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why close off an economy | although totally closed economies are essentially nonexistent today governments may still close off a specific industry or sector of their economy from international competition some oil producing countries for example have a history of prohibiting foreign petroleum firms from doing business within their borders the argument in favor of a partially closed economy is that a completely open one runs the risk of becoming overly dependent on imports resulting in a severely lopsided balance of trade also domestic producers may suffer because they cannot compete at low international prices therefore governments may use trade controls like tariffs subsidies and quotas to support domestic enterprises this policy is often referred to as protectionism the united states for example which has relatively low tariffs overall imposed a 25 tariff on steel imports and a 10 tariff on aluminum imports in 2018 in the name of protecting domestic producers from unfair foreign competition particularly from china 5 in 2022 those rules were amended 6measuring how closed an economy isone way to assess the degree to which an economy is open or closed is by measuring the country s imports and exports as a percentage of its gross domestic product gdp by that measure the african nation of sudan may have the most closed economy today using the most recently available figures imports represent just 1 0 of sudan s gdp while exports represent 1 2 in the u s by comparison those figures are 15 4 and 11 6 respectively 78 | |
what does balance of trade mean | the term balance of trade refers to the value of a country s imports as compared to the value of its ports a country that imports more that it exports will have a trade deficit while one that exports more than it imports will have a trade surplus | |
what is the difference between a tariff and a quota | a tariff imposes a tax on a particular good coming in from another country while a quota limits the quantity of such goods | |
what is a trade subsidy | a trade subsidy is a financial benefit that a government provides to a company or industry in order to make its products more competitive at home and in international markets the bottom lineno country today appears to have a completely closed economy but some are more closed than others countries with relatively closed economies rely less on imports and exports than those with more open economies attempting to produce whatever goods and services they require from within their own borders economists generally believe that relatively open economies are more beneficial for their citizens and the world at large than relatively closed ones | |
what is a closed end fund | a closed end fund is a type of mutual fund that issues a fixed number of shares through one initial public offering ipo to raise capital for its initial investments its shares can then be bought and sold on a stock exchange but no new shares will be created and no new money will flow into the fund in contrast an open end fund such as most mutual funds and exchange traded funds etfs accepts a constant flow of new investment capital it issues new shares and buys back its own shares on demand many municipal bond funds and some global investment funds are closed end funds understanding closed end fundslike many mutual funds a closed end fund has a manager overseeing the portfolio and actively buying selling and holding assets similar to stocks and etfs its shares fluctuate in price throughout the trading day however the closed end fund s parent company will issue no additional shares and the fund itself won t buy back shares unless the closed end fund is an interval fund which is a type of closed end fund that can buy back shares closed end funds and open end mutual funds have many similarities both make distributions of income and capital gains to their shareholders both charge an annual expense ratio for their services moreover the companies that offer them must be registered with the securities and exchange commission sec 1closed end funds vs open end fundsclosed end funds differ from open end funds in fundamental ways as noted a closed end fund raises a prescribed amount of capital in a one time offering of a fixed number of shares once the shares are sold the offering is closed most mutual and exchange traded funds constantly accept new investor dollars issuing additional shares and redeeming or buying back shares from shareholders who wish to sell a closed end fund lists on a stock exchange where the shares trade like stocks throughout the trading day open end mutual funds price their shares only once a day at the end of the trading day basing the price on the net asset value of the portfolio the stock price of a closed end fund fluctuates according to the usual forces of supply and demand and the changing values of the fund s holdings because they trade exclusively in the secondary markets closed end funds require a brokerage account to buy and sell open end funds can usually be purchased directly through the fund s sponsoring investment company diversified portfolioprofessional managementtransparent pricingpotential for higher yieldssubject to volatilityless liquid than open end fundsavailable only through brokersmay get heavily discountedclosed end funds and net asset value nav its pricing is one of the unique characteristics of a closed end fund the nav of the fund is calculated regularly and based on the value of the assets in the fund however the price that it trades for on the exchange is market driven this means a closed end fund can trade at a premium or a discount to its nav a premium price means the price of a share is above the nav while a discount is the opposite below the nav there are several reasons for this a fund s market price may rise because it is focused on a sector currently popular with investors or because its manager is well regarded among investors or a history of underperformance or volatility may make investors wary of the fund driving down its share value closed end fund performanceclosed end funds do not repurchase their shares from investors that means they don t have to maintain a large cash reserve level leaving them with more money to invest they can also make heavy use of leverage borrowed money to boost their returns as a result closed end funds may be able to offer higher overall returns than their open fund mutual fund counterparts examples of closed end fundsthere are many different types of closed end funds these can include business development companies bdcs real estate funds commodity funds and bond funds the largest type of closed end fund as measured by assets under management is the municipal bond fund these large funds invest in the debt obligations of state and local governments and federal government agencies managers of these funds often seek broad diversification to minimize risk but may also rely on leverage to maximize returns managers also build closed end global international and emerging markets funds that mix stocks and fixed income instruments global funds combine u s and international securities international funds purchase only non u s securities emerging markets funds focus on fast growing and volatile foreign sectors and regions one of the largest closed end funds is the eaton vance tax managed global diversified equity income fund exg founded in 2007 it had total net assets of 2 7 billion as of dec 31 2023 2 the primary investment objective is to provide current income and gains with a secondary objective of capital appreciation | |
what are the advantages of a closed end fund | shares of a closed end fund trade throughout the day on a stock exchange and that market driven price may differ from its nav this can provide opportunities for profiting from higher or lower values | |
how are closed end funds different from open end funds | an open end mutual fund issues new shares whenever an investor chooses to buy into it and repurchases them when they re available a closed end fund issues shares only once closed end funds also tend to use leverage or borrowed money to boost their returns to investors that means higher potential rewards in good times and higher potential risks in bad times | |
what is the downside to closed end funds | one of the significant downsides to closed end funds is that no new shares are issued so to gain access to a closed end fund you d have to find someone willing to sell shares at a premium or wait until some open up on the market the bottom lineclosed end funds are funds that only issue shares once when they are all sold there are no more available unless an owner decides to sell them closed end funds are generally priced by their net asset value but prices fluctuate throughout a trading day because they are actively traded | |
what is cloud computing | cloud computing is the on demand delivery of computing services such as servers storage databases networking software and analytics rather than keeping files on a proprietary hard drive or local storage device cloud based storage makes it possible to save remotely cloud computing is a popular option for people and businesses allowing for cost savings increased productivity speed and efficiency performance and security storing datacloud computing means data is stored remotely in the cloud or a virtual space companies that provide cloud services enable users to keep files and applications on remote servers and access all data via the internet an individual s or company s data work and applications are available from any device that connects to the internet cloud computing can be both public and private public cloud services provide their services over the internet for a fee private cloud services only provide services to a certain number of people these services are a system of networks that supply hosted services there is also a hybrid option which combines public and private services cloud servicesamazon web services aws uses cloud computing to power real time fraud detection and prevention of erroneous financial transactions of individuals and businesses platformscloud computing is a system primarily comprised of three services software as a service saas infrastructure as a service iaas and platform as a service paas pros and consthanks to cloud computing users can check their email on any computer and store files using services such as dropbox and google drive cloud computing lets users back up their music files and photos companies were once required to purchase construct and maintain costly information management technology and infrastructure companies can swap costly server centers and it departments for fast internet connections where employees interact with the cloud online to complete their tasks the cloud structure saves storage space on desktops or laptops it also lets users upgrade software via the web rather than through more traditional tangible methods involving discs or flash drives however security is a concern especially for medical records and financial information while regulations force cloud computing services to shore up their security and compliance measures it remains an ongoing issue encryption is commonly used to protect vital information servers maintained by cloud computing companies may fall victim to natural disasters internal bugs and power outages as with any technology with many individuals accessing and manipulating information through a single portal mistakes can transfer across an entire system service providersamazon web services is 100 public and includes a pay as you go outsourced model once on the platform users can sign up for apps and additional services microsoft azure allows clients to keep some data at their sites meanwhile alibaba cloud is a subsidiary of the alibaba group | |
what is an example of cloud computing | several cloud computing applications are used by businesses and individuals such as streaming platforms for audio or video where the actual media files are stored remotely another would be data storage platforms like google drive dropbox onedrive or box | |
is cloud computing safe | cloud security refers to efforts to protect digital assets and data stored on cloud based services measures to protect this data include two factor authorization 2fa the use of vpns security tokens data encryption and firewall services among others | |
what is cloud hacking | cloud hacking is when a cyber attack targets cloud based service platforms such as computing services storage services or hosted applications the bottom lineindividuals and businesses avoid keeping files on proprietary hard drives or local storage devices using cloud based storage cloud computing is comprised of three services saas iaas and paas providers allow users to store email backups data audio and video | |
what is the cboe options exchange | founded in 1973 the cboe options exchange is the world s largest options exchange with contracts focusing on individual equities indexes and interest rates 1originally known as the chicago board options exchange cboe the exchange changed its name in 2017 as part of a rebranding effort by its holding company cboe global markets traders refer to the exchange as the cboe see bo cboe is also the originator of the cboe volatility index vix the most widely used and recognized proxy for market volatility 12understanding the cboe options exchangecboe offers trading across multiple asset classes and geographies including options futures u s and european equities exchange traded products etps global foreign exchange fx and multi asset volatility products it is the largest options exchange in the u s and the largest stock exchange in europe by value traded it is the second largest stock exchange operator in the u s and a top global market for etp trading 3the exchange has a rich history including the creation of the cboe clearing corp which later became the options clearing corporation occ the industry clearinghouse for all u s options trades the business of the cboe goes beyond simple trade executions and in 1985 it formed the options institute its educational arm developed to educate investors around the world about options in addition the company offers seminars webinars and online courses including learning for professionals 1cboe productsthe exchange offers access to many diverse products starting with of course put and call options on thousands of publicly traded stocks as well as on exchange traded funds etfs and exchange traded notes etns investors typically use these products for hedging and income production through the selling of covered calls or cash secured puts 45there are options available on stock and sector indexes including the standard poor s 500 s p 100 dow jones industrial average russell indexes selected ftse indexes nasdaq indexes msci indexes and sector indexes including the 10 sectors contained within the s p 500 6the exchange offers social media indexes and specialty indexes covering several options strategies such as put write butterfly and collar 6finally the vix index is the premier barometer of equity market volatility this index is based on real time prices of near the money options on the s p 500 index spx and is designed to reflect investors consensus view of future 30 day expected stock market volatility traders call the vix index the fear gauge because it tends to spike to very high levels when investors believe the market is very bearish or unstable 7the vix index is also the flagship index of the cboe global markets volatility franchise this includes volatility indexes on broad based stock indexes etfs individual stocks commodities and other specialty indexes 7the cboe created the vix index in 1993 it has since become the de facto barometer of u s equity market volatility 1 | |
how many options contracts trade on the cboe | in q1 2022 total volume across cboe s options exchanges reached 830 3 million options contracts a record amount quarterly average daily volume adv also reached a new all time high of 13 4 million contracts traded per day 8 | |
when were leap options first listed on the cboe | leaps long term anticipation securities are long dated options listed on exchanges with expirations longer than one year and up to three or more years the cboe first introduced listed leap trading in 1990 110investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is the chicago mercantile exchange cme | the chicago mercantile exchange cme colloquially known as the chicago merc is an organized exchange for the trading of futures and options the cme trades futures and in most cases options in the sectors of agriculture energy stock indices foreign exchange interest rates metals real estate and even weather understanding the chicago mercantile exchange cme founded in 1898 the chicago mercantile exchange began life as the chicago butter and egg board before changing its name in 1919 it was the first financial exchange to demutualize and become a publicly traded shareholder owned corporation in 2000 2the cme launched its first futures contracts in 1961 on frozen pork bellies in 1969 it added financial futures and currency contracts followed by the first interest rate bond and futures contracts in 1972 2creation of cme groupin 2007 a merger with the chicago board of trade created the cme group one of the largest financial exchanges in the world in 2008 the cme acquired nymex holdings inc the parent of the new york mercantile exchange nymex and commodity exchange inc comex by 2010 the cme purchased a 90 interest in the dow jones stock and financial indexes 2the cme grew again in 2012 with the purchase of the kansas city board of trade the dominant player in hard red winter wheat 2 in late 2017 the chicago mercantile exchange began trading in bitcoin futures 6according to the cme group on average it handles 3 billion contracts worth approximately 1 quadrillion annually 7 in 2021 cme group ended open outcry trading for most commodities although outcry trading continues in the eurodollar options pit 8 additionally the cme group operates cme clearing a leading central counterparty clearing provider 9the approximate total value of all cme contracts in one year cme futures and risk managementwith uncertainties always present in the world there is a demand that money managers and commercial entities have tools at their disposal to hedge their risk and lock in prices that are critical for business activities futures allow sellers of the underlying commodities to know with certainty the price they will receive for their products at the market at the same time it will enable consumers or buyers of those underlying commodities to know with certainty the price they will pay at a defined time in the future while these commercial entities use futures for hedging speculators often take the other side of the trade hoping to profit from changes in the price of the underlying commodity speculators assume the risk that the commercials hedge a large family of futures exchanges such as the cme group provides a regulated liquid centralized forum to carry out such business also the cme group provides settlement clearing and reporting functions that allow for a smooth trading venue cme is one of the only regulated markets for trading in bitcoin futures cme regulationcme is regulated by the commodity futures trading commission which oversees all commodities and derivatives contracts in the united states the cftc is responsible for oversight of brokers and merchants conducts risk surveillance of derivatives trades and investigates market manipulation and other abusive trade practices 10 it also regulates trading in virtual assets such as bitcoin chicago mercantile exchange vs chicago board of tradethe chicago board of trade cbot is another chicago based futures exchange founded in 1848 11 the cbot originally focused on agricultural products such as wheat corn and soybeans it later expanded to financial products such as gold silver u s treasury bonds and energy the cme merged with the cbot in 2006 in a move approved by shareholders of both organizations 2example of chicago mercantile exchangemost commodities can be traded anywhere but there s one you can only trade at the cme weather 4 cme is the only futures exchange to offer derivatives based on weather events allowing traders to bet on cold temperatures sunshine or rainfall in 2020 the cme traded as many as 1 000 weather related contracts per day the total notional value of futures totaled 750 million while the total notional value of options totaled 480 million 12 | |
how active is the chicago mercantile exchange | the cme is the largest futures and options exchange by daily volume according to cme group the exchange handles 3 billion contracts per year worth approximately 1 quadrillion 7 | |
how big is the chicago mercantile exchange | as of march 2022 the chicago mercantile exchange reported almost 206 billion of total assets and just over 178 billion of liabilities at the end of 2021 cme group had 3 480 employees and offices in more than 15 countries 13 | |
how much money does the chicago mercantile exchange make | through the first quarter of 2022 cme had generated 711 million of net income approximately 136 million more than the same period last year 14 cme group reported a net income of 2 6 billion in 2021 with total revenues of 4 7 billion 15the bottom linethe chicago mercantile exchange is a key part of america s financial infrastructure originally a marketplace for settling agricultural futures it is now a major trading hub for precious metals foreign currencies treasury bonds cryptocurrencies and many kinds of derivatives | |
what is the coase theorem | the coase theorem is a legal and economic theory developed by economist ronald coase regarding property rights which states that where there are complete competitive markets with no transaction costs and an efficient set of inputs and outputs an optimal decision will be selected it basically asserts that bargaining between individuals or groups related to property rights will lead to an optimal and efficient outcome no matter what that outcome is joules garcia investopediaunderstanding the coase theoremthe coase theorem is applied when there are conflicting property rights the coase theorem states that under ideal economic conditions where there is a conflict of property rights the involved parties can bargain or negotiate terms that will accurately reflect the full costs and underlying values of the property rights at issue resulting in the most efficient outcome for this to occur the conditions conventionally assumed in the analysis of efficient competitive markets must be in place particularly the absence of transaction costs the information must be free perfect and symmetrical one of the tenets of the coase theorem is that bargaining must be costless if there are costs associated with bargaining such as those relating to meetings or enforcement it affects the outcome neither party can possess market power relative to the other so that bargaining power between the parties can be equal enough that it does not influence the outcome of the settlement the coase theorem shows that where property rights are concerned involved parties do not necessarily consider how the property rights are divided up if these conditions apply and that they care only about current and future income and rent without regard to issues such as personal sentiment social equity or other noneconomic factors 1the coase theorem has been widely viewed as an argument against the legislative or regulatory intervention of conflicts over property rights and privately negotiated settlements thereof it was originally developed by ronald coase when considering the regulation of radio frequencies he posited that regulating frequencies was not required because stations with the most to gain by broadcasting on a particular frequency had an incentive to pay other broadcasters not to interfere 2example of the coase theoremthe coase theorem is applied to situations where the economic activities of one party impose a cost on or damage to the property of another party based on the bargaining that occurs during the process funds may either be offered to compensate one party for the other s activities or to pay the party whose activity inflicts the damages in order to stop that activity for example if a business that produces machines in a factory is subject to a noise complaint initiated by neighboring households who can hear the loud noises of machines being made the coase theorem would lead to two possible settlements the business may choose to offer financial compensation to the affected parties in order to be allowed to continue producing the noise or the business might refrain from producing the noise if the neighbors can be induced to pay the business to do so in order to compensate the business for additional costs or lost revenue associated with stopping the noise the latter would not actually occur so the result would be the business continuing operations with no exchange of money if the market value produced by the activity that is making the noise exceeds the market value of the damage that the noise causes to the neighbors then the efficient market outcome to the dispute is that the business will continue making machines the business can continue to produce the noise and compensate the neighbors out of the revenue generated if the value of the business s output of making machines is less than the cost imposed on the neighbors by the noise then the efficient outcome is that the business will stop making machines and the neighbors would compensate the business for doing so in the real world however neighbors would not pay a business to stop making machines because the cost of doing so is higher than the value they place on the absence of the noise can the coase theorem be applied in the real world in order for the coase theorem to apply conditions for efficient competitive markets around the disputed property must occur if not an efficient solution is unlikely to be reached these assumptions zero transaction bargaining costs perfect information no market power differences and efficient markets for all related goods and production factors are obviously a high hurdle to pass in the real world where transaction costs are ubiquitous information is never perfect market power is the norm and most markets for final goods and production factors do not meet the requirements for perfect competitive efficiency because the conditions necessary for the coase theorem to apply in real world disputes over the distribution of property rights virtually never occur outside of idealized economic models some question its relevance to applied questions of law and economics recognizing these real world difficulties with applying the coase theorem some economists view the theorem not as a prescription for how disputes ought to be resolved but as an explanation for why so many apparently inefficient outcomes to economic disputes can be found in the real world who was ronald coase ronald h coase was a british economist who made pathbreaking contributions to the fields of transaction cost economics law and economics and new institutional economics he was awarded the nobel memorial prize in economic sciences in 1991 for his elucidation of the role of transaction costs property rights and economic institutions in the structure and functioning of the economy he died in 2013 at age 102 in chicago illinois where he taught economics at the university of chicago law school 2 | |
what else is ronald coase known for | ronald coase is also known for the coase conjecture it states that if a durable goods monopolist can make offers to sell arbitrarily frequently then in equilibrium that monopolist will charge the competitive price and the market will be saturated quickly 3 | |
how is the coase theorem applied legally | the coase theorem has been to analyze and resolve disputes involving contract law and tort law in contract law it is used as a method to evaluate parties power during the negotiation and acceptance of a contract in tort law it is used in application of economic analysis to assign liability the bottom linethe coase theorem is a legal and economic theory regarding property rights it states that where there are complete competitive markets with no transaction costs and an efficient set of inputs and outputs an optimal decision will be selected it was developed by economist ronald coase | |
what is a code of ethics | a code of ethics is a set of principles intended to guide professionals in conducting business with honesty and integrity a code of ethics document may outline the organization s mission and values guide on addressing problems establish ethical principles based on the organization s core values and define the standards to which professionals are held to evaluate corporate codes of ethics ethically you must apply universal moral standards like trustworthiness respect responsibility fairness caring and citizenship to the stages of content creation implementation and administration 1also called an ethical code a code of ethics may encompass areas such as business ethics professional practices and employee conduct joules garcia investopedia | |
what is the purpose of a code of ethics | business ethics refers to how ethical principles guide a business s operations common issues that fall under the umbrella of business ethics include employer employee relations discrimination environmental issues bribery insider trading and social responsibility although many laws establish basic ethical standards for businesses it s primarily up to business leaders to develop a comprehensive code of ethics ethical conduct has been shown to benefit an organization and society in the long term it aligns with the triple bottom line theory of profit people and planet and meets the growing expectations of socially responsible customers employees and investors 2businesses and trade organizations usually have a code of ethics that employees or members must follow violating this code can lead to termination or dismissal a code of ethics is crucial because it clearly defines the rules for behavior and offers a basis for preemptive warnings while a code of ethics is often not required many firms and organizations adopt one to identify and characterize their business to stakeholders this can build trust ensure accountability and demonstrate a commitment to ethical behavior all of which can improve a company s reputation and contribute to its success given the importance of climate change and the significant impact of human behavior many companies now include climate factors in their code of ethics these principles outline the company s dedication to operating sustainably or their plans to shift toward sustainable practices although this commitment to sustainability can increase costs it often proves worthwhile as consumers increasingly prefer to engage with environmentally responsible businesses enhancing the company s public image regardless of size businesses count on their management staff to set ethical conduct standards for other employees when leaders adhere to the code of ethics universal compliance is expected with no exceptions types of codes of ethicsa code of ethics can take various forms still its general goal is to ensure that a business and its employees follow state and federal laws conduct themselves according to exemplary standards and benefit all stakeholders here are two types of codes of ethics commonly found in business for all businesses laws regulate issues such as hiring and safety standards compliance based codes of ethics set guidelines for conduct and determine penalties for violations specific laws govern business conduct in industries like banking leading these sectors to adopt compliance based codes of ethics to enforce regulations employees typically undergo formal training to understand these rules noncompliance can create legal issues for the company and individual employees may face penalties for failing to follow guidelines some companies appoint a compliance officer to ensure adherence to the code of ethics this individual stays updated on regulatory changes and monitors employee conduct to encourage conformity this type of code of ethics is based on clear cut rules and defined consequences rather than personal behavior monitoring while it ensures legal compliance it may not always promote a climate of moral responsibility within a company a value based code of ethics addresses a company s core value system setting standards of responsible conduct that benefit the larger public and the environment these ethical codes often require more self regulation than compliance based codes some codes of conduct contain language that addresses both compliance and values for example a grocery store chain might create a code prioritizing health and safety regulations over financial gain additionally the code might include a commitment to avoiding suppliers that use hormones in livestock or raise animals in inhumane conditions code of ethics in different professionscertain professions such as those in finance or health have specific laws that mandate codes of ethics and conduct certified public accountants cpas who are not typically considered fiduciaries to their clients still are expected to follow similar ethical standards such as integrity objectivity truthfulness and avoidance of conflicts of interest according to the american institute of certified public accountants aicpa 3financial advisers registered with the securities and exchange commission sec or a state regulator are bound by a code of ethics known as a fiduciary duty a legal and ethical obligation requiring them to act in the best interest of their clients 4code of ethics vs code of conducta code of ethics and a code of conduct both set professional standards to guide behavior of an organization s members however there are some subtle differences having both a code of ethics and a code of conduct helps ensure that an organization operates with integrity and maintains professionalism with its employees | |
how to create a code of ethics | organizations create codes of ethics to eliminate unacceptable or immoral behavior among their members often focusing on existing ethical issues within their industry the first step is for an organization to identify its priorities and any ethical issues it wishes to avoid for example a company might want to prevent conflicts of interest due to past scandals in that case its code of ethics might prohibit inappropriate relationships or actions that could lead to a conflict of interest | |
what is an example of a code of ethics | many firms and organizations have adopted a code of ethics one good example comes from the cfa institute cfai the grantor of the chartered financial analyst cfa designation and creator of the cfa exams cfa charterholders are among the most respected and globally recognized financial professionals according to the cfai s website members of the cfa institute including cfa charterholders and candidates for the cfa designation must adhere to the following code of ethics 5 | |
what is a code of ethics in business | a code of ethics in business is a set of guiding principles to inform how decisions are made across an organization in this way it tells employees customers business partners suppliers or investors about how the company conducts business companies will use a code of ethics to state the values they consider important and how these guide their operations 6 | |
what are the five ethical principles | in the accounting profession five ethical principles guide the industry s code of ethics integrity objectivity professional competence confidentiality and professional behavior 7 | |
what is a code of ethics for teachers | a code of ethics for teachers defines the primary responsibilities of a teacher to their students and the role of the teacher in a student s life the national education association outlines the following two principles for education professionals first commitment to the student involves guiding students to reach their potential fairly and inclusively second commitment to the profession includes raising professional standards and exercising professional judgment 8 | |
what is an example of a code of ethics | an example of a code of ethics would be a business that drafts a code outlining all the ways that the business should act with honesty and integrity in its day to day operations from how its employees behave and interact with clients to the types of individuals it does business with including suppliers and advertising agencies | |
what is the difference between a code of ethics and a code of conduct | a code of ethics is broader in its nature outlining what is acceptable for the company in terms of integrity and how it operates a code of conduct is more focused in nature and instructs how a business s employees should act daily and in specific situations which links these to the values and principles of the organization the bottom linea code of ethics is a guiding set of principles intended to instruct professionals to act in a way that aligns with the organization s values and benefits all stakeholders a business s code of ethics is drafted and tailored to the specific industry at hand and it requires all business employees to adhere to it the moral choices of businesses have evolved from the industrial age to the modern era in the world we live in today working conditions how a business impacts the environment and how it deals with inequality are all areas that are garnering a greater degree of attention a code of ethics helps ensure that businesses will act with greater integrity at various levels of the organization | |
what is the coefficient of determination | the coefficient of determination is a statistical measurement that examines how differences in one variable can be explained by the difference in a second variable when predicting the outcome of a given event this coefficient is more commonly known as r squared or r2 it assesses how strong the linear relationship is between two variables and it s heavily relied upon by investors when conducting trend analysis this coefficient generally answers a key question what percentage of a stock s price movement is attributed to the index s price movement if it s listed on an index and experiences price movements investopedia julie bangunderstanding the coefficient of determinationthe coefficient of determination is a measurement that s used to explain how much the variability of one factor is caused by its relationship to another factor this correlation is represented as a value between 0 0 and 1 0 or 0 to 100 a value of 1 0 indicates a 100 price correlation and is a reliable model for future forecasts a value of 0 0 suggests that the model shows that prices aren t a function of dependency on the index 1a value of 0 20 suggests that 20 of an asset s price movement can be explained by the index a value of 0 50 indicates that 50 of its price movement can be explained by it the coefficient of determination is the square of the correlation coefficient also known as r in statistics the value r can result in a negative number but r2 can t result in a negative number because r squared is the result of r multiplied by itself or squared the square of a negative number is always a positive value 2calculating the coefficient of determinationcalculating the coefficient of determination is achieved by creating a scatter plot of the data and a trend line you d collect the prices as shown in this table if you were to plot the closing prices for the s p 500 and apple aapl stock for trading days from dec 21 to jan 20 apple is listed on the s p 500 34you d then create a scatter plot how well the data fits the regression model on a graph is referred to as the goodness of fit it measures the distance between a trend line and all the data points that are scattered throughout the diagram most spreadsheets use the same formula to calculate the r2 of a dataset if the data reside in columns a and b on your sheet you get an r2 of 0 347 using this formula and highlighting the corresponding cells for the s p 500 and apple prices suggesting that the two prices are less correlated than if the r2 was between 0 5 and 1 0 calculating the coefficient of determination manually involves several steps first gather the data as in the previous table then calculate all the values you need as shown in this table 43use this formula and substitute the values for each row of the table where n equals the number of samples taken that s 20 in this case r 2 n x y x y n x 2 x 2 n y 2 y 2 2 begin aligned r 2 big frac n sum xy sum x sum y sqrt n sum x 2 sum x 2 times sqrt n sum y 2 sum y 2 big 2 end aligned r2 n x2 x 2 n y2 y 2 n xy x y 2 | |
where represents the square root of the product in the brackets that follow it | r 2 20 10 262 772 73 77 781 69 2 638 05 20 302 584 424 77 781 69 2 20 348 307 23 2 638 05 2 2 begin aligned r 2 big tiny frac 20 10 262 772 73 77 781 69 2 638 05 sqrt 20 302 584 424 77 781 69 2 times sqrt 20 348 307 23 2 638 05 2 big 2 end aligned r2 20 302 584 424 77 781 69 2 20 348 307 23 2 638 05 2 20 10 262 772 73 77 781 69 2 638 05 2 you now have 1 20 10 262 772 73 77 781 69 2 638 05 63 467 32 2 20 302 584 424 77 781 69 2 1 697 180 74 1 302 76 3 20 10 262 772 73 2 638 05 2 6 836 85 82 69 begin aligned 1 tiny 20 times 10 262 772 73 77 781 69 times 2 638 05 63 467 32 2 tiny sqrt 20 times 302 584 424 77 781 69 2 sqrt 1 697 180 74 1 302 76 3 tiny sqrt 20 times 10 262 772 73 2 638 05 2 sqrt 6 836 85 82 69 end aligned 1 20 10 262 772 73 77 781 69 2 638 05 63 467 322 20 302 584 424 77 781 69 2 1 697 180 74 1 302 763 20 10 262 772 73 2 638 05 2 6 836 85 82 69 now multiply steps two and three divide step one by the result and square it 63 467 32 1 302 76 82 69 2 0 347 begin aligned big frac 63 467 32 1 302 76 times 82 69 big 2 0 347 end aligned 1 302 76 82 6963 467 32 2 0 347 you can see how this can become very tedious with lots of room for error particularly if you re using more than a few weeks of trading data interpreting the coefficient of determination | |
when you have the coefficient of determination you use it to evaluate how closely the price movements of the asset you re evaluating correspond to the price movements of an index or benchmark the coefficient of determination for the period was 0 347 in the apple and s p 500 example | apple is listed on many indexes so you can calculate the r2 to determine if it corresponds to any other indexes price movements a coefficient of determination of 0 357 shows that apple stock price movements are somewhat correlated to the index because 1 0 demonstrates a high correlation and 0 0 shows no correlation one aspect to consider is that r squared doesn t tell analysts whether the coefficient of determination value is intrinsically good or bad it s their discretion to evaluate the meaning of this correlation and how it may be applied in future trend analyses | |
how do you interpret a coefficient of determination | the coefficient of determination shows the level of correlation between one dependent and one independent variable it s also called r2 or r squared the value should be between 0 0 and 1 0 the closer it is to 0 0 the less correlated the dependent value the closer to 1 0 the more correlated the value 1 | |
what does r squared tell you in regression | r squared in regression tells you whether there s a dependency between two values and how much dependency one value has on the other | |
what if the coefficient of determination is greater than 1 | the coefficient of determination can t be more than one because the formula always results in a number between 0 0 and 1 0 something is incorrect if it s greater or less than these numbers 1the bottom linethe coefficient of determination is a ratio that shows how dependent one variable is on another investors use it to determine how correlated an asset s price movements are with its listed index it doesn t demonstrate dependency on the index when an asset s r2 is closer to zero it s more dependent on the price moves the index makes if its r2 is closer to 1 0 | |
what is the coefficient of variation cv | the coefficient of variation cv is a statistical measure of the dispersion of data points in a data series around the mean the coefficient of variation represents the ratio of the standard deviation to the mean and it is a useful statistic for comparing the degree of variation from one data series to another even if the means are drastically different from one another matthew collins investopediaunderstanding the coefficient of variation cv the coefficient of variation shows the extent of variability of data in a sample in relation to the mean of the population in finance the coefficient of variation allows investors to determine how much volatility or risk is assumed in comparison to the amount of return expected from investments ideally if the coefficient of variation formula should result in a lower ratio of the standard deviation to mean return then the better the risk return tradeoff 1they re most often used to analyze dispersion around the mean but quartile quintile or decile cvs can also be used to understand variation around the median or 10th percentile for example the coefficient of variation formula or calculation can be used to determine the deviation between the historical mean price and the current price performance of a stock commodity or bond relative to other assets coefficient of variation cv formulabelow is the formula for how to calculate the coefficient of variation 2cv where standard deviation mean begin aligned text cv frac sigma mu textbf where sigma text standard deviation mu text mean end aligned cv where standard deviation mean to calculate the cv for a sample the formula is c v s x 100 cv s x 100 cv s x 100where s samplex mean for the populationmultiplying the coefficient by 100 is an optional step to get a percentage rather than a decimal the coefficient of variation formula can be performed in excel by first using the standard deviation function for a data set next calculate the mean by using the excel function provided since the coefficient of variation is the standard deviation divided by the mean divide the cell containing the standard deviation by the cell containing the mean coefficient of variation cv vs standard deviationthe standard deviation is a statistic that measures the dispersion of a data set relative to its mean it is used to determine the spread of values in a single data set rather than to compare different units | |
when we want to compare two or more data sets the coefficient of variation is used the cv is the ratio of the standard deviation to the mean and because it s independent of the unit in which the measurement was taken it can be used to compare data sets with different units or widely different means | in short the standard deviation measures how far the average value lies from the mean whereas the coefficient of variation measures the ratio of the standard deviation to the mean 2advantages and disadvantages of the coefficient of variation cv the coefficient of variation can be useful when comparing data sets with different units or widely different means 3that includes when the risk reward ratio is used to select investments for example an investor who is risk averse may want to consider assets with a historically low degree of volatility relative to the return in relation to the overall market or its industry conversely risk seeking investors may look to invest in assets with a historically high degree of volatility | |
when the mean value is close to zero the cv becomes very sensitive to small changes in the mean using the example above a notable flaw would be if the expected return in the denominator is negative or zero in this case the coefficient of variation could be misleading 3 | if the expected return in the denominator of the coefficient of variation formula is negative or zero then the result could be misleading 3 | |
how can the coefficient of variation cv be used | the coefficient of variation is used in many different fields including chemistry engineering physics economics and neuroscience other than helping when using the risk reward ratio to select investments it is used by economists to measure economic inequality outside of finance it is commonly applied to audit the precision of a particular process and arrive at a perfect balance example of coefficient of variation cv for selecting investmentsfor example consider a risk averse investor who wishes to invest in an exchange traded fund etf which is a basket of securities that tracks a broad market index the investor selects the spdr s p 500 etf spy the invesco qqq etf qqq and the ishares russell 2000 etf iwm then the investor analyzes the etfs returns and volatility over the past 15 years and assumes that the etfs could have similar returns to their long term averages for illustrative purposes the following 15 year historical information is used for the investor s decision based on the approximate figures the investor could invest in either the spdr s p 500 etf or the ishares russell 2000 etf since the risk reward ratios are approximately the same and indicate a better risk return tradeoff than the invesco qqq etf | |
what does the coefficient of variation tell us | the coefficient of variation cv indicates the size of a standard deviation in relation to its mean the higher the coefficient of variation the greater the dispersion level around the mean 2 | |
what is considered a good coefficient of variation | that depends on what you re looking at and comparing no set value can be considered universally good however generally speaking it is often the case that a lower coefficient of variation is more desirable as that would suggest a lower spread of data values relative to the mean | |
how do i calculate the coefficient of variation | to calculate the coefficient of variation first find the mean then the sum of squares and then work out the standard deviation with that information at hand it is possible to calculate the coefficient of variation by dividing the standard deviation by the mean 2the bottom linethe coefficient of variation is a simple way to compare the degree of variation from one data series to another it can be applied to pretty much anything including the process of picking suitable investments generally speaking a high cv indicates that the group is more variable whereas a low value would suggest the opposite | |
what is coinsurance | coinsurance is the amount generally expressed as a fixed percentage an insured must pay toward a covered claim after the deductible is satisfied it is common in health insurance some property insurance policies also contain coinsurance provisions in this case coinsurance is the amount of coverage that the property owner must purchase for a structure investopedia eliana rodgers | |
how coinsurance works | a coinsurance provision is similar to a copayment or copay provision except that copays require the insured to pay a set dollar amount at the time of the service and coinsurance is a percentage amount one of the most common coinsurance breakdowns is the 80 20 split under the terms of an 80 20 coinsurance plan the insured is billed for 20 of medical costs while the insurer pays the remaining 80 however these terms only apply after the insured has reached the policy s out of pocket deductible amount also most health insurance policies include an out of pocket maximum that limits the total amount the insured pays for care in a given period generally speaking plans with low monthly premiums have higher coinsurance and plans with higher monthly premiums have lower coinsurance example of coinsurancehere s how it typically works assume you take out a health insurance policy with an 80 20 coinsurance provision a 1 000 out of pocket deductible and a 5 000 out of pocket maximum unfortunately you require outpatient surgery early in the year that costs 5 500 because you have not yet met your deductible you must pay the first 1 000 of the bill after meeting your 1 000 deductible you are then only responsible for 20 of the remaining 4 500 or 900 your insurance company will cover 80 the remaining balance if you require another expensive procedure later in the year your coinsurance provision takes effect immediately because you have previously met your annual deductible also because you have already paid a total of 1 900 out of pocket during the policy term the maximum amount that you will be required to pay for services for the rest of the year is 3 100 after you reach the 5 000 out of pocket maximum your insurance company is responsible for paying up to the maximum policy limit or the maximum benefit allowable under a given policy copay vs coinsuranceboth copay and coinsurance provisions are ways for insurance companies to spread risk among the people they insure however both have advantages and disadvantages for consumers because coinsurance policies require deductibles before the insurer bears any cost policyholders absorb more costs upfront on the other hand it is also more likely that the out of pocket maximum will be reached earlier in the year resulting in the insurance company incurring all costs for the remainder of the policy term a copay plan charges the insured a set amount at the time of each service copay plans spread the cost of care over a full year and make predicting your medical expenses easier the size of the copays varies depending on the type of service that you receive for example a visit to a primary care physician may have a 20 copay whereas an emergency room visit may have a 100 copay other services such as preventative care and screenings may carry full payment without a copayment a copay policy will likely result in an insured paying for each medical visit property insurance coinsurancethe coinsurance clause in a property insurance policy requires that a home or other physical property be insured for a percentage of its total cash or replacement value usually this percentage is 80 but different providers may require varying percentages of coverage 90 70 etc for example if a property has a value of 200 000 and the insurance provider requires an 80 coinsurance the homeowner must have 160 000 of property insurance coverage if they want full reimbursement on any claims if a structure is not insured to this level and the owner should file a claim for a covered peril the provider may impose a coinsurance penalty on the owner in other words the policyholder is required to hold a high enough insurance limit to cover a percentage of the property value in order to receive full compensation if there is a loss or damage to the property owners may include a waiver of coinsurance clause in policies a waiver of coinsurance clause relinquishes the homeowner s requirement to pay coinsurance generally insurance companies tend to waive coinsurance only in the event of fairly small claims in some cases however policies may include a waiver of coinsurance in the event of a total loss | |
what does 30 coinsurance mean | coinsurance is an insured individual s share of the costs of a covered expense it usually applies to health care insurance it is expressed as a percentage if you have a 30 coinsurance policy it means that when you have a medical bill you are responsible for 30 of it your health plan pays the remaining 70 | |
is coinsurance the same as copay | though both represent an out of pocket expense for you the insured person coinsurance is not the same as copay a copay is a set figure you re charged for prescriptions doctor visits and other types of health care generally at the time of service your copay applies even if you haven t met your deductible yet coinsurance is the percentage of costs of the services and treatment you re responsible for after you ve met your health plan s overall deductible | |
is coinsurance or a copay better | both coinsurance and copay have their pros and cons because you pay a set amount at the time of each service or purchase copay plans make it easier to anticipate your health care expenses you ll always pay the copay regardless of whether you ve met your deductible or not coinsurance only kicks in after your deductible s been met on the other hand once it starts applying coinsurance may mean lower outlays overall also coinsurance goes toward meeting your policy out of pocket maximums the bottom linecoinsurance is the amount an insured must pay against a health insurance claim after their deductible is satisfied coinsurance also applies to the level of property insurance that an owner must buy on a structure for the coverage of claims coinsurance differs from a copay in that a copay is generally a set dollar amount that an insured must pay at the time of each service both copay and coinsurance provisions are ways for insurance companies to spread risk among the people it insures both have advantages and disadvantages for consumers | |
what is a collar | a collar also known as a hedge wrapper or risk reversal is an options strategy used to protect against significant losses but also limits your potential profits it s used when you re optimistic about a stock you own long term but worry about short term volatility in the market an investor who already owns an underlying a stock or other asset creates a collar by buying an out of the money put option which protects against the stock price going down at the same time the investor writes an out of the money call option where the current price is lower than the option s strike price this produces income from selling the call option which hopefully at least covers the cost of buying the put option it also allows the trader to profit on the asset up to the call s strike price but not higher thus the strategy caps the potential profit at the call option s strike price as such while the collar options strategy can protect against significant losses it limits potential gains we explain in this more and clearer detail below investopedia sydney burnsunderstanding a collarinvestors typically use collars if they own a stock whose value is higher than when they bought it and they are optimistic about the stock going up but unsure of its shorter term prospects to protect their gains against a downside move in the stock they can carry out the collar option strategy the best outcome for an investor is when the stock s price matches the set price of the call option they ve sold right when the option is about to expire 1the collar strategy combines two methods buying a put to protect against price drops and selling a call to earn some money upfront let s break this down here s your checklist for carrying this out this setup is ideal if you don t want to spend extra money and are fine with not getting the profits should the stock go up higher than you thought thus this is not the best choice if you re very bullish on a stock a fence is a similar risk reversal strategy that uses three option actions collar break even point and profit or lossfor investors using a collar strategy their break even point is calculated by looking at the difference between what they spent and what they earned from the options when they end up with more money from the options than they paid a net credit they add this extra to the stock s purchase price if they spent more on the options than they got back a net debit they subtract this from the stock s purchase price you need the stock to end at this final number so you break even the most investors can make from a collar strategy is found by looking at how high the call option s preset sell price is above what they originally paid for the stock after considering the costs or gains from dealing with the options the biggest loss they can face is the difference between what they paid for the stock and the safety net price set by the put option again after accounting for the options costs or gains how to calculate this is below for each possible outcome protective collar examplesuppose you own 100 shares of stock abc bought originally at 80 per share and the stock is trading at 87 per share you want to temporarily hedge the position since there s been volatility in the overall market you buy one put option note that one stock option contract is 100 shares with a strike price of 77 and a premium of 3 00 you also write sells one call option with a strike price of 97 with a premium of 4 50 | |
when you start the collar strategy in the above scenario you receive a net credit of 1 50 per share and 1 50 100 1 500 | this is because you sold the call for 1 50 more than you paid for the put and you pocket that difference for now let s also look at what it would take to break even breakeven underlying cost put cost call premium received 80 3 00 4 50 78 50 in the stock pricelet s now calculate the best upside you would see with this strategy maximum profit for a credit collar call strike stock purchase price net premium paid 97 80 1 50 18 50 100 shares per contract 1 850lastly let s look at the worst possible outcome maximum loss for a credit collar put strike stock purchase price net premium collected 77 80 1 50 1 5 100 shares per contact 150pros and cons of a collar strategythis strategy appeals to investors seeking to protect their long positions against market volatility or downside risk however like all investment strategies it has its benefits and drawbacks a collar is worthwhile when an investor is looking to protect gains on a stock that has appreciated in value but is concerned about a potential short term downturn in the market so a collar is helpful if you are moderately bullish or neutral on the stock and want to hedge against potential downside risk without costing too much but if you re very bullish on a stock you are limiting profits you anticipate are possible it s likewise a promising approach for investors comfortable capping their upside potential in exchange for downside protection this makes it a fitting strategy for conservative investors or those approaching a financial goal when preserving gains is more important than achieving potentially higher returns the main downside to a collar is that it does cap upside gains if the underlying asset continues to rise past the call s strike price meanwhile if the stock price does not fall to the put strike price level the put option s cost would have been an unnecessary expense 1downside protectionsome upside participationcan be low cost or a net credit to docaps upside potentialrequires active monitoringcosts more that a covered call since you buy a put | |
why is it called a collar | the collar strategy is named that because it essentially puts both a floor and ceiling on the stock position like a collar around the neck the stock price is effectively collared within those two strike prices giving some downside protection but limiting potential upside gains | |
when is the best time to put on a protective collar | if you own shares of a stock collars are worthwhile if you maintain a moderately bullish outlook but are concerned about downside risks it s often used by investors who have seen a significant appreciation of their stock s value and want to protect their gains against potential downturns particularly if they are nearing a financial goal or require capital preservation collars also tend to work best when volatility is high | |
how does a collar protect against losses | the downside put places a floor below the stock price limiting losses to the difference between the put strike price and the original stock price minus the premium received for the call the put strike is selected based on the level of downside protection desired meanwhile the short reduces the cost of the strategy but caps the upside potential as the gains in the existing shares will be offset by equivalent losses in that call option can a collar strategy be modified before expiration yes a collar strategy can be adjusted or unwound before the expiration of the options if the outlook on the stock changes you can buy back the call option and sell the put option however these adjustments might come at a cost and will change the overall profitability of the strategy it s essential to carefully monitor options positions especially in volatile markets the bottom linea collar is a defensive options strategy used to protect against downside losses while limiting upside gains investors and traders can use collar options for interest rate risks as well as losses from holding a long position on a stock it is essentially the combination of a protective put with a covered call to perform the strategy you would already own a stock and be moderately bullish about its price outlook you would then buy a downside put and sell an upside call effectively collaring the position between the two strike prices if the stock drops the put creates a floor preventing further losses while the short call provides some additional income to offset the initial cost of the put if the stock rises the put expires worthless and the short call will limit further upside beyond its strike price plus any net credit received for selling it | |
what is collateral | collateral in the financial world is a valuable asset that a borrower pledges as security for a loan for example when a homebuyer obtains a mortgage the home serves as the collateral for the loan for a car loan the vehicle is the collateral a business that obtains financing from a bank may pledge valuable equipment or real estate owned by the business as collateral for the loan in the event of a default the lender can seize the collateral and sell it to recoup the loss other nonspecific personal loans can be collateralized by other assets for instance a secured credit card may be secured by a cash deposit for the same amount of the credit limit 500 for a 500 credit limit | |
how collateral works | before a lender issues you a loan it wants to know that you have the ability to repay it that s why many of them require some form of security this security is called collateral which minimizes the risk for lenders by ensuring that the borrower keeps up with their financial obligation the borrower has a compelling reason to repay the loan on time because if they default they stand to lose their home or other assets pledged as collateral loans secured by collateral are typically available at substantially lower interest rates than unsecured loans a lender s claim to a borrower s collateral is called a lien a legal right or claim against an asset to satisfy a debt in the event that the borrower does default the lender can seize the collateral and sell it applying the money it gets to the unpaid portion of the loan the lender can choose to pursue legal action against the borrower to recoup any remaining balance types of collateralthe nature of the collateral is often predetermined by the loan type when you take out a mortgage your home becomes the collateral if you take out a car loan then the car is the collateral for the loan the types of collateral that lenders commonly accept include cars only if they are paid off in full bank savings deposits and investment accounts retirement accounts are not usually accepted as collateral you also may use future paychecks as collateral for very short term loans and not just from payday lenders traditional banks offer such loans usually for terms no longer than a couple of weeks these short term loans are an option in a genuine emergency but even then you should read the fine print carefully and compare rates another type of borrowing is the collateralized personal loan in which the borrower offers an item of value as security for a loan the value of the collateral must meet or exceed the amount being loaned lenders will typically lend only a percentage of the collateral s value not 100 of its value if you are considering a collateralized personal loan your best choice for a lender is probably a financial institution that you already do business with especially if your collateral is your savings account if you already have a relationship with the bank that bank would be more inclined to approve the loan and you are more apt to get a decent rate for it use a financial institution with which you already have a relationship if you re considering a collateralized personal loan examples of collateral loansa mortgage is a loan in which the house is the collateral if the homeowner stops paying the mortgage for at least 120 days the loan servicer can begin legal proceedings which can lead to the lender eventually taking possession of the house through foreclosure 1 once the property is transferred to the lender it can be sold to repay the remaining principal on the loan a home may also function as collateral on a second mortgage or home equity line of credit heloc in this case the amount of the loan will not exceed the available equity for example if a home is valued at 200 000 and 125 000 remains on the primary mortgage a second mortgage or heloc will be available only for as much as 75 000 collateralized loans are also a factor in margin trading an investor borrows money from a broker to buy shares using the balance in the investor s brokerage account as collateral the loan increases the number of shares the investor can buy thus multiplying the potential gains if the shares increase in value but the risks are also multiplied if the shares decrease in value the broker demands payment of the difference in that case the account serves as collateral if the borrower fails to cover the loss | |
is collateral property | collateral guarantees a loan so it needs to be an item of value for example it can be a piece of property such as a car or a home or even cash that the lender can seize if the borrower does not pay | |
what loans do not use an asset as collateral | if you don t have any collateral necessary to secure a certain type of loan you may want to consider looking into unsecured loans such as a personal loan or credit card both of which don t use an asset as collateral as an alternative | |
do i get back my collateral | if you have any assets being used as collateral on a loan and don t miss any payments you won t lose your collateral however if you fail to make payments on time and ultimately default on your loan the collateral can then be seized and sold with the profits being used to pay off the remainder of the loan the bottom lineyou risk losing your collateral if you fail to pay back your debt so to ensure you keep your car home or any other valuable asset being used as collateral on a loan always make your payments on time to minimize any possibility of defaulting on your debt | |
what is a collateralized debt obligation cdo | a collateralized debt obligation cdo is a complex structured finance product that is backed by a pool of loans and other assets and sold to institutional investors a cdo is a particular type of derivative because as its name implies its value is derived from another underlying asset these assets become the collateral if the loan defaults investopedia xiaojie liuunderstanding collateralized debt obligations cdos the earliest cdos were constructed in 1987 by the former investment bank drexel burnham lambert where michael milken then called the junk bond king reigned the drexel bankers created these early cdos by assembling portfolios of junk bonds issued by different companies cdos are called collateralized because the promised repayments of the underlying assets are the collateral that gives the cdos their value 12to create a cdo investment banks gather cash flow generating assets such as mortgages bonds and other types of debt and repackage them into discrete classes or tranches based on the level of credit risk assumed by the investor these tranches of securities become the final investment products bonds whose names can reflect their specific underlying assets for example mortgage backed securities mbs are comprised of mortgage loans and asset backed securities abs contain corporate debt auto loans or credit card debt other types of cdos include collateralized bond obligations cbos investment grade bonds that are backed by a pool of high yield but lower rated bonds and collateralized loan obligations clos single securities that are backed by a pool of debt that often contain corporate loans with a low credit rating collateralized debt obligations are complicated and numerous professionals have a hand in creating them 3ultimately other securities firms launched cdos containing other assets that had more predictable income streams these included automobile loans student loans credit card receivables and aircraft leases however cdos remained a niche product until 2003 2004 during the u s housing boom issuers of cdos turned their attention to subprime mortgage backed securities as a new source of collateral for cdos 4cdo structurethe tranches of cdos are named to reflect their risk profiles for example senior debt mezzanine debt and junior debt pictured in the sample below along with their standard and poor s s p credit ratings but the actual structure varies depending on the individual product investopedia sabrina jiangin the table note that the higher the credit rating the lower the coupon rate rate of interest the bond pays annually if the loan defaults the senior bondholders get paid first from the collateralized pool of assets followed by bondholders in the other tranches according to their credit ratings the lowest rated credit is paid last 5the senior tranches are generally safest because they have the first claim on the collateral although the senior debt is usually rated higher than the junior tranches it offers lower coupon rates conversely the junior debt offers higher coupons more interest to compensate for their greater risk of default but because they are riskier they generally come with lower credit ratings senior debt higher credit rating but lower interest rates junior debt lower credit rating but higher interest rates cdos and the subprime mortgage crisiscollateralized debt obligations exploded in popularity in the early 2000s when issuers began to use securities backed by subprime mortgages as collateral cdo sales rose almost tenfold from 30 billion in 2003 to 225 billion in 2006 3a subprime mortgage is one held by a borrower with a low credit rating which indicates that they might be at a higher risk of default on their loan these subprime mortgages often had no or very low down payments and many did not require proof of income to offset the risk lenders were taking on they often used tools such as adjustable rate mortgages in which the interest rate increased over the life of the loan there was little government regulation of this market and ratings agencies were able to make investing in these mortgage backed securities look attractive and low risk to investors cdos increased the demand for mortgage backed securities which increased the number of subprime mortgages that lenders were willing and able to sell without the demand from cdos lenders would not have been able to make so many loans to subprime borrowers 6some banking executives and investors did realize that a number of the subprime mortgages that backed their investments had been designed to fail but the general consensus was that as long real estate prices continued to go up both investors and borrowers would be bailed out however prices did not continue to rise the housing bubble burst and prices declined steeply subprime borrowers found themselves underwater on homes that were worth less than what they owed on their mortgages this led to a high rate of defaults 7the correction in the u s housing market triggered an implosion in the cdo market which was backed by these subprime mortgages cdos became one of the worst performing instruments in the subprime meltdown which began in 2007 and peaked in 2009 the bursting of the cdo bubble inflicted losses running into hundreds of billions of dollars for some of the largest financial services institutions 8these losses resulted in the investment banks either going bankrupt or being bailed out via government intervention this impacted the housing market stock market and other financial institutions and helped to escalate the global financial crisis the great recession during this period despite their role in the financial crisis collateralized debt obligations are still an active area of structured finance investing cdos and the even more infamous synthetic cdos are still in use as ultimately they are a tool for shifting risk and freeing up capital two of the outcomes that investors depend on wall street to accomplish and for which wall street has always had an appetite benefits of cdoslike all types of assets cdos have benefits as well as drawbacks their role in the housing bubble and the subprime mortgage crisis was the result of their main disadvantages complexity which made them difficult to value accurately and being vulnerable to repayment risk particularly from subprime borrowers however there are also two main benefits | |
how are collateralized debt obligations cdo created | to create a collateralized debt obligation cdo investment banks gather cash flow generating assets such as mortgages bonds and other types of debt and repackage them into discrete classes or tranches based on the level of credit risk assumed by the investor these tranches of securities become the final investment products bonds whose names can reflect their specific underlying assets | |
what should the different cdo tranches tell an investor | the tranches of a cdo reflect their risk profiles for example senior debt would have a higher credit rating than mezzanine and junior debt if the loan defaults the senior bondholders get paid first from the collateralized pool of assets followed by bondholders in the other tranches according to their credit ratings with the lowest rated credit paid last the senior tranches are generally safest because they have the first claim on the collateral | |
what is a synthetic cdo | a synthetic cdo is a type of collateralized debt obligation cdo that invests in noncash assets that can offer extremely high yields to investors however they differ from traditional cdos which typically invest in regular debt products such as bonds mortgages and loans in that they generate income by investing in noncash derivatives such as credit default swaps cdss options and other contracts synthetic cdos are typically divided into credit tranches based on the level of credit risk assumed by the investor 9the bottom linea collateralized debt obligation cdo is a structured finance product that is backed by a pool of loans and other assets it can be held by a financial institution and sold to investors the tranches of a cdo tell investors what level of risk they are taking on with senior having the highest credit rating then mezzanine then junior in the case of a default on the underlying loan senior bondholders are paid from the pool of collateral assets first and junior bondholders last during the housing bubble in the early 2000s cdos held huge bundles of subprime mortgages when the housing bubble burst and subprime borrowers went into default at high rates the cdo market went into a meltdown this caused many investment banks to either go bankrupt or be bailed out by the government despite this cdos are still in use by investment banks today | |
what is a collateralized loan obligation clo | a collateralized loan obligation clo is a single security backed by a pool of debt the process of pooling assets into a marketable security is called securitization collateralized loan obligations clo are often backed by corporate loans with low credit ratings or loans taken out by private equity firms to conduct leveraged buyouts a collateralized loan obligation is similar to a collateralized mortgage obligation cmo except that the underlying debt is of a different type and character a company loan instead of a mortgage investopedia candra huff | |
how collateralized loan obligations clos work | a clo is a bundle of loans that are ranked below investment grade they are usually first lien bank loans to businesses that are initially sold to a clo manager and consolidated into bundles of 150 to 250 loans 1 to fund the purchase of new debt the clo manager sells stakes in the clo to outside investors in a structure called tranches with a clo the investor receives scheduled debt payments from the underlying loans assuming most of the risk in the event that borrowers default in exchange for taking on the default risk the investor is offered greater diversity and the potential for higher than average returns a default is when a borrower fails to make payments on a loan or mortgage for an extended period of time each tranche is a piece of the clo the order of the tranches dictates who will be paid out first when the underlying loan payments are made it also dictates the risk associated with each investment since investors who are paid last have a higher risk of default from the underlying loans investors who are paid out first have lower overall risk but they receive smaller interest payments as a result investors who are in later tranches may be paid last but the interest payments are higher to compensate for the risk a clo is an actively managed instrument managers can and do buy and sell individual bank loans in the underlying collateral pool in an effort to score gains and minimize losses in addition most of a clo s debt is backed by high quality collateral making liquidation less likely and making it better equipped to withstand market volatility 2types of clo tranchesthere are two types of tranches debt tranches and equity tranches debt tranches also called mezzanine tranches are treated just like bonds and have credit ratings and coupon payments these debt tranches come first in terms of repayment and there is also a pecking order within the debt tranches equity tranches do not have credit ratings and are paid out after all debt tranches equity tranches are rarely paid a cash flow but do offer ownership in the clo itself in the event of a sale because equity tranche investors usually face higher risks they often receive higher returns than debt tranche investors clos offer higher than average returns because an investor is assuming more risk by buying low rated debt clo structurea clo consists of several debt tranches ranked according to the creditworthiness of the underlying loans the lowest tier is the equity tranche representing ownership of the underlying collateral as the clo enters the repayment phase investors in higher ranked tranches are paid first followed by lower tranches lower ranked tranches have higher risk profiles but also higher potential returns in the lowest tier the equity tranche investors receive any additional cash flow after the debt investors are paid equity tranche investors also have a degree of control over the clo that is not available to debt investors for example they have options to refinance the underlying clo loans or reset the reinvestment period 3clo processhere s an over simplied overview of how clos are created step 1 establish the capital structure the first step to creating a clo is establishing a capital structure meaning the different levels of debt and equity underlying the security a typical clo has several debt tranches and an equity tranche representing ownership of the underlying collateral step 2 seek capital the next step is to raise capital from investors which is used to buy loans underlying the security each investor will contribute to a different loan tranche with riskier tranches offering higher returns 3step 3 choose tranches as investors commit capital they also have the opportunity to choose a tranche that meets their risk and return appetite step 4 purchase loans the clo manager will use the capital from investors to buy loans the clo manager can reinvest loan proceeds to improve the portfolio either by buying additional collateral or selling poorly performing loans at this stage an underwriter analyzes the loan pool and assesses the creditworthiness of the borrowers the underwriter also determines the appropriate structure and size of the clo transaction step 5 create special purpose vehicle most often a special purpose vehicle spv is created to issue the clo securities the spv is usually designed to protect the investors in case of default step 6 pay investors ultimately the clo will begin repaying investors with a spread that has been pre determined for each tranche at the time of closing afterward holders of the equity tranche can call or refinance the loan tranches eventually the clo begins to deleverage as the underlying loans are paid off the clo manager will repay the investors starting with the most senior tranche any remaining proceeds will go to the equity tranche holders step 7 termination the clo transaction may terminate when all of the securities have been repaid or when the underlying loans have been paid off or sold at this point any special purpose vehicles are dissolved and any remaining assets are distributed to the investors benefits of a clothere are a variety of benefits of a clo including but not limited to risks to considerwith those benefits in mind there are also a number of downsides to clos those risks include but aren t limited to risky asset some argue that a clo isn t that risky research conducted by guggenheim investments an asset management firm found that from 1994 to 2013 clos experienced significantly lower default rates than corporate bonds only 0 03 of tranches defaulted from 1994 to 2019 even so they are sophisticated investments and typically only large institutional investors purchase tranches in a clo in other words companies of scale such as insurance companies quickly purchase senior level debt tranches to ensure low risk and steady cash flow mutual funds and etfs normally purchase junior level debt tranches with higher risk and higher interest payments if an individual investor invests in a mutual fund with junior debt tranches that investor takes on the proportional risk of default 1 | |
what is a collateralized loan obligation clo | a collateralized loan obligation clo is a type of security that allows investors to purchase an interest in a diversified portfolio of company loans the company selling the clo will purchase a large number of corporate loans from borrowers such as private companies and private equity firms and will then package those loans into a single clo security the clo is then sold off to investors in a variety of pieces called tranches with each tranche offering its own risk reward characteristics | |
what is the difference between a debt tranche and an equity tranche | there are two main types of tranches used when selling a clo debt tranches and equity tranches debt tranches also called mezzanine are those that offer the investor a specified stream of interest and principal payments similar to those offered by other debt instruments such as debentures or corporate bonds equity tranches on the other hand do not pay scheduled cash flows to the investor but instead offer a share of the value of the clo if the clo is re sold in the future within each of these categories many different tranches might be available with the riskier tranches offering higher potential returns | |
what is the difference between a clo and a collateralized mortgage obligation cmo | clos are similar to collateralized mortgage obligations cmos in that both securities are based on a large portfolio of underlying debt instruments the main difference between them however is that clos are based on debts owed by corporations whereas cmos are based on mortgage loans both clos and cmos are examples of credit derivatives the bottom linea clo or collateralized loan obligation is a debt security backed by a pool of debt investors can choose one of several debt tranches to put their money into with higher risk tranches providing higher returns although yields may be higher than average investors also assume the risk of borrower defaults this article is not intended to provide investment advice investing in securities entails varying degrees of risk and can result in partial or total loss of principal the trading strategies discussed in this article are complex and should not be undertaken by novice investors readers seeking to engage in such trading strategies should seek out extensive education on the topic | |
what is a collateralized mortgage obligation | a collateralized mortgage obligation cmo refers to a type of mortgage backed security that contains a pool of mortgages bundled together and sold as an investment organized by maturity and level of risk cmos receive cash flows as borrowers repay the mortgages that act as collateral on these securities in turn cmos distribute principal and interest payments to their investors based on predetermined rules and agreements understanding collateralized mortgage obligations cmo collateralized mortgage obligations consist of several tranches or groups of mortgages organized by their risk profiles as complex financial instruments tranches typically have different principal balances interest rates maturity dates and potential of repayment defaults collateralized mortgage obligations are sensitive to interest rate changes as well as to changes in economic conditions such as foreclosure rates refinance rates and the rates at which properties are sold each tranche has a different maturity date and size and bonds with monthly coupons are issued against it the coupon makes monthly principal and interest rate payments to illustrate imagine an investor has a cmo made up of thousands of mortgages their potential for profit is based on whether the mortgage holders repay their mortgages if only a few homeowners default on their mortgages and the rest make payments as expected the investor recoups their principal as well as interest in contrast if thousands of people cannot make their mortgage payments and go into foreclosure the cmo loses money and cannot pay the investor investors in cmos sometimes referred to as real estate mortgage investment conduits remics want to obtain access to mortgage cash flows without having to originate or purchase a set of mortgages collateralized mortgage obligations vs collateralized debt obligationslike cmos collateralized debt obligations cdos consist of a group of loans bundled together and sold as an investment vehicle however whereas cmos only contain mortgages cdos contain a range of loans such as car loans credit cards commercial loans and even mortgages both cdos and cmos peaked in 2007 just before the global financial crisis and their values fell sharply after that time for example at its peak in 2007 the cdo market was worth 1 3 trillion compared to 850 million in 2013 organizations that purchase cmos include hedge funds banks insurance companies and mutual funds collateralized mortgage obligations and the global financial crisisfirst issued by salomon brothers and first boston in 1983 cmos were complex and involved many different mortgages for many reasons investors were more likely to focus on the income streams offered by cmos rather than the health of the underlying mortgages themselves as a result many investors purchased cmos full of subprime mortgages adjustable rate mortgages mortgages held by borrowers whose income wasn t verified during the application process and other risky mortgages with high risks of default the use of cmos has been criticized as a precipitating factor in the 2007 2008 financial crisis rising housing prices made mortgages look like fail proof investments enticing investors to buy cmos and other mbss but market and economic conditions led to a rise in foreclosures and payment risks that financial models did not accurately predict the aftermath of the global financial crisis resulted in increased regulations for mortgage backed securities most recently in december 2016 the sec and finra introduced new regulations that mitigate the risk of these securities by creating margin requirements for covered agency transactions including collateralized mortgage obligations | |
how a collection agency works | creditors will often hire a collection agency after a borrower is 60 90 days or more past due with a debt the delinquency typically will be reported to the three major credit bureaus equifax experian and transunion reputable collection agencies abide by the fair debt collection practices act fdcpa when it comes to contacting you and trying to collect the debt while creditors sometimes hire collection agencies to collect debt on their behalf they also sometimes sell debt often for substantially less than the amount of the debt in these cases the collection agency becomes the new creditor if the borrower pays the debt as a result of the collection agency s efforts then the creditor pays the collection agency a percentage of the funds or assets that it recovers depending on the terms of the agreement if the borrower will not or cannot cover their arrearage the collection agency can update the borrower s credit report with a collection status which leads to a drop in the individual s credit score a low credit score can affect a person s chances of obtaining a loan in the future as an account in collections can remain on their credit report for seven years collection agencies deploy multiple strategies to try to retrieve funds such as the following debt collection agency regulationsthird party collection agencies but not creditors in house collection departments are bound by the fair debt collection practices act fdcpa of which some rules are cited below a debt collector may not do the following a debt collector may however do the following | |
what does a collection agency do to you | a collection agency can sue you for the debt you owe if the debt collector wins the lawsuit it also can get a court order to take money from your bank accounts or your paychecks 3 | |
what happens if you don t pay a collection agency | if the collection agency has a court order against you you could be arrested if you don t comply as part of a lawsuit you might be required to provide financial information or to testify failing to do so could also lead to a warrant for your arrest | |
is it worth paying a collection agency | it depends on the specifics of your situation if you can afford the debt you owe to the collection agency it s likely in your best interests to pay the debt taking care of the debt can help you begin to repair any damage the debt did to your credit and it helps you avoid a lawsuit however if you have more debt than you can handle it is advisable to seek professional legal and financial assistance to determine if filing for bankruptcy is your best course of action the bottom linecompanies sometimes will outsource collection efforts on past due accounts while this can be a cost effective approach for creditors being contacted by a collection agency can be stressful for those owing the debt in most cases it is best to pay the debt as quickly as possible if you are contacted and do in fact owe the debt failing to act quickly can damage your credit score further and possibly lead to a lawsuit keep in mind though that collection agencies are bound by the fdcpa so it s also a good idea to familiarize yourself with the rights you re afforded when contacted by a collection agency | |
what is collusion | collusion is a non competitive secret and sometimes illegal agreement between rivals that attempts to disrupt the market s equilibrium the act of collusion involves people or companies that would typically compete against each other but who conspire to work together to gain an unfair market advantage the colluding parties may collectively choose to influence the market supply of a good or agree to a specific pricing level that will help the partners maximize their profits to the detriment of other competitors collusion is common among duopolies types of collusioncollusion can take many forms across market types groups collectively obtain an unfair advantage in each scenario one of the most common ways of colluding is price fixing this occurs when there are a small number of companies in a particular supply marketplace commonly referred to as an oligopoly these businesses offer the same product and form an agreement to set the price level prices may be forcibly lowered to drive out smaller competitors or they may have an inflated level to support the interest of the group at a disadvantage to the buyer price fixing can eliminate or reduce competition and lead to even higher barriers for new entrants collusion may also occur when companies synchronize their advertising campaigns the partnering businesses might want to limit the consumers knowledge about a product or service for an added advantage in this case collective partnering through the use of insider information can also be a type of collusion in the financial industry colluding groups might have the opportunity to gain several advantages through the sharing of private or preliminary information this financial collusion can allow the parties to enter and exit trades before the shared information is publicly available factors that deter collusioncollusion is an illegal practice in the united states and this significantly deters its use antitrust laws aim to prevent collusion between companies they make it complicated to coordinate and execute an agreement to collude it s also difficult for companies to partake in collusion in industries that have strict supervision defection is another key deterrent to collusion a company that initially agrees to take part in a collusion agreement might defect and undercut the profits of the remaining members the company that defects might also act as a whistleblower and report the collusion to the appropriate authorities real world examplea new york appeals court upheld a 2013 ruling against tech behemoth apple in 2015 the multinational technology giant appealed the lower court s finding that the company had illegally conspired with five of the biggest book publishers on the pricing of ebooks the new york appeals court found in favor of the plaintiffs the company s goals were to promote apple s new ipad and to prevent amazon from undercutting its title prices of ebooks the case led to a 450 million settlement in which apple paid purchasers twice their losses 1 | |
what are duopolies | a duopoly exists when just two firms dominate a market but it can also refer to a market in which two firms control more than 70 of the market share 2 | |
what are some antitrust laws | antitrust laws limit and regulate the market power of a firm to protect against competition because competition benefits consumers the sherman act was the first antitrust law passed in 1890 it was followed by the federal trade commission act and the clayton act in 1914 the clayton act was last amended in 1976 these are all federal laws 3 | |
what are some whistleblower laws | whistleblower laws can be imposed at both the federal and state level the most common of them protect employees from retaliation such as termination or discrimination for disclosing acts of wrongdoing by a company or firm the federal whistleblower protection act shields all government employees 4the bottom linecollusion refers to actions taken by individuals business firms or other entities to influence or control pricing or a market in general these moves are typically arranged in secret and all entities involved can profit collusion is illegal in the united states and laws exist to protect against it at both state and federal levels whistleblower laws protect employees in particular speak to a legal representative if you suspect you ve been targeted for revealing what you suspect to be clandestine marketing activity | |
what is the combined loan to value cltv ratio | the combined loan to value cltv ratio is the ratio of all secured loans on a property to the value of a property lenders use the cltv ratio to determine a prospective borrower s risk of default when more than one loan is used the cltv differs from the simple loan to value ltv ratio in that the ltv only includes the first or primary mortgage in its calculation 1formula and calculation of the cltv ratioa cltv ratio is calculated by dividing the amount of all loans on the property including the one you are applying for by its value it is expressed as a percentage in general lenders are willing to lend at cltv ratios of 80 and below to borrowers with high credit ratings the following formula can be used to calculate combined loan to value cltv ratio 1cltv vl1 vl2 vlntotal value of the propertywhere vl value of loan begin aligned text cltv frac text vl1 text vl2 dots text vln text total value of the property textbf where text vl text value of loan end aligned cltv total value of the propertyvl1 vl2 vln where vl value of loan | |
what the cltv ratio shows | combined loan to value cltv ratio is a calculation used by mortgage and lending professionals to determine the total percentage of a homeowner s property that has liens debt obligations compared to the value of the property lenders use the cltv ratio along with a handful of other calculations such as the debt to income ratio and the standard loan to value ltv ratio to assess the risk of extending a loan to a borrower many economists consider relaxed cltv standards to be one of the factors that contributed to the foreclosure crisis that plagued the united states during the late 2000s beginning in the 1990s and especially during the early and mid 2000s homebuyers frequently took out second mortgages at the time of purchase in lieu of making down payments lenders eager not to lose these customers business to competitors agreed to such terms despite the increased risk 2before the real estate bubble that expanded from the late 1990s to the mid 2000s the standard practice was for homebuyers to make down payments totaling at least 20 of the purchase price most lenders kept customers within these parameters by capping ltv at 80 | |
when the bubble began to heat up many of these same companies took steps to allow customers to get around putting 20 down some lenders raised ltv caps or did away with them completely offering mortgages with 5 down payments or less while others kept ltv requirements in place but raised cltv caps often to 100 this maneuver enabled customers to take out second mortgages to finance their 20 down payments 2 | the foreclosure spike beginning in 2008 underscored why cltv is important having skin in the game such as a 100 000 initial cash outlay for a 500 000 house provides a homeowner with a powerful incentive to keep up with mortgage payments if the bank forecloses a homeowner not only loses their home but also the pile of cash they paid to close on the property requiring equity in the property also insulates lenders from a dip in real estate prices special considerationssome homebuyers choose to lower their down payment by receiving multiple mortgages on a property which results in a lower loan to value ratio for the primary mortgage also because of the lower ltv ratio many homebuyers successfully avoid private mortgage insurance pmi whether it is better to obtain a second mortgage or incur the cost of pmi depends on the particular circumstances of the borrower consequently because the second mortgagor assumes more risk the interest rate on a second mortgage is typically higher than the interest rate on a first mortgage 1example of a cltv ratiolet s say you are purchasing a home for 200 000 to secure the property you provided a down payment of 50 000 and received two mortgages one for 100 000 primary and one for 50 000 secondary your combined loan to value ratio cltv is 75 100 000 50 000 200 000 loan to value vs cltvloan to value ltv and cltv are two of the most common ratios used during the mortgage underwriting process most lenders impose maximums on both values above which the prospective borrower is not eligible for a loan the ltv ratio considers only the primary mortgage balance while the cltv factors in all loans on the property such as home equity loans and home equity lines of credit helocs most lenders impose ltv maximums of 80 borrowers with good credit profiles can circumvent this requirement but must pay private mortgage insurance pmi as long as their primary loan balance is greater than 80 of the home s value pmi protects the lender not the borrower from losses when a home s value falls below the loan balance 3primary lenders tend to be more generous with cltv requirements considering the example above in the event of a foreclosure the primary mortgage holder receives its money in full before the second mortgage holder receives anything if the property value decreases to 125 000 before the borrower defaults the primary lien holder receives the entire amount owed 100 000 while the second lien holder only receives the remaining 25 000 despite being owed 50 000 the primary lien holder shoulders less risk in the case of declining property values and can afford to lend at a higher cltv 4 | |
how does my cltv ratio impact rates | in general a borrower with a high cltv ratio is considered to be a higher risk by a lender this could result in the loan being denied or approved but at a higher interest rate | |
what is a good cltv ratio | lenders generally like to see a cltv ratio of 80 or less borrowers will also need good credit scores | |
when calculating a cltv ratio lenders include all secured loans on the property this includes first mortgages second mortgages home equity loans and home equity lines of credit helocs | the bottom lineborrowers should always consider the advantages and disadvantages of taking out multiple loans on one property exercising due diligence will help ensure that what is chosen is the best option for the given circumstances | |
what is the combined ratio | the combined ratio also called the combined ratio after policyholder dividends ratio is a measure of profitability used by an insurance company to gauge how well it is performing in its daily operations the combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing them by the earned premium the formula for the combined ratio is combined ratio incurred losses expenses earned premium begin aligned text combined ratio frac text incurred losses text expenses text earned premium end aligned combined ratio earned premiumincurred losses expenses investopedia julie bang | |
what does the combined ratio tell you | the combined ratio measures the money flowing out of an insurance company in the form of dividends expenses and losses losses indicate the insurer s discipline in underwriting policies the expense ratio gauges the efficiency of an insurer and how well it uses its resources to drive top line growth the combined ratio is arguably the most important of these three ratios because it provides a comprehensive measure of an insurer s profitability the combined ratio is typically expressed as a percentage a ratio below 100 percent indicates that the company is making an underwriting profit while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums even if the combined ratio is above 100 percent a company can potentially still be profitable because the ratio does not include investment income many insurance companies believe that the combined ratio is the best way to measure success because it does not include investment income and only includes profit earned through efficient management this is important to note since a portion of dividends will be invested in equities bonds and other securities the investment income ratio investment income divided by net premiums earned takes investment income into account and is used in the calculation of the overall operating ratio examples of the combined ratioas a hypothetical example if an insurer collects 1 000 in policy premiums and pays out 800 in claims and claim related expenses plus another 150 in operating expenses it would have a combined ratio of 800 150 1 000 95 let s take another example insurance company zyx has incurred underwriting expenses of 10 million incurred losses and loss adjustment expenses of 15 million net written premiums of 30 million and earned premiums of 25 million we can calculate zyx s financial basis combined ratio by adding the incurred losses and loss adjustment expenses with the incurred underwriting expenses the financial basis combined ratio is 1 or 100 10 million 15 million 25 million the financial basis gives a snapshot of the current year s statutory financial statements we can also calculate the combined ratio on a trade basis where you divide the incurred losses and loss adjustment expenses by earned premiums and add to the incurred underwriting expenses divided by net written premiums the trade basis combined ratio of insurance company xyz is 0 93 or 93 15 million 25 million 10 million 30 million the difference between the combined ratio and the loss ratiothe loss ratio measures the total incurred losses in relation to the total collected insurance premiums while the combined ratio measures the incurred losses and expenses in relation to the total collected premiums the combined ratio is essentially calculated by adding the loss ratio and expense ratio the loss ratio is calculated by dividing the total incurred losses by the total collected insurance premiums the lower the ratio the more profitable the insurance company and vice versa if the loss ratio is above 1 or 100 the insurance company is likely to be unprofitable and may be in poor financial health because it is paying out more in claims than it is receiving in premiums limitations of the combined ratiothe components of the combined ratio each tell a story and should be examined both together and separately in order to understand what is driving the insurer to be profitable or unprofitable policy dividends are generated from the premiums generated from the insurer s underwriting activities the loss and loss adjustment ratio demonstrate how much it costs the insurer to offer one dollar of protection the expense ratio shows how expensive it is to generate new business since it takes into account commissions salaries overhead benefits and operating costs for related reading see how do i calculate the combined ratio | |
what is a command economy | a command economy is a key aspect of a political system in which a central governmental authority dictates the levels of production that are permissible and the prices that may be charged for goods and services most industries in command economies are publicly owned the main alternative to a command economy is a free market system in which supply and demand dictate production and prices the command economy is a component of a communist political system while a free market system exists in capitalist societies understanding command economycuba north korea and the former soviet union all have command economies china maintained a command economy until 1978 when it began its transition to a mixed economy that blends communist and capitalist elements 1 its current system has been described as a socialist market economy the command economy also known as a planned economy requires that a nation s central government own and control the means of production private ownership of land and capital is nonexistent or severely limited central planners set prices control production levels and limit or prohibit competition within the private sector in a pure command economy there is no private sector as the central government owns or controls all business in a command economy government officials set national economic priorities including how and when to generate economic growth how to allocate resources and how to distribute the output this often takes the form of a multi year plan capitalists may argue that command economies face at least two major problems first is the incentive problem and second is an information vacuum among the central planners making all the decisions the incentive problemthe incentive problem starts at the top policymakers even in a command economy are all too human political interest groups and the power struggles between them will dominate policymaking in a command economy even more than in capitalist economies because they are not constrained by market based forms of discipline such as sovereign credit ratings or capital flight wages are set centrally for workers and profits are eliminated as an incentive for management there is no apparent reason to produce excellence improve efficiency control costs or contribute effort beyond the minimum required to avoid official sanction getting ahead in a command economy requires pleasing the party bosses and having the right connections rather than maximizing shareholder value or meeting consumer demands corruption tends to be pervasive the incentive problem includes the issue known as the tragedy of the commons on a larger scale than is seen in capitalist societies resources that are commonly owned are effectively unowned all of their users or workers lack any incentive to preserve them things such as housing developments factories and machinery wear out break down and fall apart rapidly in a command economy the information vacuumthe problem of economic calculation in a command economy was first described by austrian economists ludwig von mises and f a hayek central planners must somehow calculate how much of every product and service should be produced and delivered 2in a free market system this is determined in a decentralized manner through the interaction of supply and demand consumers shape demand by the products and services they buy or don t buy producers respond by creating more of the products and services that consumers demand moreover all of these factors are quantifiable at every step of the supply chain someone is keeping count of the number of avocados pairs of blue jeans and lug wrenches that are in demand out there in a command economy central planners should at least initially have a grasp on the basic life or death needs of the population in terms of food clothing and shelter but without the forces of supply and demand to guide them they have no rational method to align the production and distribution of goods with consumer wants and preferences over time the incentive and economic calculation problems of a command economy mean that resources and capital goods are wasted and the society is impoverished arguments in favor of command economiesproponents of command economies argue that they allocate resources to maximize social welfare unlike in free market economies where this goal is secondary to maximizing private profit command economies may have better control of employment levels than free market economies they can create jobs to put people to work when necessary even in the absence of a legitimate need lastly command economies are seen as better able to take decisive coordinated action in the face of a national emergency or crisis such as a war or natural disaster although even market based societies may curtail property rights and greatly expand the emergency powers of their central governments during such events at least temporarily | |
what are the characteristics of a command economy | command economies are controlled from the top by government planners in general this includes monopolies are common in command economies as they are considered necessary to meet the goals of the national economy | |
how does a command economy differ from a free market economy | in a free market economy private enterprises determine their levels of production in response to the law of supply and demand in a command economy the decision is dictated by government few free market economies today operate entirely on the principle of laissez faire a government may use public policies and regulations to encourage the production of a product such as fuel efficient cars some command economies have loosened their control china s economic boom did not begin until it created its own blend of socialist ideology and capitalist enterprise 3 | |
how do central plans work in a command economy | communist nations with command economies are prone to introducing multi year plans that are expected to result in improved conditions for all its people china has had no fewer than 14 five year plans with the current one ending in 2025 4central plans generally set goals for each industry and establish strategies for every sector industries are required to participate in government objectives such as reducing carbon emissions or revitalizing rural economies the bottom linea command economy is a system in which a central governmental authority sets permitted levels of production as well as the terms of distribution and pricing it s a component of communist political systems command economies are a contrast to free markets in which prices are determined largely by supply and demand | |
what is commerce | commerce is the exchange of goods or services among two or more parties it is the subset of business that focuses on the sale of finished or unfinished products rather than their sourcing manufacturing transportation or marketing generally commerce can refer to an exchange of goods or services for money or something of equal value from the broadest perspective governments are tasked with managing the commerce of their nations in a way that meets the needs of their citizens by providing jobs and producing beneficial goods and services understanding commercecommerce has existed from the moment humans started exchanging goods and services with one another from the early days of bartering to the creation of currencies and the establishment of trade routes humans have sought ways to facilitate the exchange of goods and services by building a distribution process to bring together sellers and buyers today the term commerce normally refers to large scale purchases and sales the sale or purchase of a single item by a consumer is defined as a transaction while commerce may refer to all transactions related to the purchase and sale of that item most commerce in modern times is conducted internationally and represents the buying and selling of goods between nations commerce is not synonymous with business but is a subset of it commerce does not relate to the sourcing manufacturing or production processes but only to the distribution of goods and services that alone encompasses a number of roles such as logistical political regulatory legal social and economic commerce vs business vs tradethese words are often used interchangeably but they are not the same business is any endeavor undertaken for the purpose of making a profit it includes selling goods and services but everyone else involved in the process of creating the product and getting it to a consumer is engaged in business activity | |
when you fill up your gas tank at a service station you are completing a process that started with an oil exploration company locating an oil deposit continued with a drilling company extracting crude oil and then went through many stages of transportation refining and distribution before it got to your gas tank a number of people conducted business to get it there | commerce refers specifically to the exchange of products or services between two or more parties in the above example you engaged in commerce when you paid to fill up your gas tank along the way there were other examples of commercial activity for example the crude oil was sold in bulk to one or more oil companies that was a commercial transaction as well the distinction between commerce and trade is pretty fine both are the direct exchange of goods and services for something of value between two parties in modern times something of value means money however there are some differences in their usage regulating commerce | |
when properly managed commercial activity enhances the standard of living of a nation s citizens and increases its standing in the world however when commerce is allowed to run unregulated large businesses can become too powerful and impose negative externalities on citizens for the benefit of the business owners | most nations have established government agencies responsible for promoting and managing commerce such as the department of commerce in the united states large multinational organizations regulate commerce across borders for example the world trade organization wto and its predecessor the general agreement on tariffs and trade gatt established rules for tariffs relating to the import and export of goods between countries the rules are meant to facilitate commerce and establish a level playing field for member countries the rise of e commercethe idea of commerce has expanded to include electronic commerce in the 21st century electronic commerce or e commerce is defined as any business or commercial transaction that includes the transfer of financial information over the internet e commerce changed how commerce is conducted in the past imports and exports posed logistical hurdles for both the buyer and the seller only larger companies with scale in their favor could benefit from export customers with the rise of e commerce small business owners have a chance to market to international customers and fulfill their orders export management companies help domestic small businesses with the logistics of selling internationally export trading companies help small businesses by identifying international buyers and domestic sourcing companies that can fulfill the demand import export merchants purchase goods directly from a domestic or foreign manufacturer and then they package the goods and resell them on their own as an individual entity assuming the risk but taking higher profits | |
is commerce the same as business | the word commerce is not interchangeable with business but is rather a subset of business business includes sourcing manufacturing production and marketing whereas commerce pertains to the distribution side of the business specifically the distribution of goods and services | |
what are the different types of e commerce | there are three distinct types of e commerce | |
what is e commerce | e commerce is any sale of goods and services that is finalized in a transaction on the internet e commerce is an alternative to transactions that take place in brick and mortar stores today many companies offer their customers the choice of online or in store purchasing the bottom linecommerce refers to transactions between two or more parties in which goods or services are exchanged this can take place on a small scale such as when two individuals exchange items or money or on a large scale such as the buying and selling of goods between nations in recent decades e commerce has emerged as another form of commerce in which transactions take place on the internet rather than in brick and mortar stores | |
what is commercial | commercial relates to commerce or general business activity in the investment field the term commercial is used to refer to commercial trading or an entity engaged in business activities that are hedged by positions in the futures or options markets charities and non profits as well as government agencies usually operate on a non commercial basis understanding commercialcommercial activity is an activity intended for exchange in the market to earn an economic profit for example commercial banking refers to banking activities focused on businesses as opposed to consumer or retail banking which deals with the finance needs of individuals the colloquial meaning of the term commercial is a paid advertisement that runs on television or radio promoting goods or services available for sale commercial entities play an active role in the futures and forward markets ranging from the initial production to the final sales while the term is also widely used in other areas of finance and everyday life it generally denotes an activity that pertains to business or one that has a profit motive commercial positions in the options and futures markets generally indicate hedging activity while non commercial positions denote speculative activity economists like to assess commercial positions in the futures and options market because this trading activity provides an indication of real economic activity that helps them forecast macroeconomic data like gross domestic product gdp growth manufacturers have commercial positions to hedge the price of commodities and reduce their exposure to commodity price risk the u s commitments of traders cots reports supplied by the u s commodity futures trading commission cftc display weekly open interest for commodities traded on futures exchanges classified by commercial and non commercial holdings 1the term commercial is also used to identify large institutional entities that are incumbent participants in a given market and have considerable scale the opposite of commercial participants tends to be retail participants which is often used to identify smaller companies or even individuals in a given market commercial sized companies can meet economies of scale easier and quicker as they have a size and capital advantage this allows these companies to be able to produce goods and services on a larger scale with few input costs commercial vs non commercial activitycommercial trading activity is used by companies that actually need to take delivery of the commodity to use in their production processes examples of commercial users include car manufacturers that need to take delivery of steel or oil refiners that need to take delivery of crude oil to produce gasoline non commercial trading activity on the other hand relates to speculative positions where traders are looking to make profits from short term price variations these traders do not actually need the commodity they are trading and can even close out all their trading positions at the end of the trading day commercial faqscommercial activity is for profit activity such as selling furniture via a storefront or a restaurant more broadly commercial activity can include selling goods services food or materials commercial insurance is a form of insurance for businesses offering liability and general business risk coverage commercial insurance is meant to cover the business and its employees against certain risks there are several types of commercial insurance such as business interruption cyber property and auto coverage 2commercial real estate is a property that s used for business or related purposes commercial real estate is generally leased and is used for a variety of purposes including offices retail industrial or multi family residential commercial business is an activity conducted by companies to provide goods or services for sale commercial business includes the activity done outside of manufacturing or producing the products commercial business can also include the use of land or business for business activity such as retail stores a commercial driver s license cdl is a license required in the u s to operate large or heavy vehicles issued by states there are three classes of cdl class a b and c each class includes various qualifications such as the weight of the vehicle or the number of passengers 3the bottom linecommercial generally relates to anything business or commerce a commercial is an advertisement for a business commercial activity is selling goods or services for profit there s also commercial trading in the forward and futures markets generally done for hedging purposes | |
what is a commercial bank | the term commercial bank refers to a financial institution that accepts deposits and offers different banking and financial products commercial banks provide these services to people and businesses commercial banks make money by providing and earning interest from loans such as mortgages auto loans business loans and personal loans customer deposits provide banks with the capital to make these loans yurle villegas investopedia | |
how commercial banks work | commercial banks provide basic banking services and products to the general public both individual consumers and businesses the following table highlights some of the key services commercial banks provide to their retail customers business banking services also include bank accounts investments and lending products commercial banks also provide their business clients with merchant services which allows companies to accept payments electronically from their customers these financial institutions have traditionally been located in buildings where customers come to use teller window services and automated teller machines atms to do their routine banking with the rise in internet technology most banks now allow their customers to do most of the same services online that they could do in person including transfers deposits and bill payments the money that customers deposit at commercial banks is insured by the federal deposit insurance corporation fdic including cash in savings accounts and cds customers have the option to withdraw money upon demand and the balances are fully insured up to 250 000 therefore banks do not have to pay much for this money 1a growing number of commercial banks operate exclusively online where all transactions with the commercial bank must be made electronically because these banks don t have any brick and mortar locations they can offer a wider range of products and services at a lower cost or none at all to their customers | |
how commercial banks make money | banks make money by imposing service charges on their customers these fees vary based on the products ranging from account fees monthly maintenance charges minimum balance fees overdraft fees and non sufficient funds nsf charges safe deposit box fees and late fees many loan products also contain fees in addition to interest charges banks also make money from the interest they earn when they lend money to their clients the funds they lend come from customer deposits however the interest rate paid by banks on the money they borrow is less than the rate charged on the money they lend for example a bank may offer savings account customers an annual interest rate of 0 25 while charging mortgage clients 4 75 in interest annually many banks pay their customers no interest or very little at all on checking account balances and offer interest rates for savings accounts that are well below u s treasury bond t bond rates commercial banks and lendingconsumer lending makes up the bulk of north american bank lending some of the most significant categories include residential mortgages automobile lending and credit cards mortgages make up by far the largest share mortgages are used to buy properties and the homes themselves are often the security that collateralizes the loan mortgages are typically written for 30 year repayment periods and interest rates may be fixed adjustable or variable although a variety of more exotic mortgage products were offered during the u s housing bubble of the 2000s many of the riskier products including pick a payment mortgages and negative amortization loans are much less common now automobile lending is another significant category of secured lending for many banks compared to mortgage lending auto loans are typically for shorter terms and higher rates banks face extensive competition in auto lending from other financial institutions like captive auto financing operations run by automobile manufacturers and dealers credit cards are another significant type of financing credit cards are in essence personal lines of credit that can be drawn down at any time private card issuers offer them through commercial banks visa and mastercard run the networks through which money is moved around between the shopper s bank and the merchant s bank after a transaction not all banks engage in credit card lending as the rates of default are traditionally much higher than in mortgage lending or other types of secured lending credit card lending delivers lucrative fees for banks for example interchange fees are charged to merchants for accepting the card and entering into the transaction banks also charge customers late payment fees currency exchange over limit and other fees as well as elevated rates on the balances that credit card users carry from one month to the next the total number of commercial banks in the united states in 2023 2importance of commercial bankscommercial banks are an important part of the economy they not only provide consumers with an essential service but also help create capital and liquidity in the market commercial banks ensure liquidity by taking the funds that their customers deposit in their accounts and lending them out to others commercial banks play a role in the creation of credit which leads to an increase in production employment and consumer spending thereby boosting the economy as such these banks are heavily regulated by a central bank in their country or region for instance central banks impose reserve requirements on commercial banks this means that banks are required to hold a certain percentage of their consumer deposits at the central bank as a cushion if the public rushes to withdraw funds commercial banks vs investment banksboth commercial and investment banks provide important services and play key roles in the economy for much of the 20th century these two branches of the banking industry were generally kept separate from one another in the united states thanks to the glass steagall act of 1933 which was passed during the great depression 3 it was largely repealed by the gramm leach bliley act of 1999 allowing for the creation of financial holding companies that could have both commercial and investment bank subsidiaries 4while commercial banks traditionally provide services to individuals and businesses investment banks focus on offering banking services to large companies and institutional investors they act as financial intermediaries providing their clients with underwriting services merger and acquisition m a strategies corporate reorganization services and other types of brokerage services for institutional and high net worth individuals hnwis while commercial banking clients include individual consumers and small businesses investment banking clients include governments hedge funds other financial institutions pension funds and large companies the gramm leach bliley act tore down the wall between commercial and investment banks but maintained some safeguards for instance it forbids a bank and a nonbank subsidiary of the same holding company from marketing the products or services of the other entity to prevent banks from promoting securities underwritten by other subsidiaries to their customers and placed size limitations on subsidiaries 4examples of commercial bankssome of the world s largest financial institutions are commercial banks or have commercial banking operations many of which can be found in the u s for instance as noted above banking has had to change with the rise of financial technology fintech some of the major commercial banks have an increased online presence some banks operate exclusively online for example ally bank ally is one of the major online commercial banks in the united states the bank is headquartered in detroit and has 196 billion in assets as of december 2023 7 | |
is my bank a commercial bank | possibly commercial banks are what most people think of when they hear the term bank commercial banks are for profit institutions that accept deposits make loans safeguard assets and work with many different types of clients including the general public and businesses however if your account is with a community bank or credit union it probably would not be a commercial bank |
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