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how do you calculate trailing twelve months ttm | trailing twelve months calculations will depend on which financial metric is being considered in general ttm calculations will either 1 add up the figures from the previous 12 months or four quarters as a sum or 2 take the average or weighted average of the previous 12 months figures | |
is trailing 12 months the same as last twelve months | yes last 12 months ltm is another term for trailing 12 months ttm | |
what is a trailing 12 months profit loss | ttm p l keeps a running tab of how well an investment or project has performed over the prior twelve month period it takes the monthly or quarterly returns over that time period and reports a weighted average profit or loss figure the bottom linetrailing 12 month ttm figures report metrics based on the last 12 months or four quarters to date on a rolling basis in addition to measuring recent trends or annual performance ttm financial metrics are frequently used to compare the relative performance of similar companies within an industry or sector financial metrics commonly considered by looking at the last twelve months of figures include a company s sales stock returns dividend yield price earnings p e ratio and earnings per share eps | |
what is trailing 12 months ttm | trailing 12 months ttm is a term that describes the past 12 consecutive months of a company s performance data used for reporting financial figures these figures represent a more current picture of a business s financial performance than using its annual filings and reports which at times can contain information that is nearly one year old the 12 months studied do not necessarily coincide with a fiscal year ending period ttm figures are produced for various metrics including earnings eps p e and yield investopedia mira norianunderstanding trailing 12 months ttm analysts and investors use ttm to dissect a wide swath of financial data such as balance sheet figures income statements and cash flows the methodology for calculating ttm data may differ from one financial statement to the next in the equity research space some analysts report earnings quarterly while others do so annually but investors who seek daily information about stock prices and other current data may look to ttms as more relevant measures because they re more current and seasonally adjusted ttm figures can also be used to calculate financial ratios the price earnings ratio is often called the p e ttm and is calculated as the stock s current price divided by a company s trailing 12 month earnings per share eps much of fundamental analysis involves comparing a measurement against a like measurement from a prior term to decipher how much growth was realized for example although the company that reports 1 billion in revenues is undoubtedly impressive this achievement is even more notable if that same company s revenues increased from 500 million to 1 billion within the last 12 months this marked improvement provides a clear snapshot of the company s growth trajectory | |
where to find the ttm measures | the 12 month measure is typically reported on a company s balance sheet which is customarily updated every quarter to comply with generally accepted accounting principles gaap however some analysts take an average of the first and last quarters line items on the cash flow statement e g working capital capital expenditures and dividend payments should be treated based on the feeding financial statement for example working capital is compiled from balance sheet line items which are averaged however depreciation is deducted from income on a quarterly basis so analysts look at the last four quarters as reported on the income statement ttm revenuettm revenue describes the revenue that a company earns over the trailing 12 months ttm of business this data is instrumental in determining whether or not a company has experienced meaningful top line growth and can pinpoint precisely where that growth is coming from however this figure is often overshadowed by a company s profitability and capability to generate earnings before interest tax depreciation and amortization ebitda to calculate ttm revenue simply add up the previous four quarters of revenues so if xyz corp generated 29 4 billion in revenue in q1 33 5 billion in q4 30 billion in q3 and 21 9 billion in q2 ttm revenue would be ttm yieldused to analyze mutual fund or exchange traded fund etf performance ttm yield is the percentage of income a portfolio has returned to investors over the last 12 months this number is calculated by taking the weighted average of the yields of all holdings housed within a fund whether they be stock bonds or other funds ttm yield can also refer to the dividend yield for a stock paid out over the prior 12 months for instance if a company with 100 stock paid a 0 10 quarterly dividend over the past four quarters the ttm yield would be 0 10 0 10 0 10 0 10 100 0 4 ttm price earning ratiottm is also used to examine the trailing p e ratio of a company s stock trailing p e is a relative valuation multiple based on the last 12 months of actual earnings it is calculated by taking the current stock price and dividing it by the ttm earnings per share eps trailing p e can be contrasted with the forward p e which instead uses projected future earnings to calculate the price to earnings ratio | |
how do you calculate trailing twelve months ttm | trailing twelve months calculations will depend on which financial metric is being considered in general ttm calculations will either 1 add up the figures from the previous 12 months or four quarters as a sum or 2 take the average or weighted average of the previous 12 months figures | |
is trailing 12 months the same as last twelve months | yes last 12 months ltm is another term for trailing 12 months ttm | |
what is a trailing 12 months profit loss | ttm p l keeps a running tab of how well an investment or project has performed over the prior twelve month period it takes the monthly or quarterly returns over that time period and reports a weighted average profit or loss figure the bottom linetrailing 12 month ttm figures report metrics based on the last 12 months or four quarters to date on a rolling basis in addition to measuring recent trends or annual performance ttm financial metrics are frequently used to compare the relative performance of similar companies within an industry or sector financial metrics commonly considered by looking at the last twelve months of figures include a company s sales stock returns dividend yield price earnings p e ratio and earnings per share eps | |
what is a trailing stop | a trailing stop is a modification of a typical stop order that can be set at a defined percentage or dollar amount away from a security s current market price for a long position an investor places a trailing stop loss below the current market price for a short position an investor places the trailing stop above the current market price a trailing stop is designed to protect gains by enabling a trade to remain open and continue to profit as long as the price is moving in the investor s favor the order closes the trade if the price changes direction by a specified percentage or dollar amount a trailing stop is typically placed at the same time the initial trade is placed although it may also be placed after the trade investopedia xiaojie liuunderstanding a trailing stoptrailing stops only move in one direction because they are designed to lock in profit or limit losses if a 10 trailing stop loss is added to a long position a sell trade will be issued if the price drops 10 from its peak price after purchase the trailing stop only moves up once a new peak has been established once the trailing stop has moved up it cannot move back down 1a trailing stop is more flexible than a fixed stop loss order as it automatically tracks the stock s price direction and does not have to be manually reset like the fixed stop loss investors can use trailing stops in any asset class assuming the broker provides that order type for the market being traded trailing stops can be set as limit orders or market orders trading with trailing stop ordersthe key to using a trailing stop successfully is to set it at a level that is neither too tight nor too wide placing a trailing stop loss that is too tight could mean the trailing stop is triggered by normal daily market movement and thus the trade has no room to move in the trader s direction a stop loss that is too tight will usually result in a losing trade albeit a small one a trailing stop that is too large will not be triggered by normal market movements but it does mean the trader is taking on the risk of unnecessarily large losses or giving up more profit than they need to while trailing stops lock in profit and limit losses establishing the ideal trailing stop distance is difficult there is no ideal distance because markets and the way that stocks move are always changing despite this trailing stops are effective tools every exit method has its pros and cons the ideal trailing stop loss will change over time during more volatile periods a wider trailing stop is a better bet during quieter times or in a very stable stock a tighter trailing stop loss may be effective that said once a trailing stop loss is set for an individual trade it should be kept as is a common trading mistake is to increase risk once in a trade in order to avoid losses this is called loss aversion disposition effect in the context of markets and it can cripple a trading account quickly 2example of a trailing stopassume you bought alphabet inc goog at 100 by looking at prior advances in the stock you see that the price will often experience a pullback of 5 to 8 before moving higher again these prior movements can help establish the percentage level to use for a trailing stop choosing 3 or even 5 may be too tight even minor pullbacks tend to move more than this which means the trade is likely to be stopped out by the trailing stop before the price has a chance to move higher choosing a 20 trailing stop is excessive based on the recent trends the average pullback is about 6 with bigger ones near 8 a better trailing stop loss would be 10 to 12 this gives the trade room to move but also gets the trader out quickly if the price drops by more than 12 a 10 to 12 drop is larger than a typical pullback which means something more significant could be going on mainly this could be a trend reversal instead of just a pullback using a 10 trailing stop your broker will execute a sell order if the price drops 10 below your purchase price this is 90 if the price never moves above 100 after you buy your stop loss will stay at 90 if the price reaches 101 your stop loss will move up to 90 90 which is 10 below 101 if the stock moves up to 125 your broker will execute an order to sell if the price falls to 112 50 if the price starts falling from 125 and does not go back up your trailing stop order stays at 112 50 and if the price drops to that price the broker will enter a sell order on your behalf | |
why should i use a trailing stop | traders and investors can enhance the efficacy of a stop loss by pairing it with a trailing stop which is a trade order where the stop loss price isn t fixed at a single absolute dollar amount but is rather set at a certain percentage or dollar amount below the current market price that is constantly revised as the market moves up for a long position trailing stops may be used with stock options and futures exchanges that support traditional stop loss orders 1 | |
how can market psychology help me with trailing stops | during momentary price dips it s crucial to resist the impulse to reset your trailing stop or else your effective stop loss may end up lower than expected by the same token reining in a trailing stop loss is advisable when you see momentum peaking in the charts especially when the stock is hitting a new high the bottom linedeciding how to determine the exit points of your positions depends on how conservative you are as a trader if you tend to be aggressive you may determine your profitability levels and acceptable losses by means of a less precise approach like the setting of trailing stops according to fundamental criteria shrewd traders always maintain the option of closing out a position at any time by submitting a sell order at the market | |
what are tranches | tranches are segments created from a pool of securities usually debt instruments such as bonds or mortgages that are divided up by risk time to maturity or other characteristics in order to be marketable to different investors each portion or tranche of a securitized or structured product is one of several related securities offered at the same time but with varying risks rewards and maturities to appeal to a diverse range of investors tranche is a french word meaning slice or portion they are commonly found in mortgage backed securities mbs or asset backed securities abs investopedia jake shiunderstanding tranchestranches in structured finance are a fairly recent development spurred by the increased use of securitization to divide up sometimes risky financial products with steady cash flows to then sell these divisions to other investors the discrete tranches of a larger asset pool are usually defined in transaction documentation and assigned different classes of notes each with a different bond credit rating senior tranches typically contain assets with higher credit ratings than junior tranches the senior tranches have first lien on the assets they re in line to be repaid first in case of default junior tranches have a second lien or no lien at all examples of financial products that can be divided into tranches include bonds loans insurance policies mortgages and other debts tranches in mortgage backed securitiesa tranche is a common financial structure for securitized debt products such as a collateralized debt obligation cdo which pools together a collection of cash flow generating assets such as mortgages bonds and loans or a mortgage backed security an mbs is made of multiple mortgage pools that have a wide variety of loans from safe loans with lower interest rates to risky loans with higher rates each specific mortgage pool has its own time to maturity which factors into the risk and reward benefits therefore tranches are made to divide up the different mortgage profiles into slices that have financial terms suitable for specific investors for example a collateralized mortgage obligation cmo offering a partitioned mortgage backed securities portfolio might have mortgage tranches with one year two year five year and 20 year maturities all with varying yields if an investor wants to buy an mbs they can choose the tranche type most applicable to their appetite for return and aversion to risk a z tranche is the lowest ranked tranche of a cmo in terms of seniority its owners are not entitled to any coupon payments receiving no cash flow from underlying mortgages until the more senior tranches are retired or paid off investors receive monthly cash flow based on the mbs tranche in which they invested they can either try to sell it and make a quick profit or hold onto it and realize small but long term gains in the form of interest payments these monthly payments are bits and pieces of all the interest payments made by homeowners whose mortgage is included in a specific mbs investment strategy in choosing tranchesinvestors who desire to have long term steady cash flow will invest in tranches with a longer time to maturity investors who need a more immediate but more lucrative income stream will invest in tranches with less time to maturity all tranches regardless of interest and maturity allow investors to customize investment strategies to their specific needs conversely tranches help banks and other financial institutions attract investors across many different profile types tranches add to the complexity of debt investing and sometimes pose a problem to uninformed investors who run the risk of choosing tranches unsuitable to their investment goals tranches can also be miscategorized by credit rating agencies if they are given a higher rating than deserved it can cause investors to be exposed to riskier assets than they intended to be such mislabeling played a part in the mortgage meltdown of 2007 and the subsequent financial crisis tranches containing junk bonds or sub prime mortgages below investment grade assets were labeled aaa or the equivalent either through incompetence carelessness or as some charged outright corruption on the agencies part tranche lawsuits in the 2007 2009 financial crisisafter the financial crisis of 2007 09 an explosion of lawsuits occurred against issuers of cmos cdos and other debt securities and among investors in the products themselves all of which was dubbed tranche warfare in the press an april 2008 story in the financial times noted that investors in the senior tranches of failed cdos were taking advantage of their priority status to seize control of assets and cut off payments to other debt holders cdo trustees such as deutsche bank and wells fargo filed suits to ensure all tranche investors continued to receive funds 1and in 2009 the manager of greenwich conn based hedge fund carrington investment partners filed a lawsuit against the mortgage servicing company american home mortgage servicing the hedge fund held junior tranches of mortgage backed securities that contained loans made on foreclosed properties that american home was selling for allegedly low prices thus crippling the tranche s yield carrington argued in the complaint that its interests as a junior tranche holder were in line with those of the senior tranche holders 2 | |
what are the three types of tranches | pooled financial securities are generally broken into three tranches senior mezzanine and junior each tranche has a different level of risk and therefore a different level of return senior tranches have the least risk and the lowest returns while junior tranches have the highest risk and the highest returns mezzanine tranches sit between the two | |
what is an example of a tranche | an example of a tranche is as follows hundreds of mortgages are pooled into a security a mortgage backed security mbs the mortgages in this security all have different credit profiles based on the holder of the mortgage some have excellent credit profiles and the mortgages therefore have low interest rates some of the borrowers have bad credit profiles and their mortgages have high interest rates these different mortgages are broken down into tranches each tranche represents a different credit profile the low risk mortgages go into the senior tranche whereas the high risk mortgages go into the junior tranche an investor can choose which tranche they would like to invest in based on their risk profile | |
is a cmo a cdo | a collateralized mortgage obligation cmo is a collateralized debt obligation cdo constructed of underlying mortgages cdos are a pooled investment security of any fixed income asset but are most often made up of loans a cmo is specifically a cdo where the loans are mortgages | |
what is a aaa tranche | most pooled fixed income investments consist of tranches each assigned with a credit rating tranches assigned a aaa rating are of the best quality meaning they are the least risky but also will have the lowest return sometimes a large corporation project or sovereign government may require large amounts of funds banks may work together to offer funds and create pro rata tranches pro rata tranches will also have a credit rating assigned to it the bottom linetranches allow investors to choose the level of risk and return when investing in pooled securities those seeking higher returns will opt for higher risk tranches such as those containing below investment grade securities those seeking safer returns will opt for investment grade tranches | |
what is a transaction | a transaction is a completed agreement between a buyer and a seller to exchange goods services or financial assets in return for money the term is also commonly used in corporate accounting in business bookkeeping this plain definition can get tricky a transaction may be recorded by a company earlier or later depending on whether it uses accrual accounting or cash accounting understanding transactionsa sales transaction between a buyer and a seller is relatively straightforward person a pays person b in exchange for a product or service when they agree on the terms money is exchanged for the good or service and the transaction is complete transactions can be more complex in the accounting world because businesses may make a deal today which won t be settled until a future date or they may have revenues or expenses that are known but not yet due third party transactions can also complicate the process whether a business records income and expense transactions using the accrual method of accounting or the cash method of accounting affects the company s financial and tax reporting whereas accrual accounting is used most often by businesses with an average of over 26 million over the prior three years cash accounting is used primarily by small businesses 1transactions using accrual accounting | |
when accrual accounting is used a company records income when completing a service or delivering goods if an inventory is required when accounting for a company s income and the company has gross receipts with an average of over 26 million over the prior three years the company normally uses the accrual method of accounting for sales and purchases 1 | a company selling merchandise to a customer on store credit in october records the transaction immediately as an item in accounts receivable ar even if the customer does not make a cash payment on the merchandise until december or pays in installments the transaction is recorded as income for october the same goes for goods or services the company purchases business expenses are recorded when the products or services are received supplies purchased on credit in april are recorded as expenses for april even if the business does not make a cash payment on the supplies until may if a customer buys something on credit it will immediately be recorded as a transaction if the company selling the good uses the accrual accounting method transactions using cash accountingmost small businesses especially sole proprietorships and partnerships use the cash accounting method income is recorded when cash checks or credit card payments are received from customers let s say a business sells 10 000 of widgets to a customer in march the customer pays the invoice in april the company recognizes the sale only after the cash is received in april meanwhile expenses are recorded only when a payment is made a business may purchase 500 of office supplies in may for example and pay for them in june the business recognizes the purchase when it pays the bill in june for tax reasons the cash basis of accounting is available only if a company has an average of less than 26 million over the prior three years in annual sales 1 the cash basis is easier than the accrual basis for recording transactions because no complex accounting transactions such as accruals and deferrals are necessary its drawback is that the profit of the business may vary wildly from month to month at least on paper | |
what is an ach transaction | an ach transaction is an electronic payment made between banks they are processed through the automated clearing house examples of ach transactions include direct deposits for things like your salary or tax refund and bill payments that are made online or through your bank 2 | |
how do i cancel a pending transaction | pending transactions are those that have been made but aren t posted to your account these include payments purchases pre authorized debits and any other related transactions purchases made with a debit or credit card are held for a certain period of time before they work their way through the electronic system from your bank to the recipients the transaction date it the day of the purchase or payment posting a transaction to a credit card account moves it from the pending category contact the merchant and or your bank to request a reversal if for whatever reason you want to cancel the transaction | |
how are transactions different in accounting | accounting transactions are a little different because of the way they may be recorded in the accrual method of accounting transactions are recorded once they are executed but in the cash accounting method transactions are recorded only when money is received or paid the bottom linea transaction signals a financial agreement between two parties where one benefits financially by selling goods and services to another in simple terms a transaction is completed when the goods and services change hands for money but things get a little complicated when it comes to transactions in accounting businesses that use the accrual method of accounting record transactions when they are completed in the cash method they are documented only when payments are made or received | |
what are transaction costs | transaction costs are expenses incurred when buying or selling a good or service outside the cost of the good or service itself transaction costs represent the labor required to bring a good or service to market or to connect a buyer with a seller there are entire industries dedicated to facilitating these types of exchanges transaction costs can include things like brokers commissions and spreads which are the differences between the price the dealer pays for a security and the price the buyer pays other examples are commissions paid to professionals such as real estate agents understanding transaction coststhe transaction costs to buyers and sellers are the payments that facilitators such as banks brokers and agent receive for their roles in connecting buyers and sellers for example the fees paid to a brokerage for executing a trade are a transaction cost there are also transaction costs in buying and selling real estate which include the agent s commission and closing costs such as title search fees appraisal fees and government fees another type of transaction cost is the time and labor associated with transporting goods or commodities across long distances transaction costs are important to investors because they are one of the key determinants of net returns transaction costs diminish returns and over time high transaction costs can mean thousands of dollars lost from not just the costs themselves but also because the costs reduce the amount of capital available to invest fees such as mutual fund expense ratios have the same effect different asset classes have different ranges of standard transaction costs and fees all else being equal investors should select assets whose costs are at the low end of the range for their types ongoing fees vs transaction coststhough similar in nature ongoing fees and transaction costs are technically different ongoing fees are fees that are charged periodically over the life of the product or service these fees are typically associated with products or services that require ongoing maintenance or management such as being involved in an investment fund transaction costs are fees that are charged each time a specific transaction occurs both types of fees may be percentage based on a related dollar amount or related to a fixed dollar amount this distinction is important especially when reviewing what your broker offers though you may go to great lengths to avoid transaction costs your broker may still impose quarterly ongoing fees that can not be avoided as long as your brokerage account is open in addition there may be opportunities to forgo one type of transaction cost in exchange for an ongoing fee for instance some brokers may charge an annual fee for accounts that have no or low transaction costs sometimes it is impossible to avoid transaction costs because these costs are an inherent part of being involved in a certain market or activity when that is the case you can minimize fees and maximize your net profit through the careful choice of your broker or agent elimination of transaction costs | |
when transaction costs diminish an economy becomes more efficient and more capital and labor are freed to produce wealth a shift of this nature does not come without growing pains as the labor market must adjust to its new environment | one type of transaction cost is a barrier to communication when an otherwise perfectly matched seller and buyer have absolutely zero means of communication the transaction costs of a deal are too high to be overcome a bank serves the role of the middleman by connecting savings with investments and a prosperous economy justifies the income of the bank for the transaction cost of compiling information and linking parties however new technologies have greatly reduced barriers to communication consumers no longer need large institutions and their agents to make educated purchases many industries based on facilitating these types of transactions are changing rapidly for example insurance agents are being replaced by a wide range of technology startups that run websites either selling or promoting insurance policies the easy access to information and communication that the internet provides has created fundamental shifts in many jobs such as the real estate agent stockbroker and car salesman transaction costs can change because of shifting industry norms but in some cases they are impacted by government or judicial action for example a 2024 settlement in a lawsuit against the national association of realtors nar proposed eliminating the standard 6 commission rate that was split between buyer s and seller s agents if the new rules from the settlement are formally adopted both buyers and sellers will have the option to negotiate commissions separately with their agents brokers which could create lower transaction costs in real estate purchases how compensation offers are made would also change 1with the reduction in transaction costs the effective prices of many goods and services have gone down due to a reduction in barriers to communication between everyday individuals this is seen in the consumer goods industry as well traditionally retailers and merchandisers served the role of middlemen by pairing consumers with manufacturers with the rise of e commerce transactions and direct to consumer companies however many consumer goods are available without the transaction cost of a retail markup which lowers the cost of those goods as well however this can result in other costs that consumers don t pay at brick and mortar retailers such as shipping fees for online purchases if you re not quite sure where to start when evaluating your transaction fees consider guidance from the sec regarding the best questions to ask 2example of transaction costsmutual funds are a common example of a service that comes with associated transaction costs this is often found in the form of a load fee which pays the brokers as an incentive for choosing one mutual fund over another according to fidelity the load for mutual funds ranges from 1 to 2 fidelity also notes that financial advisors may receive payment via commission or an annual percentage of your entire portfolio the annual percentage often ranges between 0 5 and 2 0 3another cost that investors must pay for a mutual fund is called a 12b 1 fee this fee may range from 0 25 to 1 depending on whether the fee is front loaded or back loaded 3 as opposed to many other types of mutual fund fees this fee is usually a one time transaction though it s often disclosed as a marketing fee the 12b 1 fee is often paid to the broker who sold you the fund | |
are transaction costs legal | yes transaction costs charged for buying and selling goods are often legal because there are intermediaries that facilitate the transfer of a good or service from one party to the other these fees often are paid to the party that helped make the exchange occur government entities or regulatory bodies also may impose transaction costs to help the facilitation of future goods however those same governments and regulatory bodies may impose limits on the type or size of transaction costs that can be charged within an industry | |
how can i avoid transaction fees | in many cases transaction fees cannot be eliminated this is especially true where intermediaries are needed such as buying or selling securities to minimize the amount of fees paid consider minimizing the number of transactions you enter into and lump transactions together to potentially minimize the per transaction charges in addition consider seeking brokers that offer free trades for select types of contracts | |
what happens if transaction costs are too high | consider the implications of high transaction costs over time assume you begin investing 10 000 per year for 30 years and earn a steady 6 per year your gross ending value will be approximately 838 000 however if your annual fund expense is 1 you will pay over 140 000 of fees over the life of your investment this would reduce your ending portfolio value to less than 700 000 the bottom linetransaction costs are often necessary to reward intermediaries to facilitate the exchange of a good this is especially prevalent in the investment world where brokers regulatory agencies or other entities impose fees on trades or transactions be mindful of the fees your broker charges and consider implementing strategies such as bulk trades passive investing or fewer contracts to minimize these fees | |
what is transaction exposure | transaction exposure is the level of uncertainty businesses involved in international trade face specifically it is the risk that currency exchange rates will fluctuate after a firm has already undertaken a financial obligation a high level of vulnerability to shifting exchange rates can lead to major capital losses for these international businesses transaction exposure is also known as translation exposure or translation risk understanding transaction exposurethe danger of transaction exposure is typically one sided only the business that completes a transaction in a foreign currency may feel the vulnerability the entity that is receiving or paying a bill using its home currency is not subjected to the same risk usually the buyer agrees to buy the product using foreign money if this is the case the hazard comes if that foreign currency should appreciate as this would result in the buyer needing to spend more than they had budgeted for the goods the risk for exchange rate fluctuations increases if more time passes between the agreement and the contract settlement combating transaction exposureone way that firms can limit their exposure to changes in the exchange rate is to implement a hedging strategy by purchasing currency swaps or hedging through futures contracts a company is able to lock in a rate of currency exchange for a set period of time and minimize translation risk in addition a company can request that clients pay for goods and services in the currency of the company s country of domicile this way the risk associated with local currency fluctuation is not borne by the company but instead by the client who is responsible for making the currency exchange prior to conducting business with the company example of transaction exposuresuppose that a united states based company is looking to purchase a product from a company in germany the american company agrees to negotiate the deal and pay for the goods using the german company s currency the euro assume that when the u s firm begins the process of negotiation the value of the euro dollar exchange is a 1 to 1 5 ratio this rate of exchange equates to one euro being equivalent to 1 50 u s dollars usd once the agreement is complete the sale might not take place immediately meanwhile the exchange rate may change before the sale is final this risk of change is transaction exposure while it is possible that the values of the dollar and the euro may not change it is also possible that the rates could become more or less favorable for the u s company depending on factors affecting the currency marketplace when it s time to conclude the sale and make the payment the exchange rate ratio might have shifted to a more favorable 1 to 1 25 rate or a less favorable 1 to 2 rate regardless of the change in the value of the dollar relative to the euro the german company experiences no transaction exposure because the deal took place in its local currency the german company is not affected if it costs the u s company more dollars to complete the transaction because the price as dictated by the sales agreement was set in euros | |
what are per transaction fees | a per transaction fee is an expense a business must pay each time it processes an electronic payment for a customer transaction per transaction fees vary across service providers typically costing merchants from 0 5 to 5 of the transaction amount plus certain fixed fees | |
how per transaction fees work | per transaction fees are required of the merchant from a few different entities in a transaction merchants partner with merchant acquiring banks to facilitate all of the communications in an electronic payment transaction merchants also set up a merchant account with the acquirer which serves as the merchant s primary deposit account for funds from each transaction a merchant who receives a lot of electronic payments will rely heavily on the merchant acquiring bank making the terms of the merchant account agreement an important factor for a merchant 1components of per transaction feesmerchants pay a variety of fees related to the acceptance of electronic payments some fees will vary while others are fixed merchants have a wide range of acquiring banks they can partner with for electronic payment services each acquirer has different fee structures and service capabilities allowing merchants to choose the acquirer that is best for them acquirers will typically charge per transaction fees as well as a monthly fee for the management of a merchant account the second component of a per transaction fee is the fee paid to the network processing company merchants establish the types of branded cards they can accept at their store based on the processing network of their merchant acquiring bank payment card companies such as mastercard visa discover or american express each have their per transaction fees that will be charged to the merchant in a transaction payment card company fees also called wholesale fees are usually a fixed fee per transaction some acquirers may be able to negotiate lower wholesale fees through network relationships with processors acquirer and processor fees are the main components of a comprehensive per transaction fee in some cases other fees for a merchant may also apply one added cost merchants might encounter is a terminal fee which is a per transaction fee charged to a terminal provider such as square for the use of a terminal in an electronic payment card transaction 2per transaction fees are the reason why some merchants impose a minimum that customers must spend if they want to pay with a credit or debit card for example merchants may set a 5 or 10 minimum for credit card and debit card transactions smaller merchants who are less able to absorb excess card fees are more likely to impose these minimums 3american express visa mastercard and discover all charge approximately the same fees with slight variations that amount to cents in some of the components generally visa charges the lowest total amount this depends on the cards used as well as cards with rewards often have higher fees merchant account statementsacquirers will detail a merchant s total monthly costs and transaction activities in a monthly statement generally service provider transaction fees will be delineated in one of three categories interchange tiered or subscription the interchange section lists the payment card company fees and service provider fees separately on the merchant s monthly statement the tiered section assesses different fees based on the transaction type such as in person versus online subscription fees are also assessed on a monthly or annual basis | |
how can i avoid transaction fees | you can avoid transaction fees by paying for a purchase with cash however if you are using a credit card there will be a per transaction fee charged to the merchant if the merchant does not want to pay the fee they may raise their prices so customers would effectively be subsidizing the fee who pays credit card transaction fees a credit card transaction fee is charged to the merchant or vendor not the cardholder businesses pay the card transaction fees to the credit card issuer or payment processor company can businesses charge a credit card surcharge a merchant is responsible for paying a credit card transaction fee and some merchants charge a credit card surcharge to recoup this expense however in some states it is illegal for merchants to charge a credit card surcharge the bottom lineper transaction fees are charged to merchants not consumers but you may be affected by these fees if the merchant adjusts prices to recoup their expenses merchants especially smaller businesses may also set minimum purchase amounts if you are using a credit card so that they do not lose money on a transaction | |
what is a transfer agent | a transfer agent is a trust company bank or similar institution assigned by a corporation for the purposes of maintaining an investor s financial records and tracking each investor s account balance the transfer agent records transactions cancels and issues certificates processes investor mailings and handles a host of other investor problems including reissuing lost or stolen certificates 1transfer agents work closely with registrars to ensure investors receive their due interest and dividend payments in a timely manner transfer agents likewise oversee the mailing of monthly investment statements to mutual fund shareholders investopedia nez riazunderstanding transfer agenttraditionally when investors purchased a security they received a physical paper certificate today transfer agents issue certificates in book entry form an electronic method of recording securities ownership that saves vast amounts of time and money these book entry securities vary depending on the investment 2for example bonds are often issued in 1 000 multiples while stock and mutual fund holdings are issued as shares meanwhile unit investment trusts uit are sold in block units transfer agents process all types of securities in book entry form in whatever necessary shape they must take it s possible to identify which transfer agent a company uses by checking out the investor relations section of its website 1transfer agent responsibilitiescommon and preferred stock shareholders have the right to vote on major corporate decisions such as merger activities and the sale of companies these votes are facilitated through transfer agents who send proxy information to shareholders transfer agents likewise furnish shareholders with annual reports including companies audited financial statements and at year end transfer agents and registrars jointly send federal tax information to investors including dividends information and interest paid along with data on security trades executed during the year distribution of funds and sharestransfer agents pay distributions to investors based on the registrar s records for example transfer agents send interest payments to bondholders as well as the face value of their bonds once they reach maturity similarly transfer agents send cash dividend payments to stock investors once the companies they invest in generate sufficient earnings 1transfer agents also send stock shares to investors after a stock split if for example the company has a 3 for 1 stock split each shareholder receives two additional shares for every share they already own 1if investors hold securities in their own names and wish to transfer or sell those securities they may need to get their signatures guaranteed before the transfer agent will accept the transactions 3mutual fund transfer agentsmutual fund transfer agents differ from stock transfer agents in that the former never issue physical certificates whereas the latter must do so on shareholder request however mutual fund transfer agents perform many other important tasks like maintaining records of shareholders accounts overseeing dividend payments and responding to shareholder requests for account statements income tax forms and transaction confirmations 4benefits of transfer agentsall shareholders are entitled to accurate information about their investments while some corporations choose to act as their own transfer agents other companies decide to use third parties like trust companies banks or similar financial institutions these companies receive fees for their services these third party companies specialize in providing transfer agent services and many corporations find the expense of hiring a third party company well worth it transfer agents handle a detailed and challenging job especially for large corporations with many shareholders for example it s not uncommon for a publicly traded company to issue millions of shares of stock someone has to keep all of the information relevant to those millions of shares in order it s part of the company s fiduciary responsibility to its shareholders to ensure that all investor records account balances and transactions are safeguarded and accurately tracked transfer agents fulfill this vital role in maintaining records and providing investors with timely and reliable information | |
what is the difference between a broker and a transfer agent | a transfer agent acts as a liaison between a company s registrar and an investor a broker on the other hand acts as an intermediary between an investor and an exchange buying and selling securities for its clients who needs a transfer agent publicly traded companies listed on a stock exchange need transfer agents to maintain records of shareholder accounts calculate and distribute dividends and keep investors up to date with what s going on mutual funds and issuers of debt securities also rely on transfer agents for similar reasons | |
how much do transfer agents make | according to glassdoor the average total pay of a transfer agent in the u s is 52 854 per year that s based on an average salary of 41 323 and additional payments such as bonuses and commissions of 11 531 the range is quite wide though the highest paid transfer agent could make up to about 89 000 5the bottom linecompanies use transfer agents to keep track of the individuals and entities that own their stocks and bonds most of the time they get these agents from third parties such as trust companies banks or similar financial institutions the main duties of a transfer agent are to keep a record of who owns a company s stocks and bonds issue and cancel certificates to reflect changes in ownership and payout distributions and send useful information to stakeholders such as annual reports and how to vote at meetings the transfer agent essentially acts as a liaison between a company and its investors | |
what is transfer of risk | a transfer of risk is a business agreement in which one party pays another to take responsibility for mitigating specific losses that may or may not occur this is the underlying tenet of the insurance industry risks may be transferred between individuals from individuals to insurance companies or from insurers to reinsurers when homeowners purchase property insurance they are paying an insurance company to assume various specific risks associated with homeownership understanding transfer of risk | |
when purchasing insurance the insurer agrees to indemnify or compensate the policyholder up to a certain amount for a specified loss or losses in exchange for payment | insurance companies collect premiums from thousands or millions of customers every year that provides a pool of cash that is available to cover the costs of damage or destruction to the properties of some small percentage of its customers the premiums also cover administrative and operating expenses and provide the company s profits life insurance works the same way insurers rely on actuarial statistics and other information to project the number of death claims it can expect to pay out per year because this number is relatively small the company sets its premiums at a level that will exceed those death benefits reinsurance companies accept transfers of risk from insurance companies the insurance industry exists because few individuals or companies have the financial resources necessary to bear the risks of the loss on their own so they transfer the risks risk transfer to reinsurance companiessome risks are too big for insurance companies to bear alone that s where reinsurance comes in | |
when insurance companies don t want to assume too much risk they transfer the excess risk to reinsurance companies for example an insurance company may routinely write policies that limit its maximum liability to 10 million but it may take on policies that require higher maximum amounts and then transfer the remainder of the risk in excess of 10 million to a reinsurer this subcontract comes into play only if a major loss occurs | property insurance risk transferpurchasing a home is the most significant expense most individuals make to protect their investment most homeowners buy homeowners insurance with homeowners insurance some of the risks associated with homeownership are transferred from the homeowner to the insurer insurance companies typically assess their own business risks in order to determine whether a customer is acceptable and at what premium underwriting insurance for a customer with a poor credit profile and several dogs is riskier than insuring someone with a perfect credit profile and no pets the policy for the first applicant will command a higher premium because of the higher risk being transferred from the applicant to the insurer | |
what is transfer on death tod | the transfer on death tod designation allows an account holder to pass assets from brokerage accounts stocks and bonds at their death bypassing probate the account holder or security owner specifies the percentage of assets each person receives with a transfer on death registration the named beneficiaries have no access to or control over a person s assets as long as the person is alive | |
how assets are transferred | transfers on death ensure an investor s securities and security related assets are passed on to the person or people they want them to be passed to without going through a lengthy probate process the uniform transfer on death securities registration act lets owners name beneficiaries for their stocks bonds or brokerage accounts with percentage allocations retirement accounts such as individual retirement accounts iras or 401 k s are not tod accounts these have named beneficiaries with regulations determining when beneficiaries can make withdrawals how much they can withdraw or how they are taxed a tod transfers all assets associated with an account to the named beneficiary 1required documentsproof of death this may be in the form of a death certificate current court letter of appointment stock power of attorney affidavit of domicile or other documents as proof of death proof of ownership documentation citing the owner and proof of tod intent a tod is used for stocks bonds deeds and similar assets 2type of account required documents depend on the type of account such as a single or joint account whether one or both account holders are deceased and whether the account is a trust account and the trustee or grantor is deceased unlike a tod a payable on death pod designation is an arrangement between a bank and a client that designates beneficiaries to receive assets after the client s death without going through probate a pod designation is usually associated with bank accounts and certificates of depositexamplean investor and active day trader has 50 000 in a margin account with their broker and stocks worth 200 000 in their brokerage account when this investor set up these accounts they filed a tod form stipulating who the assets should be transferred to upon death and in what percentages the account owner can update this form at any time assume the owner of the account is unmarried with two adult children they leave 50 of their brokerage account and stocks to their son and 50 to their daughter upon death and after the appropriate paperwork is filed half of the account balance and stocks will transfer to the son and the other half to the daughter | |
what happens after the beneficiary receives the tod assets | in most cases a new account is set up for the beneficiary and the deceased person s securities and funds are transferred typically no buying selling transferring of the account to another firm or other activities may occur until the account is open and legal ownership has been established 2 | |
are tod accounts taxable to the beneficiary | while a transfer on death designation can help avoid the probate process the assets are still subject to applicable estate taxes capital gains taxes and inheritance taxes | |
what are the disdvantages of a tod | assets in tod accounts are still considered part of the estate that means creditors can seek to repay debts before beneficiaries can access the assets 3the bottom linea transfer on death or tod is a designation that allows assets to pass directly to a beneficiary after they die the account owner specifies the percentage of assets each beneficiary receives allowing their executor to distribute without first passing through probate tod cannot be used for retirement accounts like iras because retirement account beneficiaries must follow withdrawal and taxation rules | |
what is a transfer payment | a transfer payment is a one way payment to a person or organization which has given or exchanged no goods or services for it this contrasts with a simple payment which in economics refers to a transfer of money in exchange for a product or service generally the phrase transfer payment is used to describe government payments to individuals through social programs such as welfare student grants and even social security however government payments to corporations including unconditional bailouts and subsidies are not commonly described as transfer payments understanding transfer paymentsin the u s transfer payments usually refer to payments made to individuals by the federal government through various social programs these payments are considered a redistribution of wealth from the well compensated to the poorly compensated they are made both for humanitarian reasons and at times of economic distress to help stimulate the economy by putting more money into people s hands types of transfer paymentsthe most well known form of transfer payment is likely social security payments whether for retirement or disability these are considered transfer payments even though most recipients have paid into the system during their working lives similarly unemployment payments are also considered transfer payments there are many other types of transfer payments they can be made from one person to another or even from an individual to an organization these can include individual donations to charities or non profit organizations or even a simple cash gift from one person to another subsidies for education and training are also considered a type of government transfer payment this includes transfers to companies or labor groups that provide educational services or operate apprenticeship programs transfer payments do not include subsidies paid to farmers manufacturers and exporters even though they are a one way payment from the government transfer payments and the economytransfer payments are often introduced or expanded during severe economic recessions social security for example was created by the roosevelt administration during the great depression more recently though less grand in scale in march 2020 congress voted to provide direct cash payments of 1 200 to most americans totaling some 250 billion as well as additional direct assistance to u s workers affected by the economic collapse congress also approved 500 billion in bailouts for u s corporations 1many countries provide direct cash assistance to people during economic recessions as a way to support those in need and stimulate the economy according to keynesian economics there is a multiplier effect to transfer payments meaning every dollar in payments stimulates a chain reaction that results in more spending than merely the original dollar | |
what is transfer price | transfer price also known as transfer cost is the price at which related parties transact with each other such as during the trade of supplies or labor between departments transfer prices may be used in transactions between a company and its subsidiaries or between divisions of the same company in different countries investopedia ellen lindnerunderstanding transfer pricetransfer prices are used when individual entities of a larger multi entity firm are treated and measured as separately run entities it is common for multi entity corporations to be consolidated on a financial reporting basis however they may report each entity separately for tax purposes a transfer price arises for accounting purposes when related parties such as divisions within a company or a company and its subsidiary report their own profits when these related parties are required to transact with each other a transfer price is used to determine costs transfer prices generally do not differ much from the market price if the price does differ then one of the entities is at a disadvantage and would ultimately start buying from the market to get a better price for example assume entity a and entity b are two unique segments of company abc entity a builds and sells wheels and entity b assembles and sells bicycles entity a may also sell wheels to entity b through an intracompany transaction if entity a offers entity b a rate lower than market value entity b will have a lower cost of goods sold cogs and higher earnings than it otherwise would have however doing so would also hurt entity a s sales revenue if on the other hand entity a offers entity b a rate higher than market value then entity a would have higher sales revenue than it would have if it sold to an external customer entity b would have higher cogs and lower profits in either situation one entity benefits while the other is hurt by a transfer price that varies from market value regulations on transfer pricing ensure the fairness and accuracy of transfer pricing among related entities regulations enforce an arm s length transaction rule that states that companies must establish pricing based on similar transactions done between unrelated parties it is closely monitored within a company s financial reporting transfer pricing requires strict documentation that is included in the footnotes to the financial statements for review by auditors regulators and investors this documentation is closely scrutinized if inappropriately documented it can burden the company with added taxation or restatement fees these prices are closely checked for accuracy to ensure that profits are booked appropriately within arm s length pricing methods and associated taxes are paid accordingly 1transfer prices are used when divisions sell goods in intracompany transactions to divisions in other international jurisdictions a large part of international commerce is actually done within companies as opposed to between unrelated companies intercompany transfers done internationally have tax advantages which has led regulatory authorities to frown upon using transfer pricing for tax avoidance | |
when transfer pricing occurs companies can manipulate profits of goods and services in order to book higher profits in another country that may have a lower tax rate in some cases the transfer of goods and services from one country to another within an intracompany transaction can also allow a company to avoid tariffs on goods and services exchanged internationally the international tax laws are regulated by the organisation for economic cooperation and development oecd and auditing firms within each international location audit the financial statements accordingly 2 | transfer price exampleto better understand the effect of transfer pricing on taxation let s take the example above with entity a and entity b assume entity a is in a high tax country while entity b is in a low tax country it would benefit the organization as a whole for more of company abc s profits to appear in entity b s division where the company will pay lower taxes in that case company abc may attempt to have entity a offer a transfer price lower than market value to entity b when selling them the wheels needed to build the bicycles as explained above entity b would then have a lower cost of goods sold cogs and higher earnings and entity a would have reduced sales revenue and lower total earnings companies will attempt to shift a major part of such economic activity to low cost destinations to save on taxes this practice continues to be a major point of discord between the various multinational companies and tax authorities like the internal revenue service irs the various tax authorities each have the goal to increase taxes paid in their region while the company has the goal to reduce overall taxes | |
why is transfer price used | transfer prices are used when individual entities of a larger multi entity firm are treated and measured as separately run entities while it is common for multi entity corporations to be consolidated on a financial reporting basis they may report each entity separately for tax purposes when these entities report their own profits a transfer price may be necessary for accounting purposes to determine the costs of the transactions | |
what are the benefits of transfer pricing | transfer prices will usually be equal to or lower than market prices which will result in cost savings for the entity buying the product or service it increases transparency in intra entity transactions finally the desired product is readily available so supply chain issues can be mitigated | |
what are the disadvantages of transfer pricing | since transfer prices are usually equal to or lower than market prices the entity selling the product is liable to get less revenue there is also the fact that it is a complicated process market prices are based on supply demand relationships whereas transfer prices may be subject to other organizational forces additionally intra entity animosity might arise especially if the transfer price is appreciably higher or lower than the market price as one of the parties will feel cheated | |
what is transfer pricing | transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided transfer pricing allows for the establishment of prices for the goods and services exchanged between subsidiaries affiliates or commonly controlled companies that are part of the same larger enterprise transfer pricing can lead to tax savings for corporations though tax authorities may contest their claims | |
how transfer pricing works | transfer pricing is an accounting and taxation practice that allows for pricing transactions internally within businesses and between subsidiaries that operate under common control or ownership the transfer pricing practice extends to cross border transactions as well as domestic ones a transfer price is used to determine the cost to charge another division subsidiary or holding company for services rendered typically transfer prices are reflective of the going market price for that good or service transfer pricing can also be applied to intellectual property such as research patents and royalties multinational corporations mncs are legally allowed to use the transfer pricing method to allocate earnings among their subsidiary and affiliate companies that are part of the parent organization however companies sometimes can also use or misuse this practice by altering their taxable income thus reducing their overall taxes the transfer pricing mechanism is a way that companies can shift tax liabilities to low cost tax jurisdictions transfer pricing and taxesto better understand how transfer pricing impacts a company s tax bill let s consider the following scenario let s say that an automobile manufacturer has two divisions division a which manufactures software and division b which manufactures cars division a sells the software to other carmakers as well as its parent company division b pays division a for the software typically at the prevailing market price that division a charges other carmakers let s say that division a decides to charge a lower price to division b instead of using the market price as a result division a s sales or revenues are lower because of the lower pricing on the other hand division b s costs of goods sold cogs are lower increasing the division s profits in short division a s revenues are lower by the same amount as division b s cost savings so there s no financial impact on the overall corporation however let s say that division a is in a higher tax country than division b the overall company can save on taxes by making division a less profitable and division b more profitable by making division a charge lower prices and pass those savings on to division b boosting its profits through a lower cogs division b will be taxed at a lower rate in other words division a s decision not to charge market pricing to division b allows the overall company to evade taxes in short by charging above or below the market price companies can use transfer pricing to transfer profits and costs to other divisions internally to reduce their tax burden transfer pricing and the irsthe irs states that transfer pricing should be the same between intercompany transactions that would have otherwise occurred had the company done the transaction with a party or customer outside the company according to the irs website transfer pricing is defined as follows as a result the financial reporting of transfer pricing has strict guidelines and is closely watched by tax authorities auditors and regulators often require extensive documentation if the transfer value is done incorrectly or inappropriately the financial statements may need to be restated and fees or penalties could be applied however there is much debate and ambiguity surrounding how transfer pricing between divisions should be accounted for and which division should take the brunt of the tax burden tax authorities have strict rules regarding transfer pricing to discourage companies from using it to avoid taxes | |
what is a transfer tax | a transfer tax is a charge levied on the transfer of ownership or title to property from one individual or entity to another a transfer tax may be imposed by a state county or municipality it is usually not deductible from federal or state income taxes although it may be added to the cost basis when profit on the sale of securities and investment property is calculated transfer tax is considered an excise tax in some states alexanderford getty imagesunderstanding a transfer taxa transfer tax on real estate may be imposed by state county or municipal authorities for the privilege of transferring real property within the jurisdiction the government is effectively taxing the transfer of a legal deed certificate or title from a seller to a buyer the amount of the tax is based on the property value and the property classification the seller is liable for the real estate transfer tax although it is not uncommon for an agreement to be reached for the buyer to pay the tax some states require that the buyer pay the tax if the seller does not pay it or is exempt from paying it some states do not impose a transfer tax on real estate they include alaska arizona idaho indiana louisiana mississippi missouri montana new mexico north dakota texas utah and wyoming 1transfer taxes on inheritancesa transfer tax may also be imposed on the transfer of property by inheritance this is sometimes called a death tax particularly by opponents of inheritance taxes a death tax may refer to any gift tax estate tax or generation skipping transfer tax that is imposed on the value of property inherited after the death of the owner in 2023 exclusions for estates worth less than 12 92 million protect most americans from owing estate taxes in 2024 the maximum increases to 13 61 million 2in recent years all but the wealthiest americans have been protected from these taxes by high dollar amount exemptions at the federal level the federal estate tax applies to a decedent s gross estate which generally includes all of the person s financial and real assets for taxpayers inheriting in 2023 the exclusion amount is 12 92 million 13 61 million for 2024 there is also a gift tax that applies to transfers of money or property made while a person is living the federal gift tax range applies to the giver of a gift not the recipient for amounts above 17 000 for 2023 and 18 000 for 2024 2the generation skipping transfer taxthe generation skipping transfer gst tax is an additional tax on a transfer of title to a property that skips a generation the gst tax was implemented to prevent families from avoiding the estate tax for one or more generations by making their gifts or bequests directly to their grandchildren or great grandchildren rather than to their children 3the same exclusions apply to the gst the transfer must be worth more than 12 92 million in 2023 13 61 million in 2024 for the tax to kick in 2state transfer taxessixteen states and the district of columbia have either an estate tax or an inheritance tax and one state maryland has both an estate tax is levied against the assets of the deceased while an inheritance tax is owed by the recipient of the assets 4who pays the transfer tax the party responsible for paying the transfer tax is often the seller in the case of real estate transfers but not always in some states the responsibility is split equally and in others there is no real estate transfer tax at all for inheritances the tax is paid by the recipient for estate taxes it s paid by the estate of the deceased | |
what are other names for a transfer tax | in real estate the transfer tax may also be known as the stamp tax deed tax mortgage registration tax documentary transfer tax or recordation tax | |
how do i calculate the transfer tax | to calculate the transfer tax you ll first need to know the tax rate in your state or local municipality then work the math you may see the tax expressed as a percentage or as a dollar amount for a simple 1 tax for example you d multiply the value of the property by 0 01 to find the tax for a tax that is listed as say 1 for every 1 000 in value you d divide the property value by 1 000 1 000 x 1 1 000 likewise if the tax was 1 50 for every 1 000 in value you d multiply 1 000 x 1 5 to get 1 500 then divide the property value by 1 500 if you need help there are online tax calculators you can use to estimate the transfer tax as well the bottom linepaying transfer taxes is a typically unavoidable aspect of transferring an estate or real property from one person to another when a government charges a transfer tax on an inheritance it s considered an inheritance tax but at the federal level it only applies to estates worth more than 12 92 million in 2023 13 61 million in 2024 | |
what is a transferable letter of credit | a transferable letter of credit is a letter of credit that allows the first beneficiary to transfer some or all of the credit to another party creating a secondary beneficiary the party that initially accepts the transferable letter of credit from the bank is referred to as the first or primary beneficiary while the party that applied for the letter of credit is the applicant a transferable letter of credit is often used in business deals to ensure payment to a supplier or manufacturer and is an alternative to making an advance payment | |
how transferable letters of credit work | a letter of credit is a document provided by a bank guaranteeing that a seller will receive the money a buyer has promised to pay it for goods or services in a particular transaction if the buyer fails to do so the bank can become responsible for paying 1for example sellers of manufactured goods often require a letter of credit guaranteeing that they will receive the money they are due on time and for the full correct amount before proceeding to fill a customer s order the buyer applies to a bank to obtain the letter of credit and pays a fee to compensate the bank for the risk it is taking letters of credit are often used in transactions between importers and exporters as the u s department of commerce explains letters of credit lcs are one of the most secure instruments available to international traders an lc is useful when reliable credit information about a foreign buyer is difficult to obtain but the exporter is satisfied with the creditworthiness of the buyer s foreign bank an lc also protects the buyer since no payment obligation arises until the goods have been shipped as promised 2a transferable letter of credit includes an additional provision making some or all of the credit that the bank is guaranteeing transferable to another party known as the secondary beneficiary the secondary beneficiary might for example be a supplier that the seller the first beneficiary is relying on to provide the goods that they are selling in this type of arrangement the first beneficiary is serving as a sort of middleman between the supplier and the buyer there can be more than one secondary beneficiary 3transferable letters of credit like other credit letters are used in both domestic and international commerce obtaining a transferable letter of creditletters of credit are available from many banks particularly those with an international presence the approval process for letters of credit both transferable and non transferable is similar to applying for a bank loan the buyer must submit a credit application including details on their income assets and existing debts as well as the transaction itself the bank will analyze that information as part of its underwriting process underwriting is the procedure banks follow to assess how much risk a particular borrower poses and make a decision on whether to extend them credit and if so at what cost with a letter of credit the borrower isn t taking an actual loan instead the letter of credit guarantees that the bank is willing to issue a loan for a specified amount to the borrower if one is needed to cover the payment promised to the seller transferable letter of credit vs confirmed letter of credita transferable letter of credit can be a more convenient option for a buyer than a confirmed letter of credit that s because the buyer is only required to deal with one bank for a transferable letter of credit with a confirmed letter of credit however the buyer must obtain two letters of credit with the second letter guaranteeing the first one confirmed letters of credit can be required by a seller in the event that the first bank defaults on repayment the second bank will typically be a bank that the seller is familiar with confirmed letters are common in international trade and may involve banks in more than one country | |
what is a commercial letter of credit | with a commercial letter of credit the bank makes payment directly to the beneficiary typically the seller in a transaction by releasing the buyer s funds when the beneficiary has fulfilled its obligations this contrasts with a standby letters of credit in which the bank pays the seller directly only if the buyer fails to do so | |
what is a back to back letter of credit | a back to back letter of credit refers to two separate letters of credit issued for the same transaction when a middleman is involved the buyer will provide a letter of credit to the middleman such as a re seller or broker assuring them that they ll be paid based on the first letter the middleman can then provide a separate letter of credit to their supplier such as a manufacturer the two letters ensure that all parties get paid | |
what is a revolving letter of credit | a revolving letter of credit is one that provides a sum of credit that can be used over a series of transactions it is often useful when a buyer and seller such as an importer and an exporter have an ongoing relationship with a revolving letter of credit the buyer doesn t have to get a new letter of credit each time | |
what is a credit facility | a credit facility refers to a loan made to a borrower who can then access the funds as needed rather than all at once revolving credit is one example of a credit facility 4 | |
what does a letter of credit cost | banks typically charge a percentage of the amount of money they are guaranteeing for a letter of credit but the fee can also vary based on the applicant s creditworthiness a review of lender websites shows fees generally ranging from about 0 75 to 2 the bottom lineletters of credit are an important tool in business transactions between buyers and sellers especially if the parties are in different countries or have not had a long relationship and built up trust transferable letters assure both sellers and their suppliers that they will be paid for their goods and services if they deliver as promised buyers must pay for letters of credit but they often facilitate deals that wouldn t be possible otherwise | |
what is translation exposure | translation exposure also known as translation risk is the risk that a company s equities assets liabilities or income will change in value as a result of exchange rate changes this occurs when a firm denominates a portion of its equities assets liabilities or income in a foreign currency it is also known as accounting exposure accountants use various methods to insulate firms from these types of risks such as consolidation techniques for the firm s financial statements and using the most effective cost accounting evaluation procedures in many cases translation exposure is recorded in financial statements as an exchange rate gain or loss understanding translation exposuretranslation exposure is most evident in multinational organizations since a portion of their operations and assets will be based in a foreign currency it can also affect companies that produce goods or services that are sold in foreign markets even if they have no other business dealings within that country in order to properly report the organization s financial situation the assets and liabilities for the whole company need to be adjusted into the home currency since an exchange rate can vary dramatically in a short period of time this unknown or risk creates translation exposure this risk is present whether the change in the exchange rate results in an increase or decrease of an asset s value translation risk can lead to what appears to be a financial gain or loss that is not a result of a change in assets but in the current value of the assets based on exchange rate fluctuations for example should a company be in possession of a facility located in germany worth 1 million and the current dollar to euro exchange rate is 1 1 then the property would be reported as a 1 million asset if the exchange rate changes and the dollar to euro ratio becomes 1 2 the asset would be reported as having a value of 500 000 this would appear as a 500 000 loss on financial statements even though the company is in possession of the exact same asset it had before translation risk can occur at any time a business operates in regions that use different currencies transaction vs translation exposurethere is a distinct difference between transaction and translation exposure transaction exposure involves the risk that when a business transaction is arranged in a foreign currency the value of that currency may change before the transaction is complete | |
should the foreign currency appreciate it will cost more in the business s home currency translation risk focuses on the change in a foreign held asset s value based on a change in exchange rate between the home and foreign currencies | hedging translation riska variety of mechanisms are in place that allow a company to use hedging to lower the risk created by translation exposure companies can attempt to minimize translation risk by purchasing currency swaps or hedging through futures contracts in addition a company can request that clients pay for goods and services in the currency of the company s country of domicile this way the risk associated with local currency fluctuation is not borne by the company but instead by the client who is responsible for making the currency exchange prior to conducting business with the company | |
what is transparency | although the term transparency is not a financial term or metric per se it has become increasingly important to consumers and investors over the last several years transparency is the extent to which investors have ready access to required financial information about a company such as price levels market depth and audited financial reports investors also require transparency with investment firms and funds surrounding the various fees that ll be charged to them transparency can also include clarity for consumers regarding the fees that bank charges or the rate that consumers will ultimately pay to their credit card company moment makers group getty imagesunderstanding transparencyfinancial decisions are typically made based on an assessment of a financial situation investors analyze a company s financial statements to determine if the stock is worth buying on the other hand consumers choose a bank or investment firm based in part on the costs or fees adequate disclosure of fees interest rates and penalties are important for making sound decisions as to what credit card or loan to apply for as well as what bank account to open or what mutual fund to invest in because investor decisions as to what security to buy are based on a company s financial reports the reports should be as transparent as possible for example assume two companies have similar debt levels size market risk exposure and earnings one company operates with transparency concerning its financial reports while the other company runs multiple businesses with complex financial reports investors may gravitate to the first company since they can easily understand the company s fundamentals and risks involved however investors who put their money into a company with a complex structure might miss critical financial details that could lead to the company performing poorly and a loss on the investment as a result it s important that transparency rules are followed by all companies the critical nature of transparency and consistency to the financial markets is why publicly traded companies on exchanges such as the new york stock exchange nyse are regulated required transparencythe u s securities and exchange commission sec is the federal government agency responsible for regulating the financial reporting for corporations the primary goals of the sec are to protect investors by ensuring a fair and orderly functioning of the financial markets the sec requires publicly traded companies to report their quarterly financials called a 10 q and their year end financials called a 10 k companies must also file an annual report as well as interim reports such as 8ks which contain pertinent financial information and developments below are some of the financial statements required by the sec as outlined in their financial reporting manual the income statement shows the profit and loss of a corporation the statement outlines the revenue on the top line operating expenses are listed such as the cost of goods sold as well as operating income also other expenses include overhead or selling general and administrative expenses sg a as well as interest expenses and taxes paid the profit or net income is listed at the bottom of the income statement the balance sheet shows a corporation s assets liabilities and stockholders equity or shareholders equity assets can include fixed assets such as machinery or equipment while liabilities can include short term payables and long term liabilities such as debt the cash flow statement measures all of the cash inflows or credits as well as any of the cash outflows or debits to cash that a company experienced during the period the statement of cash flows also shows any investing activities such as purchases of equipment that would help the long term by day of the company financing activities are also listed which include any cash inflows or outflows regarding the financing of the company such as loans bond issuance and stock issuance the statement of stockholders equity records all the changes to shareholders equity which occurred during that period these changes might include any share buybacks stock issuance and dividends paid out to shareholders dividends are typically cash payments made to investors as a reward for owning the stock however dividends can also be paid out as shares of stock the statement of comprehensive income list other types of income which can include items such as foreign exchange gains or losses hedging and pension activity examples of comprehensive income include available for sale securities financial investments pension and retirement plans and derivative securities importance of transparencytransparency helps reduce uncertainty and wild stock price fluctuations because all market participants can base decisions of value on the same data companies also have a strong motivation to provide disclosure because transparency is rewarded by the stock s performance a strong indicator of future growth is how a business invests its money when an investor cannot find information stating where a company invests the investor is less likely to invest in the business opaque financial statements could hide a company s debt level for example while the business is struggling with insolvency investors should be aware of the underlying investments that compose their portfolios for example owning a single stock means investing in one company while owning a mutual fund means investing in a basket of securities or companies transparency helps to shows investors how much risk is involved with buying stocks which can aid in making more informed investment decisions investors should compare their investment returns with those of related securities benchmarks and other asset classes to help determine how their investment is performing if a stock for example is underperforming while the industry is doing well it might be a red flag in other words market participants might be concerned about the company s financial situation revenue outlook debt load or the ability of management to run the company effectively investing limitations such as liquidity restrictions meaning it s difficult to readily buy and sell shares as well as the fee structure for funds and investments should be made available example of transparencyin february 2016 six groups at a tyson shareholder meeting spoke with the chair of the board john tyson about the lack of transparency the company provided on its financial reports the international brotherhood of teamsters noted that contributions to the american beef federation the national chicken council and state and local lobbying efforts were not readily available multiple shareholders noted that tyson s chemical spill of acidic wastewater in monett missouri killed over 100 000 fish in the city s waterways shareholders wanted more information on the company s planned improvement of water quality in plant areas additionally shareholders asked for an annual report showing plant safety records to ensure the records improve over time tyson s family members controlled the company s voting rights and did not approve of what was being asked of them as a result all six proposals were voted down however tyson foods was later fined 2 million in early 2018 by the u s justice department as originally reported by the associated press as part of the settlement the company was required to hire an independent auditor to review their environmental compliance procedures conduct training and make improvements to their poultry facilities the bottom lineas investors we base our investment decisions largely on the financial statements that each company provides therefore it s crucial to stick with companies that are transparent about their financial reporting and avoid ones that obfuscate the numbers if management isn t transparent it s virtually impossible for investors to be sure about that company s real risk reward tradeoff transparency faqscorporate transparency is simply the extent to which a company s actions financial statements strategy and other issues are visible to outside observers price transparency is the extent to which all information regarding a stock s price such as its bid prices ask prices and trading quantities is available to traders in the world of blockchain transparency is an especially important concept because of the decentralized nature of bitcoin s blockchain for example all transactions can be viewed on a public ledger this makes it difficult for hackers to extract bitcoins without being traced government transparency is the extent to which a given government prioritizes honesty and access to information in order to allow for effective public oversight transparency is often seen as a major tool for citizens to hold public officials accountable and to combat corruption workplace transparency is the extent to which managers and employees of a particular company value openness communication and honesty in the workplace | |
what is the transportation sector | the transportation sector is a category of companies that provide services to move people or goods as well as transportation infrastructure technically transportation is a sub group of the industrials sector according to the global industry classification standard gics the transportation sector consists of several industries including air freight and logistics airlines marine road and rail and transportation infrastructure these industries are further broken down into the sub industries air freight and logistics airlines marine railroads trucking airport services highways and rail tracks and marine ports and services understanding the transportation sectorthe performance of companies in the transportation industry is highly sensitive to fluctuations in company earnings and the price of transportation services main factors affecting company earnings include fuel costs labor costs demand for services geopolitical events and government regulation many of these factors are interconnected for example if the u s government passes regulations that make it more difficult for people to earn their commercial drivers license this will reduce the supply of drivers driving up the cost of hiring drivers oil prices are a key factor for transportation as the commodity s price generally has an influence on transportation expenses gas and fuel prices that rise will increase costs for a trucking company eating into their profit and potentially reducing their stock price energy costs and the value of transportation stocks are certainly interrelated low energy costs may become a factor in boosting the share price of various transportation companies but the influence can also be reversed when demand for transportation services is high the impact will be reflected in quarterly reports of transportation companies this information may once disseminated may motivate energy traders to bid up prices for oil and similar commodities however if demand for commercial transportation falls this information could lead to a decline in oil prices as well investing in the transportation sectoryou can invest in companies that move people and products by buying shares of individual transportation companies or through sector specific mutual funds or exchange traded funds etfs that specialize in the transportation sector the transportation sector is one of the most broadly diversified with industrial companies representing airlines railroads truckers equipment and leasing stocks and logistics companies funds that track this sector will track a benchmark sector index like the djta the dow jones transportation average djta is a price weighted average of 20 transportation stocks traded in the united states the djta is in fact the oldest u s stock index first compiled in 1884 by charles dow co founder of dow jones company the index initially consisted of nine railroad companies a testament to their dominance of the u s transportation sector in the late 19th and early 20th centuries and two non railroad companies in addition to railroads the index now includes airlines trucking marine transportation delivery services and logistics companies additionally the s p transportation select industry index provides a secondary benchmark for the sector | |
what is a transposition error | a transposition error describes an event where a bookkeeper accidentally reverses two adjacent digits when recording transactional data although this error may seem small in scale it often results in substantial financial incongruities that can have a great impact in other areas transpositional errors which tend to occur in accounting firms brokerages and other financial services providers fall under the broader category of transcription errors understanding transpositional errorstransposition errors are generally the result of human error for example in accounting when a bookkeeper manually enters data into a ledger they may by mistake incorrectly transfer information from an invoice into a balance sheet transposition errors may also occur when checks are filled out incorrectly resulting in improper payment amounts that can cause overdrafts and other banking issues furthermore transportation errors can result in incorrectly recorded phone numbers street addresses or zip codes in customer profiles and although the aforementioned mistakes are typically easily remedied in some cases transposition errors relating to medicinal dosing information may lead to tragic consequences examples of transposition errorsif a company fails to catch and correct transposition errors the incorrect value of assets may be perpetuated to outside agencies and individuals such as corporate shareholders and the internal revenue service this could cause a chain effect of inaccuracies for example a business may be saddled with an increased tax liability if the transposition error is large enough to slingshot that company into a higher tax bracket of course this largely depends on the degree of error in question if a bookkeeper mistakenly writes 24 74 instead of 24 47 the resulting 0 27 discrepancy would hardly be consequential on the other hand if 1 823 000 were accidentally recorded as 1 283 000 the resulting 540 000 error is sure to have a profound financial ripple effect transposition errors made in the trading world are sometimes called fat finger trades in one famous example a japanese trader accidentally ordered 1 9 billion shares in toyota luckily that order never went through interestingly transposition errors may be revealed by a rather peculiar mathematical phenomenon pointedly the difference between the incorrectly recorded amount and the correct amount will always be evenly divisible by 9 for example if a bookkeeper errantly writes 72 instead of 27 this would result in an error of 45 which may be evenly divided by 9 to give us 5 likewise if a bookkeeper mistakenly records 63 instead of 36 the difference between those two figures 27 may be evenly divided by 9 to give us 3 bank tellers can use this rule to detect errors transposition errors also describe scenarios where bookkeepers enter spreadsheet data into the wrong cells | |
what is a traunch | a traunch is one of a series of payments to be paid out over a specified period subject to certain performance metrics being achieved it is commonly used in venture capital vc circles to refer to the fundraising rounds used to fund startup companies the term traunch is based on the french word tranche meaning slice the term tranche is also used in the context of securitization as with mortgage backed securities mbs understanding traunchesone of the ways that investors seek to mitigate the risks of investing in startup companies is by parceling their capital contributions into separate traunches for example a startup company might wish to receive 5 million in financing rather than rendering the full amount upfront the investor might offer a deal in which the 5 million is split into two traunches 2 5 million today and the remaining 2 5 million paid at a future date subject to certain performance milestones being achieved from the investor s perspective dividing an investment into traunches helps reduce risk by allowing the investor to withhold some of the planned funding unless the company demonstrates progress in its business plan this can include performance targets relating to product development revenue targets additional fundraising or other such goals typically companies have little time in which to achieve the targets set out in each traunch which is a challenge incurred by the early startup process of course this reduced flexibility can make things difficult for the startup company in a variety of ways when hiring obtaining only a limited amount of the invested capital can make it difficult for the company to attract the personnel it needs to efficiently develop its offering moreover even when candidates are hired the lack of clear funding can make it difficult to retain those candidates traunch investments can also produce a misalignment of incentives between the investor and the entrepreneur from the entrepreneur s perspective it may be tempting to avoid communicating with the investor about problems facing the business especially when those problems might cause the next traunch to go unpaid similarly the traunch structure can incentivize entrepreneurs to manipulate their performance figures and otherwise mislead investors into believing they are making steady progress toward their mandated goals more broadly they can make it difficult for the entrepreneur to adapt their business model to meet new opportunities and avoid unforeseen risks after all there is no guarantee that the performance goals chosen at the onset of the investment will remain relevant over the following years in this sense the traunch structure can compel entrepreneurs to prioritize relatively unimportant milestones when other more important opportunities might present themselves real world example of a traunchsuppose you are the founder of a startup company that recently agreed to a traunched investment under the terms of the financing agreement your company will receive 1 million today 2 million in 12 months and an additional 7 million in 24 months to secure these later rounds of funding you must meet certain goals within the next 12 months you must hire for a range of positions by 24 months you must generate at least 500 000 in revenue failure to meet these targets means you will forfeit the next traunch of funding though you agree to these terms you are concerned that you may struggle to meet them you wonder if the staff you need to hire will be dissuaded from joining the company considering that you will be unable to guarantee their role for more than 12 months at the start similarly you anticipate that it will be challenging to attract the customers and partnership agreements necessary to achieve your revenue goal given that your company s long term prospects are in question potential customers and partners might wish to delay signing agreements with your company until it achieves a more secure financial footing this in turn could make it difficult for you to achieve your revenue goal | |
what are travel expenses | for tax purposes travel expenses are costs associated with traveling to conduct business related activities reasonable travel expenses can generally be deducted from taxable income by a company when its employees incur costs while traveling away from home specifically for business that business can include conferences or meetings understanding travel expensesthe internal revenue service irs considers employees to be traveling if their business obligations require them to be away from their tax home the area where their main place of business is located for substantially longer than an ordinary workday and they need to get sleep or rest to meet the demands of their work while away well organized records such as receipts canceled checks and other documents that support a deduction can help you get reimbursed by your employer and can help your employer prepare tax returns examples of travel expenses can include travel expenses do not include regular commuting costs 2individual wage earners can no longer deduct unreimbursed business expenses that deduction was one of many eliminated by the tax cuts and jobs act of 2017 3while many travel expenses can be deducted by businesses those that are deemed unreasonable lavish or extravagant or expenditures for personal purposes may be excluded types of travel expensestypes of travel expenses can include the use of a personal vehicle in conjunction with a business trip including actual mileage tolls and parking fees can be included as a travel expense the cost of using rental vehicles can also be counted as a travel expense though only for the business use portion of the trip for instance if in the course of a business trip you visited a family member or acquaintance the cost of driving from the hotel to visit them would not qualify for travel expense deductions 4travel expenses incurred while on an indefinite work assignment that lasts more than one year are not deductible for tax purposes 5the irs allows other types of ordinary and necessary expenses to be treated as related to business travel for deduction purposes such expenses can include transport to and from a business meal the hiring of a public stenographer payment for computer rental fees related to the trip and the shipment of luggage and display materials used for business presentations travel expenses can also include operating and maintaining a house trailer as part of the business trip 1can i deduct my business travel expenses business travel expenses can no longer be deducted by individuals if you are self employed or operate your own business you can deduct those ordinary and necessary business expenses from your return 1if you work for a company and are reimbursed for the costs of your business travel your employer will deduct those costs at tax time | |
do i need receipts for travel expenses | yes whether you re an employee claiming reimbursement from an employer or a business owner claiming a tax deduction you need to prepare to prove your expenditures keep a running log of your expenses and file away the receipts as backup | |
what are reasonable travel expenses | reasonable travel expenses from the viewpoint of an employer or the irs would include transportation to and from the business destination accommodation costs and meal costs certainly business supplies and equipment necessary to do the job away from home are reasonable taxis or ubers taken during the business trip are reasonable unreasonable is a judgment call the boss or the irs might well frown upon a bill for a hotel suite instead of a room or a sports car rental instead of a sedan the bottom lineindividual taxpayers need no longer fret over recordkeeping for unreimbursed travel expenses they re no longer tax deductible by individuals at least until 2025 when the provisions in the latest tax reform package are due to expire or be extended 6if you are self employed or own your own business you should keep records of your business travel expenses so that you can deduct them properly | |
what is travel insurance | travel insurance is a type of insurance covering financial losses associated with traveling and it can be useful protection for domestic or international travel whether you missed your flight to florida lost your bags in berlin or broke your ankle in ankara the best travel insurance companies can help remedy all kinds of travel mishap costs understanding travel insurancetravel insurance helps cover financial losses associated with surprise circumstances that could ruin a trip including illness injury accidents flight or other transportation delays and other issues this insurance costs 4 to 10 of a trip s price so for a 10 000 trip trip insurance could cost between 400 and 1 000 1premiums or the price you pay for coverage are based on the coverage type your age destination trip cost and more specialized policy riders focus on the needs of business travelers athletes and expatriates you may already have travel insurance coverage from your homeowners or renters insurance or your credit cards call your insurance agent to find out about your current travel coverage and your credit card company to find out about any benefits you get when you purchase air or train tickets rent a car or book a hotel using the card many travel rewards cards come with built in travel insurance and other travel benefits | |
how travel insurance works | travel insurance may be sold online by travel agents travel suppliers airlines cruise lines private insurance companies or insurance brokers when booking your flight accommodations or car travel insurance companies include aig travel berkshire hathaway travel protection generali global assistance geoblue nationwide and more typically you ll purchase coverage shortly after initial bookings for lodging flights or other transportation activities and rental cars some policies may require you to do so to retain full coverage here are some terms to know for travel insurance if you buy travel insurance you may have concurrent insurance coverage meaning you re covered under more than one policy when the travel coverage is primary the travel insurance reimburses you first without needing to make a claim through another company and sparing you potentially increased policy rates if the travel insurance coverage is secondary you ll first need to attempt to file a claim with other coverage such as an airline lost baggage or your own auto insurance damaged car there are usually stipulations spelled out on how you qualify for coverage your claim must fall under the types of coverage offered for example lost baggage insurance might include coverage for personal items prescriptions credit cards and your passport or visa you may also need to take extra steps to qualify for coverage such as reporting the loss or theft to the police this is the maximum amount you can receive for the claim for example you might only receive 500 per bag you may not even receive more for expensive items such as jewelry or electronic devices you might need to provide receipts for items over a certain amount without receipts the insurer may only pay for repairs some coverage might require you to pay a deductible or flat amount before covering the remainder of your claim up to the limit these are the conditions under which your coverage will not cover the loss each policy differs for example your baggage damage coverage may not cover losses caused by animals it may exclude coverage of bicycles hearing aids or other medical devices keys and tickets or seizure by a government or customs official pre existing conditions may not be covered by travel medical insurance or may only be covered if you buy a travel insurance plan within one to two weeks of booking your trip 2comprehensive travel insurancecomprehensive travel insurance includes many types of coverage listed below bundled into one plan most commonly comprehensive travel insurance bundles a 24 hour assistance line to help find doctors or get assistance in an emergency reimburse you for trip cancellation interruption and delay baggage loss or delay and medical expense and medical evacuation coverage 34alternatively you can purchase each coverage type separately this may be wise if you already have coverage through other insurance or can cover your losses in many cases trip cancellation or interruption coveragethis insurance reimburses a traveler for some or all prepaid nonrefundable travel expenses and comes in the following forms with most of the above acceptable cancellation and interruption causes and reimbursement amounts vary by provider acceptable reasons for a claim might include the following 5you may need to pay more or meet more requirements to file a claim for a cancellation due to financial default terrorism in your destination city or work reasons | |
when traveling register your travel plans with the state department through its free travel registration website the smart traveler enrollment program step the nearest embassy or consulate can contact you if there is a family state or national emergency | damage and baggage losses coveragebaggage and personal belongings being lost stolen or damaged is a frequent travel problem and can quickly ruin a trip as you must shop for replacements baggage and personal effects coverage protects lost stolen or damaged belongings during travel to in and from a destination however many travel insurance policies pay for belongings only after you exhaust all other available claims baggage coverage may have many restrictions and exclusions such as only covering up to 500 per item and 250 for each additional item you may be able to increase or decrease amounts shop around for coverage or increase limits by paying more for example the insurance may not pay for lost and damaged luggage due to airline fault most carriers such as airlines reimburse travelers if baggage is lost or destroyed due to the airline s error however there may be limitations on reimbursement amounts so baggage and personal effects coverage provide an additional layer of protection 1rental insurancevacation rental insurance covers costs from accidental damage to a vacation rental property some plans also offer trip cancellation and interruption to help reimburse costs when you can t use your vacation rental some of these reasons could include the following rental car insurance covers a rental car s damage or loss while on a trip taking the place of the rental agency s collision damage waiver cdw or your regular car insurance policy policies vary and may cover collisions theft vandalism and other incidents rental car insurance may be a secondary policy to your own car insurance however it doesn t cover your liability or legal responsibility for damage or injury you cause to others 1travel health insurancemedical coverage can help with unexpected international medical and dental expenses and help with locating doctors and healthcare facilities abroad as with other policies coverage will vary by price and provider consult with your current medical insurers before purchasing a policy to determine whether a policy extends its coverage outside the country most health insurance companies pay customary and reasonable hospital costs if you become sick or injured while traveling but few will pay for a medical evacuation 6the u s government doesn t insure citizens or pay for medical expenses abroad before purchasing a policy read the provisions to see what exclusions such as preexisting medical conditions apply don t assume that the new coverage mirrors that of your existing plan routine medical care is typically excluded unless you buy a long term medical plan intended for expatriates missionaries maritime crew members or others abroad for extended periods medicare or medicaid generally don t cover medical costs overseas unless you have specific medicare advantage or medigap plans covering emergency overseas care 78accidental death and dismembership ad d coverageif an accident results in death or serious injury an ad d policy pays a lump sum to surviving beneficiaries or you for an injury the insurance usually offers three parts providing coverage for accidents and fatalities 1exclusions that may apply include death caused by drug overdose or sickness in addition only some injuries may be covered specifically hand foot limb or eyesight there are stated amount limits per injury accidental death coverage may not be necessary if you already have a life insurance policy however benefits paid by your travel insurance coverage may be in addition to those paid by your life insurance policy leaving more money to your beneficiaries other travel insurance coveragedepending on your plan or package selected you may be able to add the following travel insurance types | |
how to get travel insurance | travel insurance varies in cost exclusions and coverage coverage is available for single multiple and yearly trips to get travel insurance you fill out an insurance company s application about your trip including the following the insurance company reviews the information using underwriting guidelines to guide issuing a policy and the rate if it accepts your application the company will issue a policy covering your trip if the company rejects your application you can apply with another insurer | |
when you receive your policy you ll typically get a 10 to 15 day review period to review the contract s fine details if you don t like the policy you can return it for a refund read through the document and ensure the plan you purchased doesn t apply too many loopholes and that it covers | also read through for any exclusions for example types of property covered and whether property lost or damaged by the airline is covered and how | |
do i need travel insurance | you might consider travel insurance if you can t afford to cancel and then rebook an expensive or long trip you might also consider travel health insurance if your health insurance doesn t cover international costs an alternative is to book an easily cancellable vacation look for a pay later hotel room and car rental options flexible cancellation terms and the ability to rebook without a fee | |
what is not covered by travel insurance | review the travel insurance policy to discover exclusions according to naic common travel policy exclusions are 9pandemics may also be excluded from coverage | |
how can i get cheap travel insurance | your homeowners or renters insurance may provide some protection for personal belongings and airlines and cruise lines are responsible for loss and damage to your baggage during transport also credit cards may provide automatic protection for things like delays and luggage or rental car accidents if used for deposits or other trip related expenses the bottom linethe main types of travel insurance include trip cancellation or interruption coverage baggage and personal effects coverage medical expense coverage and accidental death or flight accident coverage before buying a policy check to see if you already have coverage through your own health or car insurance or a credit card | |
what is a traveler s check | a traveler s check sometimes spelled cheque is a once popular but now largely outmoded medium of exchange utilized as an alternative to hard currency and intended to aid tourists the product is typically used by people on vacation in foreign countries it offers a safe way to travel overseas without the risks associated with losing cash the issuing party usually a bank provides security against lost or stolen checks traveler s checks have increasingly been supplanted by credit cards and prepaid debit cards | |
how traveler s checks work | a traveler s check is for a prepaid fixed amount and operates like cash so a purchaser can use it to buy goods or services when traveling a customer can also exchange a traveler s check for cash major financial service institutions issue traveler s checks and banks and credit unions sell them though their ranks have significantly dwindled today a traveler s check is similar to a regular check because it has a unique check number or serial number when a customer reports a check stolen or lost the issuing company cancels that check and provides a new one they come in several fixed denominations in a variety of currencies making them a safeguard in countries with fluctuating exchange rates and they do not have an expiration date they are not linked to a customer s bank account or line of credit and do not contain personally identifiable information therefore eliminating the risk of identity theft they operate via a dual signature system you sign them when you purchase them and then you sign them again when you cash them which is designed to prevent anyone other than the purchaser from using them many banks hotels and retailers used to accept them as cash although some banks charged fees to cash them however with the rising worldwide use of credit cards and prepaid debit cards such as the visa travelmoney card which offers zero liability for its unauthorized use it is getting much harder to find institutions that will cash traveler s checks history of traveler s checksjames c fargo the president of the american express company was a wealthy well known american who was unable to get checks cashed during a trip to europe in 1891 a company employee marcellus f berry believed that the solution for taking money overseas required a check with the signature of the bearer and devised a product for it american express and visa still use the british spelling on their products | |
where to get traveler s checks | companies that still issue traveler s checks today include visa and aaa they often come with a purchase fee aaa now offers members pre paid international visa cards instead of paper checks in the u s they are available primarily from american express locations you can also buy traveler s checks online from the american express website but you need to be registered with an account visa offers traveler s checks at citibank locations nationwide as well as at several other banks american express visa and aaa are among the companies that still issue traveler s checks | |
where to cash traveler s checks | if you want to convert your traveler s checks into cash instead of spending them directly you can often deposit them normally at your bank many hotel or resort lobbies will also provide this service to guests at no charge american express also provides a service to redeem traveler s checks that they issue online to be deposited into your bank account advantages and disadvantages of traveler s checkstraveler s checks are handy for tourists who do not want to risk losing their cash or having it stolen while abroad because traveler s checks can be reported lost or stolen and the funds replaced they provide peace of mind this was particularly a concern before credit cards and atms were widespread and affordable worldwide for most travelers at the same time these paper checks are now a bit outdated and come with a fee to purchase making them potentially more expensive and cumbersome than using plastic or electronic payments replaced if lost or stolenwidely accepted around the worldconvenient to usethey don t expireoutmodedmust have the physical check to use itincurs a fee to purchaselimited number of issuers todayalternatives to traveler s checksthe most obvious alternative is to use a credit or debit card issued by a bank that works worldwide and charges low or no foreign exchange fees on purchases or atm withdrawals if your bank doesn t allow for this or charges high fees then prepaid travel cards are the modern version of traveler s checks they allow you to get local currency from atms and make purchases with merchants effectively eliminating the need for traveler s checks prepaid cards are not linked to your bank account which prevents anybody from draining your checking account if the card gets lost or stolen and you can t go into debt credit cards offer similar or better protection but you might not want to use your everyday card abroad by using a dedicated travel card you avoid spreading your card numbers around which means you can be less vigilant about monitoring your accounts when you get back home visa and mastercard both offer prepaid cards designed for use abroad those cards are available online through travel agents and at banks or credit unions travel cards should feature low atm fees technology that lets you operate like a local in foreign countries emergency cash when you lose the card and zero liability fraud protection that said prepaid cards can be expensive so you need to compare fees against your other cards to decide whether or not a travel card makes sense for u s citizens living abroad for extended periods maintaining checking and other bank accounts in the united states provides several advantages and many checking accounts are friendly for foreign transactions | |
where do you buy traveler s checks | you can buy still buy traveler s checks from visa and a handful of other financial institutions to buy them visit a location or check the website of an issuing institution you may need a photo id in order to set up an account | |
how do you cash traveler s checks | some hotels resorts and currency traders will cash traveler s checks in exchange for local currency however with the rising prevalence of credit and debit cards fewer locations cash traveler s checks | |
what do you do with traveler s checks | traveler s checks are a secure way of carrying money while abroad many businesses in the tourism industry will cash traveler s checks and they can also be deposited into a bank account because the checks can be easily replaced they have a lower risk of theft or loss however traveler s checks have fallen out of favor due to the increased convenience of credit cards and prepaid debit cards the bottom linetraveler s checks were once a popular way to carry money while vacationing abroad they are sold in fixed denominations and can be used for purchases or cashed like an ordinary check traveler s checks can be easily replaced making them less risky than carrying large amounts of cash however they have fallen out of favor due to the convenience of using credit or debit cards | |
a treasury bill t bill is a short term u s government debt obligation backed by the u s department of the treasury terms range from four to 52 weeks t bills are issued at a discount from the par value also known as the face value | treasury bills are usually sold in denominations of 100 however some can reach a maximum denomination of 5 million in noncompetitive bids 1 the treasury sells t bills during auctions using a competitive and noncompetitive bidding process investopedia michela buttignol | |
how to buy treasury bills | the u s department of the treasury issues t bills to raise cash to fund the federal government s spending when there is a budget deficit t bills are generally held either until the maturity date or cashed before maturity investors can buy t bills in electronic form from a brokerage firm which could cost a small fee or directly from treasurydirect the platform of the u s treasury here are the steps to do so after submitting your order you should receive an on screen confirmation indicating your request has been processed you ll receive an email from treasurydirect confirming your purchase and providing a transaction summary your payment will typically be settled the next day at maturity the yield from your treasury bond will be automatically deposited into your linked account t bill prices tend to rise when the u s federal reserve is engaged in an expansionary monetary policy by purchasing treasurys conversely t bill prices fall when the fed sells its debt securities treasury bill ratesthe maturity period for treasury bills is four eight 13 17 26 and 52 weeks alternatively one through four six and 12 months 2 when interest rates are expected to rise longer maturity dates pay more than shorter dates meanwhile if interest rates are expected to fall longer maturity dates might have lower interest rates 3 below is a chart of the four week six month and one year t bill yields for the last 10 years redemptions and interestt bills are issued at a discount from the par value a 1 000 bill might cost the investor 950 when the bill matures the investor is paid the face value par value of the bill they bought since the face value exceeds the purchase price the difference is the interest earned for the investor 4for example the treasury issues a 52 week t bill in april and sells it on may 1 if it s sold for 95 419667 per 100 and an investor purchases a 1 000 52 week t bill that day they pay 954 19667 and receive 1 000 on maturity the gain is 45 80 in interest when the t bill matures 5t bills do not pay regular interest payments as with a coupon bond but a t bill does include interest reflected in the amount it pays when it matures 6 the interest income from t bills is exempt from state and local income taxes however the interest income is subject to federal income tax 7t bills are issued at a discount from the par value meaning the purchase price is less than the face value of the bill pros and cons of t billszero default risk since t bills have a u s government guaranteet bills offer a low minimum investment requirement of 100interest income is exempt from state and local income taxes but subject to federal income taxesinvestors can buy and sell t bills with ease in the secondary bond markett bills offer low returns compared with other debt instrumentsthe t bill pays no interest payments leading up to its maturityt bills can inhibit cash flow for investors who require steady incomet bills have interest rate risk so their rate could become less attractive in a rising rate environmentt bills pay a fixed rate of interest which can provide a stable income however should interest rates rise the existing t bills fall out of favor since their return is less than the market for this reason t bills have interest rate risk which means there is a danger that bondholders might lose out should there be higher rates in the future although t bills have zero default risk their returns are typically lower than corporate bonds and some certificates of deposit since treasury bills don t pay periodic interest payments they re sold at a discounted price to the face value of the bond 7if sold early there could be a gain or loss depending on where bond prices are trading at the time of the sale the sale price of the t bill could be lower than the original purchase price 2a competitive bid sets a price at a discount from the t bill s par value investors can specify the yield noncompetitive bid auctions allow investors to submit a bid to purchase a set dollar amount of bills the yield investors receive is based on the average auction price from all bidders federal reserve policylike other debt securities t bill prices fluctuate many factors can influence prices including macroeconomic conditions monetary policy and supply and demand for treasurys 4federal reserve monetary policy and the federal funds rate affect t bills the rate is the interest rate that banks charge each other for lending money from their reserve balances overnight the fed increases or decreases this rate to contract or expand the money supply 8 | |
how does inflation affect treasury bills | treasurys also have to compete with inflation which is the pace of rising prices even if t bills are the most liquid and safest debt security in the market fewer investors tend to buy them when the inflation rate is higher than the t bill s returns if an investor buys a t bill with a 2 yield while inflation is at 3 the investor would have a net loss on the investment when measured in real terms as a result t bill prices tend to fall during inflationary periods as investors sell them and opt for higher yielding investments 9 | |
are treasury bills the only debt security issued by the u s treasury | treasury bills are one of several types of debt issued by the u s department of the treasury treasury bonds and treasury notes are fixed term debt treasury bills are short term obligations up to a year treasury notes are medium term securities from two to 10 years treasury bonds have the longest time frame maturing in 20 or 30 years 10 | |
what type of interest payments are earned on a treasury bill | the only interest paid will be when the bill matures at that time you are given the full face value t bills are zero coupon bonds usually sold at a discount and the difference between the purchase price and the par amount is your accrued interest the bottom linetreasury bills or t bills are short term debt obligations issued by the u s treasury department they are considered safe investments because they are backed by the full faith and credit of the u s government t bills are sold at a discount from their face value and mature at face value the difference between the purchase price and the maturity value is the interest earned by the investor treasury bills are a good option for investors who are looking for a safe and secure investment with a short term maturity while parking their money for a short period correction june 12 2024 this article has been corrected to state that as the federal funds rate increases the yield on existing t bills goes up | |
a treasury bill t bill is a short term u s government debt obligation backed by the u s department of the treasury terms range from four to 52 weeks t bills are issued at a discount from the par value also known as the face value | treasury bills are usually sold in denominations of 100 however some can reach a maximum denomination of 5 million in noncompetitive bids 1 the treasury sells t bills during auctions using a competitive and noncompetitive bidding process investopedia michela buttignol | |
how to buy treasury bills | the u s department of the treasury issues t bills to raise cash to fund the federal government s spending when there is a budget deficit t bills are generally held either until the maturity date or cashed before maturity investors can buy t bills in electronic form from a brokerage firm which could cost a small fee or directly from treasurydirect the platform of the u s treasury here are the steps to do so after submitting your order you should receive an on screen confirmation indicating your request has been processed you ll receive an email from treasurydirect confirming your purchase and providing a transaction summary your payment will typically be settled the next day at maturity the yield from your treasury bond will be automatically deposited into your linked account t bill prices tend to rise when the u s federal reserve is engaged in an expansionary monetary policy by purchasing treasurys conversely t bill prices fall when the fed sells its debt securities treasury bill ratesthe maturity period for treasury bills is four eight 13 17 26 and 52 weeks alternatively one through four six and 12 months 2 when interest rates are expected to rise longer maturity dates pay more than shorter dates meanwhile if interest rates are expected to fall longer maturity dates might have lower interest rates 3 below is a chart of the four week six month and one year t bill yields for the last 10 years redemptions and interestt bills are issued at a discount from the par value a 1 000 bill might cost the investor 950 when the bill matures the investor is paid the face value par value of the bill they bought since the face value exceeds the purchase price the difference is the interest earned for the investor 4for example the treasury issues a 52 week t bill in april and sells it on may 1 if it s sold for 95 419667 per 100 and an investor purchases a 1 000 52 week t bill that day they pay 954 19667 and receive 1 000 on maturity the gain is 45 80 in interest when the t bill matures 5t bills do not pay regular interest payments as with a coupon bond but a t bill does include interest reflected in the amount it pays when it matures 6 the interest income from t bills is exempt from state and local income taxes however the interest income is subject to federal income tax 7t bills are issued at a discount from the par value meaning the purchase price is less than the face value of the bill pros and cons of t billszero default risk since t bills have a u s government guaranteet bills offer a low minimum investment requirement of 100interest income is exempt from state and local income taxes but subject to federal income taxesinvestors can buy and sell t bills with ease in the secondary bond markett bills offer low returns compared with other debt instrumentsthe t bill pays no interest payments leading up to its maturityt bills can inhibit cash flow for investors who require steady incomet bills have interest rate risk so their rate could become less attractive in a rising rate environmentt bills pay a fixed rate of interest which can provide a stable income however should interest rates rise the existing t bills fall out of favor since their return is less than the market for this reason t bills have interest rate risk which means there is a danger that bondholders might lose out should there be higher rates in the future although t bills have zero default risk their returns are typically lower than corporate bonds and some certificates of deposit since treasury bills don t pay periodic interest payments they re sold at a discounted price to the face value of the bond 7if sold early there could be a gain or loss depending on where bond prices are trading at the time of the sale the sale price of the t bill could be lower than the original purchase price 2a competitive bid sets a price at a discount from the t bill s par value investors can specify the yield noncompetitive bid auctions allow investors to submit a bid to purchase a set dollar amount of bills the yield investors receive is based on the average auction price from all bidders federal reserve policylike other debt securities t bill prices fluctuate many factors can influence prices including macroeconomic conditions monetary policy and supply and demand for treasurys 4federal reserve monetary policy and the federal funds rate affect t bills the rate is the interest rate that banks charge each other for lending money from their reserve balances overnight the fed increases or decreases this rate to contract or expand the money supply 8 | |
how does inflation affect treasury bills | treasurys also have to compete with inflation which is the pace of rising prices even if t bills are the most liquid and safest debt security in the market fewer investors tend to buy them when the inflation rate is higher than the t bill s returns if an investor buys a t bill with a 2 yield while inflation is at 3 the investor would have a net loss on the investment when measured in real terms as a result t bill prices tend to fall during inflationary periods as investors sell them and opt for higher yielding investments 9 | |
are treasury bills the only debt security issued by the u s treasury | treasury bills are one of several types of debt issued by the u s department of the treasury treasury bonds and treasury notes are fixed term debt treasury bills are short term obligations up to a year treasury notes are medium term securities from two to 10 years treasury bonds have the longest time frame maturing in 20 or 30 years 10 | |
what type of interest payments are earned on a treasury bill | the only interest paid will be when the bill matures at that time you are given the full face value t bills are zero coupon bonds usually sold at a discount and the difference between the purchase price and the par amount is your accrued interest the bottom linetreasury bills or t bills are short term debt obligations issued by the u s treasury department they are considered safe investments because they are backed by the full faith and credit of the u s government t bills are sold at a discount from their face value and mature at face value the difference between the purchase price and the maturity value is the interest earned by the investor treasury bills are a good option for investors who are looking for a safe and secure investment with a short term maturity while parking their money for a short period correction june 12 2024 this article has been corrected to state that as the federal funds rate increases the yield on existing t bills goes up | |
what is treasurydirect | treasurydirect is the online platform through which investors can purchase federal government securities directly from the u s treasury understanding treasurydirecttreasurydirect sells treasury bills notes bonds treasury inflation protected securities tips and savings bonds all of which are backed by the full faith and credit of the u s government and are used to finance the federal debt 3the treasurydirect website is the main portal through which the u s treasury sells its securities in effect treasurydirect is the only way investors can purchase and redeem treasury securities directly from the government in paperless electronic form through the website money can be deposited from and withdrawn to personal bank accounts and repurchase of securities can be rolled over as currently held securities mature the types of treasury securities available through treasurydirect include the treasurydirect trading system eliminates banks brokers and dealers as middlemen saving investors money on commissions and fees the minimum required investment in the treasurydirect market10treasury securities are sold through an auction process which establishes a security s rate and yield investors can place either competitive or non competitive bids competitive bidders specify the rate yield or discount margin that they will accept non competitive bidders agree to accept the rate yield or discount margin that the auction establishes 1at the auction s close the treasury first issues securities to all non competitive bidders then to competitive bidders from lowest to the highest bid until it has issued the total amount of securities provided for by that auction all accepted bidders receive the terms of the highest accepted offer the minimum required investment in the treasurydirect market is 100 10 | |
how to open a treasurydirect account | to open a treasurydirect account investors must have a social security number or employer identification number ein a u s address a checking or savings account for transferring funds to and from a treasurydirect account an email address and a secure web browser and internet connection individuals institutions corporations partnerships limited liability companies llcs sole proprietors estates and trusts can also establish treasurydirect accounts 12you can request the irs or your state tax department to deposit your tax refund straight into your treasurydirect account and use the funds to purchase securities 11of course investors can still purchase treasury securities through traditional channels like brokerages or banks even if they set up a treasurydirect account however financial professionals cannot buy securities for clients through the system special considerations for treasury directonly new issues can be bought through treasurydirect treasury securities typically follow a schedule to release these new issues also known as on the run treasuries treasuries issued before the most recently issued bond or note of a particular maturity are referred to as off the run treasuries as they are taken off treasurydirect for example the 52 week bill is auctioned every four weeks at which time the previously existing 52 week bills will only be available for trading in the secondary market 12 | |
what are treasury inflation protected securities tips | treasury inflation protected securities tips are a type of treasury security issued by the u s government tips are indexed to inflation to protect investors from a decline in the purchasing power of their money daniel fishel investopediaunderstanding treasury inflation protected securities tips the principal value of tips rises as inflation rises inflation is the pace at which prices increase throughout the u s economy as measured by the consumer price index cpi inflation becomes an issue when there isn t a commensurate rise in real wage growth to offset the negative effects of rising prices 1tips are a popular asset for protecting portfolios from inflation and profiting from it because they pay interest every six months based on a fixed rate determined at the bond s auction however the interest payment amounts can vary since the rate is applied to the adjusted principal or value of the bond if the principal amount is adjusted higher over time due to rising prices then the interest rate will be multiplied by the increased principal amount as a result investors receive higher interest or coupon payments as inflation rises conversely investors will receive lower interest payments if deflation occurs 1tips are issued with maturities of five 10 and 30 years and are considered a low risk investment because the u s government backs them at maturity tips return the adjusted principal or the original principal whichever is greater 1tips can be purchased directly from the government through the treasurydirect system in 100 increments with a minimum investment of 100 and are available with the aforementioned maturities 1some investors prefer to get tips through a tips mutual fund or exchange traded fund etf however purchasing tips directly allows investors to avoid the management fees associated with mutual funds tips price relationship to inflationtips are important since they help combat the inflation risk that erodes the yield on fixed rate bonds inflation risk is an issue because the interest rate paid on most bonds is fixed for the life of the bond as a result the bond s interest payments might not keep up with inflation for example if prices rise by 3 and an investor s bond pays 2 then the investor has a net loss in real terms tips are designed to protect investors from the adverse effects of rising prices over the life of the bond the par value principal increases with inflation and decreases with deflation as measured by the cpi as mentioned earlier when tips mature bondholders are paid the inflation adjusted principal or original principal whichever is greater 1suppose an investor owns 1 000 in tips at the end of the year with a coupon rate of 1 if there is no inflation as measured by the cpi then the investor will receive 10 in coupon payments for that year if inflation rises by 2 however then the 1 000 principal will be adjusted upward by 2 to 1 020 the coupon rate will remain the same at 1 but it will be multiplied by the adjusted principal amount of 1 020 to arrive at an interest payment of 10 20 for the year conversely if inflation were negative known as deflation with prices falling 5 then the principal would be adjusted downward to 950 the resulting interest payment would be 9 50 over the year however at maturity the investor would receive no less than the principal amount invested of 1 000 or an adjusted higher principal if applicable 1the interest payments during the life of the bond are subject to being calculated based on a lower principal amount in the event of deflation but the investor is never at risk of losing the original principal if held to maturity if investors sell tips before maturity in the secondary market they might receive less than the initial principal 1tips don t work as a short term hedge against spikes in inflation their real function is to protect investors against rising living costs over the long term | |
how to buy tips | as with other treasury securities investors can buy tips directly from the u s government at the treasury website treasurydirect gov this entails a somewhat complicated login process with several security layers 1you can also buy tips directly from your bank or broker this may be more convenient for those investors who already have a substantial portfolio of securities at a certain financial institution advantages and disadvantages of tipslet s discuss the advantages of treasury inflation protected securities the benefits include but aren t necessarily limited to along with those advantages there are some disadvantages to consider the principal increases with inflation meaning that at maturity bondholders are paid the inflation adjusted principalinvestors will never be paid less than their original principal when tips matureinterest payments increase as inflation increases since the rate is calculated based on the adjusted principal balancethe interest rate offered is usually lower than most fixed income bonds that do not have an inflation adjustmentinvestors might be subject to higher taxes on increased coupon paymentsif inflation does not materialize while tips are held then the utility of holding tips decreasesbest type of investor for tipstips are definitely best designed for certain types of investors some of those investors were briefly touched on when we talked about advantages and disadvantages more specifically we ll talk about those investors now and we ll start with conservative investors tips are ideal for conservative investors who prioritize capital preservation and seek to minimize risk since tips are backed by the u s government they are considered one of the safest investment options available for this reason institutional investors such as pension funds and insurance companies often use tips to match their long term liabilities with inflation protected assets to make sure they have future cash flow retirees and those focused on generating a stable income stream can benefit from tips as we touched on earlier the semi annual interest payments adjusted for inflation provide a reliable income that keeps pace with the rising cost of living in addition tips can be great for those who may be saving for retirement long term investors who are concerned about the impact of inflation over extended periods can leverage tips though this investment strategy may be best for those who are convinced there will be a high rate of inflation for years to come investors who are sensitive to state and local taxes might find tips advantageous as we talked about earlier there are some local and state tax benefits to owning tips other forms of niche investors may actually be esg investors if an investor does not align with corporate esg policies but instead politically aligns with the prevailing government entity legislation they can choose to invest in fixed income securities by entities i e the government in this example they align with regarding esg tips and nominal bondslet s quickly cover the difference between nominal bonds and tips nominal bonds and tips are both types of bonds issued by the u s treasury but they differ primarily in how they handle inflation protection nominal bonds also known as conventional bonds pay a fixed interest rate over the life of the bond and the principal value remains constant until maturity they do not provide explicit protection against inflation tips on the other hand are specifically designed to protect investors from inflation nominal bonds pay fixed interest payments based on the face value of the bond these coupon payments do not adjust for changes in inflation the market price of these nominal bonds fluctuates based on interest rates and overall market considerations the yield on nominal bonds is fixed interest income from both nominal bonds and tips is subject to federal income tax however the inflation adjustments to the principal of tips are also taxable as income in the year they occur this is not the case for nominal bonds example of tipsbelow is a comparison of the 10 year tips to the 10 year treasury note both issued and auctioned by the u s treasury department treasury notes t notes are intermediate term bonds maturing in two three five seven or 10 years they provide semiannual interest payments at fixed coupon rates 2as a historical example on march 29 2019 the 10 year tips was auctioned with an interest rate of 0 875 3 on the other hand fast forward about five years to see the impact that inflation has had according to tipswatch on march 21 2024 the first reopening auction for tips received a real yield to maturity of 1 932 4 | |
have have tips performed | in 2022 inflation in the united states hit highs not seen in four decades leading many investors to flock to tips for protection however that insurance policy didn t really go according to plan these inflation protecting securities fell an average of 14 2 during the course of the year performing not much better than regular treasuries and major equity markets 5this serves as a reminder of how tips work and how they are often misunderstood when inflation soared in 2022 the federal reserve as it normally does when the cost of living rockets hiked interest rates and steep increases in the cost of borrowing caused tips like the rest of the bond market to plummet in value despite the extra payouts tied to inflation in 2023 as inflation cooled and the fed lowered interest rates tips struggled to perform well from january 1 2023 to december 31 2023 the ishares tips bond etf returned an annual return of 0 99 gaining 1 05 over the course of the year most of this return had been given back through the first several months of 2024 from the start of the year to the end of mary 2024 the etf had a loss of 0 73 6 | |
how can i buy treasury inflation protected securities tips | you can buy tips directly from the u s treasury s treasurydirect website with a minimum purchase of 100 1 you can also typically buy them through your broker there are also several mutual funds and exchange traded funds etfs that invest in tips and other inflation linked securities that you can buy and sell like ordinary shares of stock can i buy tips for my individual retirement account ira yes you can include tips and funds that hold tips in an individual retirement account ira however you cannot use the treasurydirect service to buy them directly in an ira instead you would need to rely on the broker holding your retirement account | |
what yields do tips have | the yields on tips are often negative this is because after taking into account the effects of inflation the real yield is negative for instance if standard two year treasuries yield 1 but inflation is 2 then the real yield is 1 tips are meant to keep up with inflation not beat inflation therefore you can have a nominal yield on tips that is positive but a real yield that is effectively zero note that while the yield on tips may be negative their principal value will increase with inflation which can generate capital gains |
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