis is accepted or rejected accordingly if the null hypothesis qualifies to be rejected it indicates that data readings are strong and are probably not due to chance the t test is just one of many tests used for this purpose statisticians use additional tests other than the t test to examine more variables and larger sample sizes for a large sample size statisticians use a z test other testing options include the chi square test and the f test using a t testconsider that a drug manufacturer tests a new medicine following standard procedure the drug is given to one group of patients and a placebo to another group called the control group the placebo is a substance with no therapeutic value and serves as a benchmark to measure how the other group administered the actual drug responds after the drug trial the members of the placebo fed control group reported an increase in average life expectancy of three years while the members of the group who are prescribed the new drug reported an increase in average life expectancy of four years initial observation indicates that the drug is working however it is also possible that the observation may be due to chance a t test can be used to determine if the results are correct and applicable to the entire population four assumptions are made while using a t test the data collected must follow a continuous or ordinal scale such as the scores for an iq test the data is collected from a randomly selected portion of the total population the data will result in a normal distribution of a bell shaped curve and equal or homogenous variance exists when the standard variations are equal t test formulacalculating a t test requires three fundamental data values they include the difference between the mean values from each data set or the mean difference the standard deviation of each group and the number of data values of each group this comparison helps to determine the effect of chance on the difference and whether the difference is outside that chance range the t test questions whether the difference between the groups represents a true difference in the study or merely a random difference the t test produces two values as its output t value and degrees of freedom the t value or t score is a ratio of the difference between the mean of the two sample sets and the variation that exists within the sample sets the numerator value is the difference between the mean of the two sample sets the denominator is the variation that exists within the sample sets and is a measurement of the dispersion or variability this calculated t value is then compared against a value obtained from a critical value table called the t distribution table higher values of the t score indicate that a large difference exists between the two sample sets the smaller the t value the more similarity exists between the two sample sets a large t score or t value indicates that the groups are different while a small t score indicates that the groups are similar degrees of freedom refer to the values in a study that has the freedom to vary and are essential for assessing the importance and the validity of the null hypothesis computation of these values usually depends upon the number of data records available in the sample set the correlated t test or paired t test is a dependent type of test and is performed when the samples consist of matched pairs of similar units or when there are cases of repeated measures for example there may be instances where the same patients are repeatedly tested before and after receiving a particular treatment each patient is being used as a control sample against themselves this method also applies to cases where the samples are related or have matching characteristics like a comparative analysis involving children parents or siblings the formula for computing the t value and degrees of freedom for a paired t test is t mean 1 mean 2 s diff n where mean 1 and mean 2 the average values of each of the sample sets s diff the standard deviation of the differences of the paired data values n the sample size the number of paired differences n 1 the degrees of freedom begin aligned t frac textit mean 1 textit mean 2 frac s text diff sqrt n textbf where textit mean 1 text and textit mean 2 text the average values of each of the sample sets s text diff text the standard deviation of the differences of the paired data values n text the sample size the number of paired differences n 1 text the degrees of freedom end aligned t n s diff mean1 mean2 where mean1 and mean2 the average values of each of the sample setss diff the standard deviation of the differences of the paired data valuesn the sample size the number of paired differences n 1 the degrees of freedom the equal variance t test is an independent t test and is used when the number of samples in each group is the same or the variance of the two data sets is similar the formula used for calculating t value and degrees of freedom for equal variance t test is t value mean 1 mean 2 n 1 1 var 1 2 n 2 1 var 2 2 n 1 n 2 2 1 n 1 1 n 2 where mean 1 and mean 2 average values of each of the sample sets var 1 and var 2 variance of each of the sample sets n 1 and n 2 number of records in each sample set begin aligned text t value frac textit mean 1 textit mean 2 sqrt frac n1 1 times textit var 1 2 n2 1 times textit var 2 2 n1 n2 2 times frac 1 n1 frac 1 n2 textbf where textit mean 1 text and textit mean 2 text average values of each text of the sample sets textit var 1 text and textit var 2 text variance of each of the sample sets n1 text and n2 text number of records in each sample set end aligned t value n1 n2 2 n1 1 var12 n2 1 var22 n11 n21 mean1 mean2 where mean1 and mean2 average values of eachof the sample setsvar1 and var2 variance of each of the sample setsn1 and n2 number of records in each sample set and degrees of freedom n 1 n 2 2 where n 1 and n 2 number of records in each sample set begin aligned text degrees of freedom n1 n2 2 textbf where n1 text and n2 text number of records in each sample set end aligned degrees of freedom n1 n2 2where n1 and n2 number of records in each sample set the unequal variance t test is an independent t test and is used when the number of samples in each group is different and the variance of the two data sets is also different this test is also called welch s t test the formula used for calculating t value and degrees of freedom for an unequal variance t test is t value m e a n 1 m e a n 2 v a r 1 n 1 v a r 2 n 2 where m e a n 1 and m e a n 2 average values of each of the sample sets v a r 1 and v a r 2 variance of each of the sample sets n 1 and n 2 number of records in each sample set begin aligned text t value frac mean1 mean2 sqrt bigg frac var1 n1 frac var2 n2 bigg textbf where mean1 text and mean2 text average values of each text of the sample sets var1 text and var2 text variance of each of the sample sets n1 text and n2 text number of records in each sample set end aligned t value n1var1 n2var2 mean1 mean2 where mean1 and mean2 average values of eachof the sample setsvar1 and var2 variance of each of the sample setsn1 and n2 number of records in each sample set and degrees of freedom v a r 1 2 n 1 v a r 2 2 n 2 2 v a r 1 2 n 1 2 n 1 1 v a r 2 2 n 2 2 n 2 1 where v a r 1 and v a r 2 variance of each of the sample sets n 1 and n 2 number of records in each sample set begin aligned text degrees of freedom frac left frac var1 2 n1 frac var2 2 n2 right 2 frac left frac var1 2 n1 right 2 n1 1 frac left frac var2 2 n2 right 2 n2 1 textbf where var1 text and var2 text variance of each of the sample sets n1 text and n2 text number of records in each sample set end aligned degrees of freedom n1 1 n1var12 2 n2 1 n2var22 2 n1var12 n2var22 2 where var1 and var2 variance of each of the sample setsn1 and n2 number of records in each sample set | |
which t test to use | the following flowchart can be used to determine which t test to use based on the characteristics of the sample sets the key items to consider include the similarity of the sample records the number of data records in each sample set and the variance of each sample set image by julie bang investopedia 2019example of an unequal variance t testassume that the diagonal measurement of paintings received in an art gallery is taken one group of samples includes 10 paintings while the other includes 20 paintings the data sets with the corresponding mean and variance values are as follows though the mean of set 2 is higher than that of set 1 we cannot conclude that the population corresponding to set 2 has a higher mean than the population corresponding to set 1 | |
is the difference from 19 4 to 21 6 due to chance alone or do differences exist in the overall populations of all the paintings received in the art gallery we establish the problem by assuming the null hypothesis that the mean is the same between the two sample sets and conduct a t test to test if the hypothesis is plausible | since the number of data records is different n1 10 and n2 20 and the variance is also different the t value and degrees of freedom are computed for the above data set using the formula mentioned in the unequal variance t test section the t value is 2 24787 since the minus sign can be ignored when comparing the two t values the computed value is 2 24787 the degrees of freedom value is 24 38 and is reduced to 24 owing to the formula definition requiring rounding down of the value to the least possible integer value one can specify a level of probability alpha level level of significance p as a criterion for acceptance in most cases a 5 value can be assumed using the degree of freedom value as 24 and a 5 level of significance a look at the t value distribution table gives a value of 2 064 comparing this value against the computed value of 2 247 indicates that the calculated t value is greater than the table value at a significance level of 5 therefore it is safe to reject the null hypothesis that there is no difference between means the population set has intrinsic differences and they are not by chance | |
how is the t distribution table used | the t distribution table is available in one tail and two tails formats the former is used for assessing cases that have a fixed value or range with a clear direction either positive or negative for instance what is the probability of the output value remaining below 3 or getting more than seven when rolling a pair of dice the latter is used for range bound analysis such as asking if the coordinates fall between 2 and 2 | |
what is an independent t test | the samples of independent t tests are selected independent of each other where the data sets in the two groups don t refer to the same values they may include a group of 100 randomly unrelated patients split into two groups of 50 patients each one of the groups becomes the control group and is administered a placebo while the other group receives a prescribed treatment this constitutes two independent sample groups that are unpaired and unrelated to each other | |
what does a t test explain and how are they used | a t test is a statistical test that is used to compare the means of two groups it is often used in hypothesis testing to determine whether a process or treatment has an effect on the population of interest or whether two groups are different from one another | |
what is tactical asset allocation taa | tactical asset allocation is an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing anomalies or strong market sectors this strategy allows portfolio managers to create extra value by taking advantage of certain situations in the marketplace it is a moderately active strategy since managers return to the portfolio s original asset mix once reaching the desired short term profits tactical asset allocation taa basicsto understand tactical asset allocation one must first understand strategic asset allocation a portfolio manager may create an investor policy statement ips to set the strategic mix of assets for inclusion in the client s holdings the manager will look at many factors such as the required rate of return acceptable risk levels legal and liquidity requirements taxes time horizon and unique investor circumstances the percentage of weighting that each asset class has over the long term is known as the strategic asset allocation this allocation is the mix of assets and weights that help an investor reach their specific goals the following is a simple example of typical portfolio allocation and the weight of each asset class the usefulness of tactical asset allocationtactical asset allocation is the process of taking an active stance on the strategic asset allocation itself and adjusting long term target weights for a short period to capitalize on the market or economic opportunities for example assume that data suggests that there will be a substantial increase in demand for commodities over the next 18 months it may be prudent for an investor to shift more capital into that asset class to take advantage of the opportunity while the portfolio s strategic allocation will remain the same the tactical allocation may then become tactical shifts may also come within an asset class assume the 45 strategic allocation of stocks consists of 30 large cap and 15 small cap holdings if the outlook for small cap stocks does not look favorable it may be a wise tactical decision to shift the allocation within stocks to 40 large cap and 5 small cap for a short time until conditions change usually tactical shifts range from 5 to 10 though they may be lower in practice it is unusual to adjust any asset class by more than 10 tactically this large adjustment would show a fundamental problem with the construction of the strategic asset allocation tactical asset allocation is different from rebalancing a portfolio during rebalancing trades are made to bring the portfolio back to its desired strategic asset allocation tactical asset allocation adjusts the strategic asset allocation for a short time with the intention of reverting to the strategic allocation once the short term opportunities disappear types of tactical asset allocationtaa strategies may be either discretionary or systematic in a discretionary taa an investor adjusts asset allocation according to market valuations of the changes in the same market as the investment an investor with substantial stock holdings for instance may want to reduce these holdings if bonds are expected to outperform stocks for a period unlike stock picking tactical asset allocation involves judgments on entire markets or sectors consequently some investors perceive taa as supplemental to mutual fund investing conversely a systematic tactical asset allocation strategy uses a quantitative investment model to take advantage of inefficiencies or temporary imbalances among different asset classes these shifts use a basis of known financial market anomalies or inefficiencies backed by academic and practitioner research real world exampleforty six percent of respondents in a survey of smaller hedge funds endowments and foundations were found to use tactical asset allocation techniques to beat the market by riding market trends | |
what is the taft hartley act | the taft hartley act is a 1947 u s federal law that extended and modified the 1935 wagner act it prohibits certain union practices and requires disclosure of certain financial and political activities by unions 1 the bill was initially vetoed by president truman but congress overrode the veto understanding the taft hartley actthe labor management relations act lmra commonly known as the taft hartley act amended the 1935 national labor relations act nlra or wagner act congress passed the taft hartley act in 1947 overriding president harry truman s veto union critics at the time called it the slave labor bill but the republican controlled congress encouraged by the business lobby saw it as necessary to counter union abuses to end a string of large scale strikes that broke out after the end of world war ii and to suppress communist influence in the labor movement the taft hartley act like the wagner act before it does not cover domestic help or farmworkers the taft hartley act key amendments and changestaft hartley outlined six unfair practices by labor unions and provided remedies in the form of amendments for protecting employees from harm resulting from these practices previously the wagner act had only addressed unfair labor practices perpetrated by employers in 1947 president harry truman amended parts of the nlra when he passed the taft hartley act this act created current right to work laws which allow states to prohibit compulsory membership in a union as a condition for employment in the public and private sectors of the country 1in february 2021 congress re introduced the national right to work act giving employees nationwide a choice to opt out of joining or paying dues to unions 2 the act was also introduced in 2019 and 2017 but stalled in march 2021 the united states house of representatives passed the protecting the right to organize act pro act the pro union legislation overrides right to work laws and would make it easier to form unions 3 as of november 2022 the pro act of 2021 has not been voted upon in congress the following states have right to work laws alabama arizona arkansas kansas florida georgia idaho indiana iowa kentucky louisiana michigan mississippi nebraska nevada north carolina north dakota oklahoma south carolina south dakota tennessee texas utah virginia west virginia wisconsin and wyoming 4 the most recent state to enact legislation was wisconsin in 2015 5the taft hartley act also made changes to union election rules 1 these changes excluded supervisors from bargaining groups and gave special treatment to certain professional employees the taft hartley act also created four new types of elections one gave employers the right to vote on union demands the other three gave employees the right to hold elections on the status of incumbent unions to determine whether a union has the power to enter into agreements for employees and to withdraw union representation after it s granted in 1951 congress repealed the provisions governing union shop elections 1 | |
why was taft hartley act passed | the taft hartley act s purpose was to regulate labor unions and restrict what unions can do during periods of national emergency the act prohibits unions from engaging in several unfair practices | |
what did the taft hartley act make illegal | the taft hartley act made a number of different union practices prohibited these practices include jurisdictional strikes wildcat strikes political strikes solidarity strikes and secondary boycotts it also outlawed discrimination against nonunion members by union hiring halls and closed shops | |
is the taft hartley act still in effect | the taft hartley act was vetoed by president harry s truman in 1947 still the act was enacted by the 80th u s congress after receiving support from both congressional representatives from both the democrat and republican parties the act continues to be strongly opposed by many though the act remains in effect the bottom lineenacted in 1947 the taft hartley act was intended to protect employee rights by unfair practices by unions the act prohibits unions from performing certain practices and requires disclosure of certain activities the act has many detractors who feel the act has hurt labor laws and decrease worker rights | |
tag along rights also known as co sale rights act as a protective shield for minority shareholders they allow these smaller stakeholders to join or tag along when a majority shareholder sells their stake ensuring they can exit on the same terms on the flip side drag along rights empower majority shareholders to force or drag minority shareholders into a sale potentially against their wishes | understanding tag along rightstag along rights are prenegotiated rights that a minority shareholder has in a company s stock these rights allow a minority shareholder to sell their share if a majority shareholder is negotiating a sale for their stake tag along rights are prevalent in startup companies and other private firms and have upside potential tag along rights give minority shareholders the ability to capitalize on a deal that a larger shareholder often a financial institution with substantial pull puts together large shareholders such as venture capital firms are usually more able to find buyers and negotiate payment terms tag along rights therefore offer minority shareholders greater liquidity private equity shares are hard to sell but majority shareholders can often ease purchases and sales on the secondary market 1under most states laws for corporations majority shareholders owe a fiduciary duty to minority shareholders meaning they must deal with minority shareholders honestly and in good faith advantages and disadvantages of tag along rightsone of the most basic advantages of using tag along rights is that it gives the business minority shareholders including sometimes employees given stock ownership financial and legal protection when the company is being sold when a sale is proposed minority shareholders typically don t possess enough bargaining power to properly negotiate for a better deal tag along rights benefit minority shareholders because they re able to receive the same benefits the majority shareholders bargain for 2the flip side of this coin is that tag along rights could discourage majority shareholders from investing in the company after all tag along rights force the company s management and large shareholders to make concessions that will only benefit the minority shareholders in other words some investors will simply not select a company that makes less than favorable obligations of them example of tag along rightsco founders angel investors and venture capital firms often rely on tag along rights for example suppose three co founders launch a tech company the business is going well and the co founders believe they have proved the concept enough to scale the co founders then seek outside investment in a seed round a private equity angel investor sees the company s value and offers to buy 60 of it requiring a large amount of equity to compensate for the risk of investing in the small company the co founders accept the investment making the angel investor the largest shareholder the investor is tech focused and has significant relationships with some of the larger public technology companies the startup co founders know this so they negotiate tag along rights in their investment agreement the business grows consistently over the next three years and the angel investor happy with the investment returns looks for a buyer of their equity among the major tech companies the investor finds a buyer who wants to buy the entire 60 stake for 30 a share the tag along rights negotiated by the three co founders give them the ability to include their equity shares in the sale the minority investors are entitled to the same price and terms as the majority investor thus using their rights the three co founders effectively sell their shares for 30 each tag along rights vs drag along rightstag along or co sale rights are the opposite of drag along rights the major difference is that the former enables and protects minority shareholders while the latter enables and protects majority shareholders tag along rights allow minority shareholders to participate in a sale initiated by the majority shareholder permitting them to sell their shares at the same price and terms and preventing them from being left behind or forced to sell at a lower price meanwhile drag along rights favor majority shareholders 3 when a majority shareholder decides to sell their shares they can exercise drag along rights to force the minority shareholders to also sell their shares to the same buyer this is a way to ensure the majority shareholder can deliver 100 of the company s shares to a buyer purpose protect minority shareholderseffect minority shareholders can sell at same price and termstrigger majority shareholder decides to sellimpact ensures minority shareholders can participate in sale and receive a fair pricenegotiation points sale of all or part shares notice and timing execution and enforcementpurpose enable majority shareholder to force minority shareholders to selleffect minority shareholders are forced to sell at same price and termstrigger majority shareholder decides to sell and critical mass of shareholders wish to sellimpact ensures majority shareholder can deliver 100 of share capital to buyernegotiation points threshold percentage preemption rights consideration notice periodsthe terms when negotiating tag along rights and drag along rights are quite different when negotiating tag along rights there are a few key considerations these are the negotiating points for these rights | |
how are drag along or tag along rights different from preemptive rights | while drag along and tag along rights focus on the sale of shares preemptive rights are designed to protect shareholders from dilution preemptive rights give existing shareholders the chance to buy more shares before the company offers them to new investors so they can keep the same ownership percentage 4 | |
how do appraisal rights affect minority shareholders | appraisal rights allow minority shareholders to demand a fair valuation and compensation for their shares if they disagree with certain corporate actions such as mergers or consolidations these rights offer a form of protection ensuring that minority shareholders receive equitable treatment and are not forced to accept unfavorable terms 5 | |
what are shareholder information rights | information rights entitle shareholders to access essential company information such as financial statements annual reports and board meeting minutes these rights improve transparency and allow shareholders to make informed decisions about their investments check on company performance and hold management accountable for their actions the bottom linetag along and drag along rights are essential mechanisms in shareholder agreements designed to protect minority shareholders and make transactions smoother tag along rights ensure that minority shareholders have the chance to participate in a sale initiated by majority shareholders while receiving the same terms and conditions by contrast drag along rights enable majority shareholders to compel minority shareholders to join in the sale of the company this provision confirms that potential buyers can acquire 100 ownership without facing the complications of fragmented shareholdings thus making the company more attractive to prospective purchasers together these rights are meant to balance the interests of majority and minority shareholders promoting fairness and stability in corporate transactions | |
what is the taguchi method of quality control | the taguchi method of quality control is an approach to engineering that emphasizes the roles of research and development r d and product design and development in reducing the occurrence of defects and failures in manufactured goods this method developed by japanese engineer and statistician genichi taguchi considers design to be more important than the manufacturing process in quality control and aims to eliminate variances in production before they can occur understanding the taguchi method of quality controlthe taguchi method gauges quality as a calculation of loss to society associated with a product in particular loss in a product is defined by variations and deviations in its function as well as detrimental side effects that result from the product loss from variation in function is a comparison of how much each unit of the product differs in the way it operates the greater that variance the more significant the loss in function and quality this could be represented as a monetary figure denoting how usage has been impacted by defects in the product example of the taguchi method of quality controlif the product is a precision drill that must consistently drill holes of an exact size in all materials it is used on then part of its quality is determined by how much the units of the product differ from those standards with the taguchi method of quality control the focus is to use research and design to ensure that every unit of the product will closely match those design specifications and perform exactly as designed loss from detrimental side effects on society speaks to whether or not the design of the product could inherently lead to an adverse impact for example if operating the precision drill could cause injury to the operator because of how it is designed there is a loss of quality in the product under the taguchi method work done during the design stage of creation would aim to minimize the possibility that the drill is crafted in a way that could cause injuries to the operator from a higher perspective the taguchi method would also strive to reduce the cost to society to use the product such as by designing goods to be more efficient in their operation rather than generate waste for instance the drill could be designed to minimize the need for regular maintenance history of the taguchi method of quality controlgenichi taguchi a japanese engineer and statistician began formulating the taguchi method while developing a telephone switching system for electrical communication laboratory a japanese company in the 1950s using statistics he aimed to improve the quality of manufactured goods 1by the 1980s taguchi s ideas began gaining prominence in the western world leading him to become well known in the united states having already enjoyed success in his native japan big name global companies such as toyota motor corp ford motor co boeing co and xerox holdings corp have adopted his methods criticism of the taguchi method of quality controltaguchi s methods have not always been well received by western statisticians one of the biggest accusations against his quality control methodology is that it is unnecessarily complicated in fact some skeptics even claim that a doctorate in mathematics is required to understand it | |
what is tail risk | tail risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution tail risks include events that have a small probability of occurring and occur at both ends of a normal distribution curve understanding tail risktraditional portfolio strategies typically follow the idea that market returns follow a normal distribution however the concept of tail risk suggests that the distribution of returns is not normal but skewed and has fatter tails the fat tails indicate that there is a probability which may be larger than otherwise anticipated that an investment will move beyond three standard deviations distributions that are characterized by fat tails are often seen when looking at hedge fund returns for example the chart below depicts three curves of increasing right skewness with fat tails to the downside and which differ from the symmetrical bell curve shape of the normal distribution normal distributions and asset returns | |
when a portfolio of investments is put together it is assumed that the distribution of returns will follow a normal distribution under this assumption the probability that returns will move between the mean and three standard deviations either positive or negative is approximately 99 7 this means that the probability of returns moving more than three standard deviations beyond the mean is 0 3 | the assumption that market returns follow a normal distribution is key to many financial models such as harry markowitz s modern portfolio theory mpt and the black scholes merton option pricing model 12 however this assumption does not properly reflect market returns and tail events have a large effect on market returns tail risk is highlighted in nassim taleb s bestselling financial book the black swan 3other distributions and their tailsstock market returns tend to follow a normal distribution that has excess kurtosis kurtosis is a statistical measure that indicates whether observed data follow a heavy or light tailed distribution in relation to the normal distribution the normal distribution curve has a kurtosis equal to three and therefore if a security follows a distribution with kurtosis greater than three it is said to have fat tails a leptokurtic distribution or heavy fat tailed distribution depicts situations in which extreme outcomes have occurred more than expected compared to the normal distribution these curves have excess kurtosis therefore securities that follow this distribution have experienced returns that have exceeded three standard deviations beyond the mean more than 0 3 of the observed outcomes the graph below depicts the normal distribution in green as well as increasingly leptokurtic curves in red and blue which exhibit fat tails thoughtcohedging against tail riskalthough tail events that negatively impact portfolios are rare they may have large negative returns therefore investors should hedge against these events hedging against tail risk aims to enhance returns over the long term but investors must assume short term costs investors may look to diversify their portfolios to hedge against tail risk for example if an investor is long exchange traded funds etfs that track the standard poor s 500 index s p 500 the investor could hedge against tail risk by purchasing derivatives on the cboe volatility index which is inversely correlated to the s p 500 4 | |
what is takaful | takaful is a type of islamic insurance wherein members contribute money into a pool system to guarantee each other against loss or damage takaful branded insurance is based on sharia or islamic religious law which explains how individuals are responsible to cooperate and protect one another takaful policies cover health life and general insurance needs takaful insurance companies were introduced as an alternative to those in the commercial insurance industry which are believed to go against islamic restrictions on riba interest al maisir gambling and al gharar uncertainty principles all of which are outlawed in sharia understanding takafulall parties or policyholders in a takaful arrangement agree to guarantee each other and make contributions to a pool or mutual fund instead of paying premiums the pool of collected contributions creates the takaful fund each participant s contribution is based on the type of coverage they require and their personal circumstances a takaful contract specifies the nature of the risk and the length of the coverage similar to that of a conventional insurance policy the takaful fund is managed and administered on behalf of the participants by a takaful operator who charges an agreed upon fee to cover costs much like a conventional insurance company costs include sales and marketing underwriting and claims management any claims made by participants are paid out of the takaful fund and any remaining surpluses after making provisions for the likely cost of future claims and other reserves belong to the participants in the fund not the takaful operator those funds may be distributed to the participants as cash dividends or distributions or via a reduction in future contributions an islamic insurance company operating a takaful fund must operate under the following principles special considerationsaccording to allied market research the global takaful insurance market was valued at 24 85 billion in 2020 and is projected to reach 97 17 billion by 2030 growing at a cagr of 14 6 from 2021 to 2030 2since 60 of the global muslim population is comprised of young muslims less than 25 years of age this demographic can represent a sizeable customer base as their wealth grows over time 3some of the largest names in the takaful market according to a research and markets report were believed to be the following takaful vs conventional insurancemost islamic jurists conclude that conventional insurance is unacceptable in islam because it does not conform with sharia for the following reasons | |
take home pay is the net amount of income received after the deduction of taxes benefits and voluntary contributions from a paycheck it is the difference resulting from the subtraction of all deductions from gross income deductions include federal state and local income tax social security and medicare contributions retirement account contributions and medical dental and other insurance premiums the net amount or take home pay is what the employee receives | the basics of take home paythe net pay amount listed on a paycheck is the take home pay paychecks or pay statements report the income attributable to a given pay period pay statements list both earnings and deductions common deductions are income tax federal insurance contributions act fica and medicare tax withholdings there may also be less common deductions such as court ordered child support or alimony and uniform upkeep cost the net pay is the amount remaining after all deductions are taken 1 many paychecks also have cumulative fields that show the year to date earnings withholdings and deduction amounts gross pay is often shown as a line item on a pay statement if it is not shown you may calculate it either by dividing the annual salary by the number of pay periods or by multiplying the hourly wage by the number of hours worked in a pay period for example an employee earning an annual salary of 50 000 which is paid every two weeks will have gross pay of 1 923 08 50 000 26 pay periods per paycheck significance of take home pay vs gross paytake home pay can differ significantly from gross pay as an example an employee paid an hourly wage of 15 hour who works 80 hours per pay period has a gross pay of 1 200 15 x 80 1200 but if after deductions the employee s take home pay is 900 the employee is earning 11 25 hour as a take home rate 900 80 11 25 as seen this employee s take home pay rate differs significantly from the gross pay rate many credit rating and lending agencies will consider take home pay when lending money for large purchases such as vehicles and property | |
what is take or pay | take or pay is a provision in a contract stating that a buyer has the obligation of either taking delivery of goods from a seller or paying a specified penalty amount to the seller for not taking them take or pay provisions benefit both parties by sharing risk and they benefit society by facilitating trade and reducing transaction costs understanding take or paya take or pay provision is generally included between a company and its supplier it requires the purchasing firm to take a stipulated amount of goods from the supplier by a certain date at the risk of paying a fine to the supplier if it doesn t 1this sort of agreement benefits the supplier by reducing the risk of losing money on any capital spent to produce whatever product it is trying to sell it benefits the buyer by allowing it to ask for a lower negotiated price elsewhere the provision can be an overall net gain to the economy because the sharing of risk by the buyer and supplier facilitates both a transaction that might otherwise not occur and the accompanying gains from trade for both parties take or pay provisions are very common in the energy sector 2 this is because of the substantial overhead costs for suppliers to provide energy units such as natural gas or crude oil and the volatility of energy prices the overhead costs of providing crude oil as compared with giving a haircut for example are very high take or pay contracts provide energy suppliers an incentive to invest capital upfront because they have a measure of assurance that they ll be able to sell their products without a take or pay provision the supplier bears all the risk that the buyer s ongoing need for the energy might dry up or that a price swing might induce the buyer to break the contract the supplier could also be subject to what is termed a holdup by the buyer if it has made overhead investments that will lose value if the buyer does not buy the output as agreed holdups are a type of transaction cost identified by economist oliver williamson that occurs with this kind of relationship specific assets 34examples of take or payfirm a contracts to purchase 200 million cubic feet of natural gas from firm b over 10 years at an agreed amount of 20 million per year firm a finds however that this year it will only need 18 million firm a does not purchase the full 20 million and is instead subjected to a fee that was agreed to in the original contract the fee is defined in the contract and is usually less than the full purchase price in this case a reasonable fee might be 50 of the contract price of those two million cubic feet alternatively with world gas prices having fallen significantly during the course of the contract firm a decides to decline the delivery entirely and instead purchase gas from another supplier firm c at a new lower price instead it pays the agreed penalty to firm b it is in firm a s interest to do this if the total cost of the gas from firm c plus 50 of the original negotiated price with firm b is still less than the originally negotiated price to take firm b s gas in both cases each party benefits from the take or pay provision firm a gets only the amount of gas it needs at a lower total cost than it would have paid firm b while firm b at least receives the penalty price from firm a rather than in the first instance losing the full cost of two million cubic feet of gas or in the latter case getting nothing at all when firm a switched suppliers | |
what is take or pay | a take or pay clause in a contract stipulates that a buyer will take an agreed upon amount of a commodity from a seller on a certain date or pay a set penalty fee if it does not the fee is generally less than the full purchase price of the commodity who benefits from take or pay everyone benefits the supplier has its risk of spending capital to produce its commodity reduced because it knows it will get at least a certain amount of money for it the buyer benefits because it is free to search for a lower price for the commodity elsewhere the economy benefits because the provision facilitates trade and reduces transaction costs | |
what is a holdup | a holdup occurs when a buyer has information on the capital costs of its supplier for making the commodity being purchased the supplier s investment may in part be based on its relationship with the buyer customizing it particularly for the buyer in effect the buyer shares in the supplier s gross return on the investment the supplier may be said to be held up if the buyer makes the decision not to purchase the commodity because it does not like the price after the investment is already made the bottom linetake or pay allows buyers and sellers to share risk in a transaction if the buyer does not buy the goods or does not buy all the goods the contract stipulated the seller receives a penalty fee this also allows the buyer additional flexibility if economic conditions change between the time of the agreement and the date when the purchase is due to be made | |
what is a take out loan | a take out loan is a type of long term financing that replaces short term interim financing such loans are usually mortgages that are collateralized with assets and have fixed payments that are amortizing take out lenders who underwrite these loans are normally large financial conglomerates such as insurance or investment companies while banks or savings and loan companies usually issue short term loans such as a construction loan understanding take out loansa borrower must complete a full credit application to obtain approval for a take out loan which is used to replace a previous loan often one with a shorter duration and higher interest rate all types of borrowers can get a take out loan from a credit issuer to pay off past debts take out loans can be used as a long term personal loan to pay off previous outstanding balances with other creditors they are most commonly used in real estate construction to help a borrower replace a short term construction loan and obtain more favorable financing terms the take out loan s terms can include monthly payments or a one time balloon payment at maturity take out loans are an important way of stabilizing your financing by replacing a short term higher interest rate loan with a long term lower interest rate one | |
how do businesses use take out loans | construction projects on all types of real estate property require a high initial investment yet they are not backed by a fully completed piece of property therefore construction companies typically must obtain high interest short term loans to complete the initial phases of property development construction companies may choose to obtain a delayed draw term loan which can be based on various construction milestones being met before principal balances are dispersed they also have the option of obtaining a short term loan many short term loans will provide the borrower with a principal payout that requires payment at a future time often the borrowing terms allow the borrower to make a one time payoff at the loan s maturity this provides an optimal opportunity for a borrower to obtain a take out loan with more favorable terms example of a take out loanassume xyz company has received approval for plans to build a commercial real estate office building over 12 to 18 months it may obtain a short term loan for the financing it needs to build the property with full repayment required in 18 months the property plans are achieved ahead of schedule and the building is completed in 12 months xyz now has more negotiating power because the fully complete property is able to be used as collateral thus it decides to obtain a take out loan which provides it with the principal to pay off the previous loan six months early the new loan allows xyz to make monthly payments over 15 years at an interest rate that is half of that of the short term loan with the take out loan it can repay its short term loan six months early saving on interest costs xyz now has 15 years to pay its new take out loan at a much lower rate of interest using the completed property as collateral |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.