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how to calculate the fixed charge coverage ratio | the calculation for determining a company s ability to cover its fixed charges starts with earnings before interest and taxes ebit from the company s income statement and then adds back interest expense lease expense and other fixed charges next the adjusted ebit is divided by the amount of fixed charges plus interest a ratio result of 1 5 for example shows that a company can pay its fixed charges and interest 1 5 times out of earnings | |
what does the fixed charge coverage ratio tell you | the fixed charge ratio is used by lenders looking to analyze the amount of cash flow a company has available for debt repayment a low ratio often reveals a lack of ability to make payments on fixed charges a scenario that lenders try to avoid since it increases the risk that they will not be paid back to avoid this risk many lenders use coverage ratios including the times interest earned tie ratio and the fixed charge coverage ratio to determine a company s ability to take on and pay for additional debt a company that can cover its fixed charges at a faster rate than its peers is not only more efficient but also more profitable this is a company that wants to borrow to finance growth rather than to get through a hardship a company s sales and the costs related to its sales and operations make up the information shown on its income statement some costs are variable costs and dependent on the volume of sales over a particular time period as sales increase so do the variable costs other costs are fixed and must be paid regardless of whether or not the business has activity these fixed costs can include items such as equipment lease payments insurance payments installment payments on existing debt and preferred dividend payments example of the fixed charge coverage ratio in usethe goal of computing the fixed charge coverage ratio is to see how well earnings can cover fixed charges this ratio is a lot like the tie ratio but it is a more conservative measure taking additional fixed charges including lease expenses into consideration the fixed charge coverage ratio is slightly different from the tie though the same interpretation can be applied the fixed charge coverage ratio adds lease payments to earnings before income and taxes ebit and then divides by the total interest and lease expenses let s say company a records ebit of 300 000 lease payments of 200 000 and 50 000 in interest expense the calculation is 300 000 plus 200 000 divided by 50 000 plus 200 000 which is 500 000 divided by 250 000 or a fixed charge coverage ratio of 2 the company s earnings are two times greater than its fixed costs which is considered low that s because the company would only be able to pay the fixed charges twice with the earnings it has increasing the risk that it cannot make future payments the higher this ratio is the better like the tie ratio the higher the fccr the better limitations of the fixed charge coverage ratiothe fccr doesn t consider rapid changes in the amount of capital for new and growing companies the formula also doesn t consider the effects of funds taken out of earnings to pay an owner s draw or pay dividends to investors these events affect the ratio inputs and can give a misleading conclusion unless other metrics are also considered for this reason when banks evaluate a company s creditworthiness for a loan they typically look at several other benchmarks in addition to the fixed charge coverage ratio this gives them a more complete view of the company s financial condition | |
how do i calculate the fixed charge coverage ratio | add earnings before interest and taxes ebit and fixed charges before tax fcbt and divide it by the summary of fcbt plus interest the quotient is the fixed charge coverage ratio fccr | |
how is the fixed charge coverage ratio used | banks will often look at the fccr when evaluating whether to lend money to a business lenders analyze the amount of cash flow a company has available for debt repayment | |
what does the fixed charge coverage ratio not take into account | the fccr doesn t consider both events affect the ratio inputs and can give a misleading conclusion unless other metrics are also considered this is why banks usually look at several other benchmarks in addition to the fixed charge coverage ratio when they evaluate a company s creditworthiness for a loan the bottom linethe fixed charge coverage ratio fccr measures how well a company s earnings can be used to cover its fixed charges such as rent utilities and debt payments lenders often use the fixed charge coverage ratio to assess a company s creditworthiness with a high fccr indicating that the business can adequately cover fixed charges based on its current earnings alone | |
what is a fixed cost | a fixed cost is a business expense that normally doesn t change with an increase or decrease in the number of goods and services produced or sold by the business fixed costs are commonly related to recurring expenses not directly related to production such as rent interest payments insurance depreciation and property tax since fixed costs are unrelated to a company s production of goods or services they are generally indirect costs a fixed cost is one of two different types of business expenses that together produce total cost the other is a variable cost mira norian investopediaunderstanding fixed costsfixed costs don t change with production levels also referred to as fixed expenses they are usually established by contract agreements or schedules these are the base costs involved in operating a business once established fixed costs do not change over the life of an agreement or cost schedule fixed costs are allocated in the indirect expense section of the income statement which leads to operating profit depreciation is a common fixed expense that is recorded as an indirect expense companies create a depreciation expense schedule for asset investments with values falling over time for example a company might buy machinery for a manufacturing assembly line that is expensed over time using depreciation another primary fixed and indirect cost is salaries for management any fixed costs on the income statement are accounted for on the balance sheet and cash flow statement fixed costs on the balance sheet may be either short or long term liabilities any cash used to pay fixed cost expenses is shown on the cash flow statement in general the opportunity to lower fixed costs can benefit a company s bottom line by reducing expenses and increasing profit companies examine fixed and variable expenses when analyzing costs per unit as such the cost of goods sold cogs can include both types of costs all costs directly associated with producing a good are summed collectively and subtracted from revenue to arrive at gross profit cost accounting varies for each company depending on the costs with which they work economies of scale can also be a factor for companies producing large quantities of goods fixed costs can contribute to better economies of scale because they can decrease per unit when larger quantities are produced that is per unit fixed costs drop when they get spread out over a larger number of units fixed costs that may be directly associated with production will vary by company but can include costs like direct labor and rent companies have some flexibility when breaking down costs on their financial statements and fixed costs can be allocated throughout their income statement the proportion of fixed to variable costs and how they re allocated can depend on its industry examples of fixed costsfixed costs include any number of expenses including rental and lease payments certain salaries insurance property taxes interest expenses depreciation and some utilities for instance someone who starts a new business would likely begin with fixed expenses for rent and management salaries all types of companies have fixed cost agreements that they monitor regularly while these fixed costs may change over time the change is not related to production levels instead changes can stem from new contractual agreements or schedules fixed cost vs variable costfixed expenses are usually negotiated for a specified period but can t decrease on a per unit basis when they are associated with the direct cost section of the income statement fluctuating in the breakdown of costs of goods sold unlike fixed costs variable costs are costs directly associated with production therefore they change depending on business output these costs can increase or decrease relative to production levels or sales | |
when production increases variable costs rise when production decreases these expenses drop variable costs also vary by industry so it s important for anyone analyzing companies to make comparisons between those that are in the same industry | examples of variable costs include the cost of labor utilities raw materials shipping costs and commissions another type of expense is a hybrid between fixed and variable costs semi variable costs are composed of fixed and variable components which means they are fixed for a certain production level after this threshold the costs become variable some of the most common examples of semi variable costs include those for repairs and electricity special considerationsfixed expenses can be used to calculate several key metrics including a company s breakeven point and operating leverage a breakeven analysis involves using both fixed and variable costs to identify a production level at which revenue equals costs this can be an important part of cost structure analysis a company s breakeven production quantity is calculated by breakeven point fixed costs sppu vcpu where sppu sales price per unit vcpu variable cost per unit begin aligned text breakeven point frac text fixed costs text sppu text vcpu textbf where text sppu text sales price per unit text vcpu text variable cost per unit end aligned breakeven point sppu vcpufixed costs where sppu sales price per unitvcpu variable cost per unit a company s breakeven analysis can be important for decisions that must be made about fixed and variable costs the breakeven analysis also influences the price at which a company chooses to sell its products operating leverage is a cost structure metric used in cost structure management companies can generate more profit per additional unit produced with higher operating leverage the proportion of fixed to variable costs influences a company s operating leverage higher fixed costs help operating leverage to increase you can calculate operating leverage using the following formula operating leverage q p v q p v f where q number of units p price per unit v variable cost per unit f fixed costs begin aligned text operating leverage frac text q times text p text v text q times text p text v text f textbf where text q text number of units text p text price per unit text v text variable cost per unit text f text fixed costs end aligned operating leverage q p v fq p v where q number of unitsp price per unitv variable cost per unitf fixed costs cost structure management and ratiosin addition to financial statement reporting most companies closely follow their cost structures through independent cost structure statements and dashboards independent cost structure analysis helps a company fully understand its fixed and variable costs and how they affect different parts of the business as well as the total business overall many companies have cost analysts dedicated solely to monitoring and analyzing a business s fixed and variable costs the fixed charge coverage ratio on the other hand is a type of solvency metric that helps analyze a company s ability to pay its fixed charge obligations the fixed charge coverage ratio is calculated with the following equation ebit fixed charges before tax fixed charges before tax interest begin aligned frac text ebit text fixed charges before tax text fixed charges before tax text interest end aligned fixed charges before tax interestebit fixed charges before tax the fixed cost ratio is a simple ratio that divides fixed costs by net sales it s used to determine the proportion of fixed costs involved in production | |
are all fixed costs considered sunk costs | all sunk costs are fixed costs in financial accounting but not all fixed costs are considered to be sunk the defining characteristic of sunk costs is that they cannot be recovered | |
how are fixed costs treated in accounting | fixed costs are associated with a business s basic operating and overhead costs fixed costs are considered indirect costs of production meaning they are not costs incurred directly due to the production process such as a cost for parts needed for assembly however they do factor into total production costs as a result fixed costs are depreciated over time instead of being expensed | |
how do fixed costs differ from variable costs | unlike fixed costs variable costs are directly related to the cost of production of goods or services variable costs are commonly designated as the cost of goods sold cogs whereas fixed costs are not usually but can be included in cogs fluctuations in sales and production levels can affect variable costs if factors such as sales commissions are included in per unit production costs meanwhile fixed costs must still be paid even if production slows significantly the bottom linea fixed cost is one type of business expense the other type is a variable cost fixed costs are expenses that do not change as production levels change rent is one example of a fixed cost unlike fixed costs variable costs e g shipping change based on a company s production levels | |
what is a fixed exchange rate | a fixed exchange rate is a regime applied by a government or central bank that ties the country s official currency exchange rate to another country s currency or the price of gold the purpose of a fixed exchange rate system is to keep a currency s value within a narrow band investopedia nono floresunderstanding a fixed exchange ratefixed rates provide greater certainty for exporters and importers fixed rates also help the government maintain low inflation which in the long run keep interest rates down and stimulates trade and investment most major industrialized nations have had floating exchange rate systems where the going price on the foreign exchange market forex sets its currency price this practice began for these nations in the early 1970s while developing economies continue with fixed rate systems 1from the end of world war ii to the early 1970s the bretton woods agreement meant that the exchange rates of participating nations were pegged to the value of the u s dollar which was fixed to the price of gold 2 | |
when the united states postwar balance of payments surplus turned to a deficit in the 1950s and 1960s the periodic exchange rate adjustments permitted under the agreement ultimately proved insufficient in 1973 president richard nixon removed the united states from the gold standard ushering in the era of floating rates 3 | the european exchange rate mechanism erm was established in 1979 as a precursor to the monetary union and the introduction of the euro member nations including germany france the netherlands belgium and italy agreed to maintain their currency rates within plus or minus 2 25 of a central point 4the united kingdom joined in october 1990 at an excessively strong conversion rate and was forced to withdraw two years later the original members of the euro converted from their home currencies at their then current erm central rate as of january 1 1999 5 the euro itself trades freely against other major currencies while the currencies of countries hoping to join trade in a managed float known as erm ii 6developing economies often use a fixed rate system to limit speculation and provide a stable system a stable system allows importers exporters and investors to plan without worrying about currency moves however a fixed rate system limits a central bank s ability to adjust interest rates as needed for economic growth a fixed rate system also prevents market adjustments when a currency becomes over or undervalued effective management of a fixed rate system also requires a large pool of reserves to support the currency when it is under pressure an unrealistic official exchange rate can also lead to the development of a parallel unofficial or dual exchange rate a large gap between official and unofficial rates can divert hard currency away from the central bank which can lead to forex shortages and periodic large devaluations these can be more disruptive to an economy than the periodic adjustment of a floating exchange rate regime real world example of a fixed exchange ratein 2018 according to bbc news iran set a fixed exchange rate of 42 000 rials to the dollar after losing 8 against the dollar in a single day the government decided to remove the discrepancy between the rate traders used 60 000 rials and the official rate which at the time was 37 000 7 | |
what is fixed income | fixed income refers to those types of investment securities that pay investors fixed interest or dividend payments until they mature at maturity investors are repaid the principal amount that they originally invested government and corporate bonds are the most common types of fixed income products unlike equities that may pay no income to investors or variable income securities where payments can change based on some underlying measure such as short term interest rates the payments of a fixed income security are known in advance and remain fixed throughout its term in addition to purchasing fixed income securities directly investors can choose from a variety of fixed income exchange traded funds etfs and mutual funds to buy investopedia mira norianunderstanding fixed incomecompanies and governments issue debt securities to raise money to fund day to day operations and finance large projects these fixed income instruments pay a set interest rate return in exchange for investors lending their money at the maturity date investors are repaid the original amount that they invested this amount is known as the principal for example a company might issue a 5 bond with a 1 000 face or par value that matures in five years the investor buys the bond for 1 000 and will not be paid back until the end of the five years over the course of the five years the company makes interest payments called coupon payments based on a rate of 5 per year as a result the investor is paid 50 per year for five years at the end of the five years on the maturity date the investor is repaid the 1 000 they invested initially investors may also find fixed income investments that make coupon payments monthly quarterly or semiannually fixed income securities are recommended for conservative investors seeking a diversified portfolio the percentage of the portfolio dedicated to fixed income depends on the investor s investment style an investor might also choose to diversify their portfolio with a mix of fixed income products and stocks creating a portfolio of for example 50 fixed income products and 50 stocks treasury bonds and bills municipal bonds corporate bonds and certificates of deposit cds are all examples of fixed income products each of these products has unique benefits and limitations as investments types of fixed income productsas stated earlier the most common example of a fixed income security is a government or corporate bond bonds trade over the counter otc in the bond market and secondary market the most common government securities are those issued by the u s government and are generally referred to as treasury securities fixed income securities are offered by non u s governments and corporations as well here are common types of fixed income products traditional portfolio theory holds that an efficient investment strategy that attempts to balance risk and returns should diversify in stocks and bonds stocks tend to be riskier with higher potential returns while fixed income securities are safer with usually lower returns | |
how to invest in fixed income | investors looking to add fixed income securities to their portfolios have several options today most brokers offer customers direct access to a range of bond markets from treasuries to corporate bonds to munis 1 for those who do not want to select individual bonds fixed income mutual funds bond funds provide exposure to various bonds and debt instruments these funds give the investor an income stream and professional portfolio management 2 fixed income etfs work much like a mutual fund but may be more accessible and more cost effective to individual investors these etfs may target specific credit ratings durations or other factors etfs also carry a professional management expense 3 investors can also use a laddering strategy when investing in fixed income a laddering strategy offers steady interest income that arises from investing in a series of short term bonds with different maturities then as bonds mature the portfolio manager reinvests the returned principal into additional short term bonds with maturities that extend the ladder this method provides investors with ready capital and they avoid losing out on rising market interest rates for example a 60 000 investment could be divided into one year two year and three year bonds the investor decides to invest 20 000 into each of the three bonds | |
when the one year bond matures the 20 000 principal will be rolled into a bond maturing one year after the original three year holding when the second bond matures those funds roll into a bond that extends the ladder for another year and so on in this way the investor receives a constant flow of interest income and can take advantage of any higher interest rates | fixed income investing is generally a conservative strategy where returns are generated from low risk securities that pay predictable interest example of fixed incomelet s say pepsico pep issues fixed rate bonds to fund a new bottling plant in argentina the issued 5 bond is available at a face value of 1 000 and is due to mature in five years the company plans to use proceeds from the new plant to repay the debt you purchase 10 bonds costing a total of 10 000 and will receive 500 in interest payments each year for five years 0 05 x 10 000 500 the company receives the 10 000 and uses the funds to build the overseas plant the interest amount is fixed and gives you a steady income upon maturity in five years the company pays you back the principal amount of 10 000 you earn a total of 2 500 in interest over the five years 500 x five years advantages and disadvantages of fixed incomeincome generationfixed income investments offer investors a steady stream of income over the life of the bond or debt instrument they offer the issuer much needed access to capital or money steady income lets investors plan their spending a reason these are popular products in retirement portfolios relatively less volatilethe interest payments from fixed income products can also help investors stabilize the risk return in their investment portfolio known as the market risk for investors holding stocks fluctuating prices can result in large gains or losses the steady and stable interest payments from fixed income products can partly offset losses from the decline in stock prices as a result these safer investments help to diversify the risk of an investment portfolio guaranteesfixed income investments in the form of treasury bonds have the backing of the u s government 8corporate bonds while not insured are backed by the financial viability of the underlying company should a company declare bankruptcy or liquidation bondholders have a higher claim on company assets than do common shareholders 9moreover bond investments held at brokerage firms are backed by the securities investor protection corporation sipc with up to 500 000 coverage for cash and securities fixed income cds have federal deposit insurance corporation fdic protection up to 250 000 per individual 6fixed rates are great for lower risk but once you ve locked in a rate you can t increase it during inflationary periods fixed income securities are less favorable because newly issued bonds will have higher rates of return although there are many benefits to fixed income products as with all investments there are risks that investors should be aware of before purchasing them credit and default riskas mentioned earlier treasuries and cds have protection through the government and fdic 6 when choosing a corporate bond investment look at the credit rating of the bond and the underlying company to size up the risk of default bonds with ratings below bbb are of low quality meaning your risk of loss is higher and are considered junk bonds 10the credit risk linked to a corporation can have varying effects on the valuations of the fixed income instrument leading up to its maturity for example if a company is struggling financially the prices of its bonds on the secondary market might decline in value if an investor tries to sell a bond of a struggling company the bond might sell for less than the face or par value also liquidity could be an issue that is the bond may become difficult for investors to sell in the open market at a fair price or at all because there s no demand for it the prices of bonds can increase and decrease over the life of the bond if the investor holds the bond until its maturity the price movements are immaterial since the investor will be paid the face value of the bond upon maturity however if the bondholder sells the bond before its maturity through a broker or financial institution the investor will receive the current market price at the time of the sale the selling price could result in a gain or loss on the investment depending on the underlying corporation the coupon interest rate and the current market interest rate interest rate riskfixed income investors might face interest rate risk this is the risk that in an environment where market interest rates are rising the rate paid by the bond falls behind and in such a case the bond would lose value in the secondary bond market with bonds when rates rise prices fall also the investor s capital is tied up in the investment and they cannot put it to work earning higher income without taking an initial loss for example if an investor purchased a two year bond paying 2 5 per year and interest rates for 2 year bonds jumped to 5 the investor is locked in at 2 5 for better or worse investors holding fixed income products receive their fixed rate regardless of where interest rates move in the market inflationary riskinflationary risk is also a danger to fixed income investors the pace at which prices rise in the economy is called inflation if inflation increases it eats into the gains of fixed income securities for example if fixed rate debt security pays a 2 return and inflation rises by 1 5 the investor loses out earning only a 0 5 return in real terms steady income stream of fixed returnsmore stable returns than stockshigher claim to the assets in bankruptciesgovernment and fdic backing on somereturns are often lower than other investmentscredit and default risk exposuresusceptible to interest rate risksensitive to inflationary risk | |
what is the fixed income clearing corporation ficc | the term fixed income clearing corporation ficc refers to a regulatory clearing agency that deals with the confirmation settlement and delivery of fixed income assets in the u s the agency was established in 2003 as a subsidiary of the depository trust clearing corporation dtcc it ensures the systematic and efficient settlement and clearing of u s government securities and mortgage backed security mbs transactions in the market 1understanding the fixed income clearing corporation ficc the depository trust and clearing corporation is a financial services company established in 1999 it brought together the functions of two other organizations the depository trust company and the national securities clearing corporation 2 the goal of the dtcc is to provide clearing and settlement services for the financial market 3as noted above the ficc was established as a subsidiary of the dtcc in 2003 it was created as a result of the merger between the government securities clearing corporation gscc and the mortgage backed security clearing corporation the agency is registered with and regulated by the u s securities and exchange commission sec 1the role of the agency is to ensure that u s government backed securities and mbs are systematically and efficiently settled for instance treasury notes and bonds settle on a t 1 basis to ensure that trades are settled consistently and efficiently the ficc employs the services of its two clearing banks the bank of new york mellon and jpmorgan chase bank 4according to the sec the ficc is the only agency that acts as a clearinghouse for u s government securities transactions as such it substitutes itself for both sides of every transaction that it clears guaranteeing those transactions and making itself the buyer for every seller and the seller for every buyer 5special considerationsin october 2021 the sec announced it fined the ficc 8 million for failing to manage risk in its government securities division the sec stated that the division lacked the appropriate risk management policies between april 2017 and november 2018 the sec also found that the ficc didn t comply with industry rules that required it to put policies and procedures in place relating to the review of its margin coverage between 2015 and 2016 5fixed income clearing corporation ficc structurethe ficc is divided into two sections the government securities division gsd and the mortgage backed securities division mbsd we ve highlighted some of the most important information about both below the gsd is responsible for handling new fixed income issues and reselling government securities the division provides netting for trades in u s government debt issues including repurchase agreements repos or reverse repurchase agreement transactions reverse repos 6securities transactions processed by the ficc s gds include treasury bills bonds notes zero coupon securities government agency securities and inflation indexed securities the gsd provides real time trade matching through an interactive platform that collects and matches securities trades enabling participants to monitor the status of their trades in real time 6the mbs division of the ficc provides real time automated and trade matching trade confirmation risk management netting and electronic pool notification to the mbs market 7through the rttm service the mbsd immediately confirms trade executions in a legal and binding manner a trade is deemed compared by the mbsd at the point in time at which the division makes available to the members on both sides of a transaction output indicating that their trade data have been compared a trade compared by the mbsd constitutes a valid and binding contract and trade settlements are guaranteed by the mbsd at the point of comparison 8key participants in the mbs market are mortgage originators government sponsored enterprises registered broker dealers institutional investors investment managers mutual funds commercial banks insurance companies and other financial institutions | |
a fixed income security is an investment that provides a return through fixed periodic interest payments and the eventual return of principal at maturity unlike variable income securities where payments change based on an underlying measure such as short term interest rates the returns of a fixed income security are known | investopedia michela buttignolunderstanding fixed income securitiesfixed income securities are debt instruments that pay a fixed amount of interest in the form of coupon payments to investors the interest payments are commonly distributed semiannually and the principal is returned to the investor at maturity bonds are the most common form of fixed income securities a bond is an investment product corporations and governments issue to raise funds to finance projects and fund operations corporate and government bonds have various maturities and face values the face value is the amount the investor will receive when the bond matures corporate and government bonds mostly trade over the counter otc and not on exchanges they are usually listed with 1 000 face values also known as the par value companies governments and other entities raise capital by issuing fixed income products to investors credit rating of fixed income securitiesbonds are assigned different credit ratings based on the financial viability of the issuer credit ratings are part of a grading system performed by credit rating agencies these agencies measure the creditworthiness of corporate and government bonds and the entity s ability to repay these loans credit ratings are helpful to investors because they define the risks involved in investing bonds can either be investment grade or non investment grade bonds investment grade bonds are issued by stable companies with a low risk of default and therefore have lower interest rates than non investment grade bonds non investment grade bonds also known as junk bonds or high yield bonds have lower credit ratings due to a probability of default by the issuer investors receive a higher interest rate from investing in junk bonds for assuming the higher risk of these debt securities types of fixed income securitiestreasury notes t notes are issued by the u s treasury and are intermediate term bonds that mature in 2 3 5 7 or 10 years t notes are issued in increments of 100 and pay semiannual interest payments at fixed coupon rates or interest rates 1 the interest payment and principal repayment of all treasury marketable securities are backed by the full faith and credit of the u s government which issues these bonds to fund itself 2the u s treasury also issues treasury bonds t bonds which mature in 20 or 30 years treasury bonds are sold in 100 increments and are sold at auction on the treasury direct website 3short term fixed income securities include treasury bills the t bill has a term of 4 8 13 17 26 or 52 weeks and doesn t pay interest instead investors buy the security at a lower price than its face value or a discount when the bill matures investors receive the face value amount of the discount note the interest earned or return on the investment is the difference between the purchase price and the face value amount of the bill 4a municipal bond is issued by states cities and counties to fund capital projects such as roads schools and hospitals commonly sold with a 5 000 face value the interest earned from these bonds is exempt from federal income tax the interest earned on a muni bond may be exempt from state and local taxes if the investor resides in the state where the bond is issued 5 the muni bond has several maturity dates in which a portion of the principal comes due in intervals until the entire principal is repaid a bank issues a certificate of deposit cd in return for depositing money with the bank for a predetermined period the bank pays interest to the account holder cds often have maturities of five years or less but some can be for even longer terms they typically pay lower rates than bonds but higher rates than traditional savings accounts a cd carries federal deposit insurance corporation fdic insurance up to 250 000 per account holder 6corporate bonds are debt securities issued by companies to raise funds unlike company stocks bond investors have no voting rights or equity in the company bonds are classified based on their maturity period short term bonds are held for less than three years medium term for four to ten years and long term for more than ten years bonds are classified as investment or non investment grade depending on the company s credit rating 7companies issue preferred stock that provides investors with a fixed dividend set as a dollar amount or percentage of share value on a predetermined schedule interest rates and inflation influence the price of preferred shares and shares have higher yields than most bonds due to their longer duration advantages and disadvantages of fixed income securitiesfixed income securities provide steady interest income to investors throughout the life of the bondfixed income securities are rated by credit rating agenciesfixed income securities usually have less price volatility than stocksu s treasury fixed income securities are backed by the full faith and credit of the united states governmentthe issuer can default on making the interest payments or paying back the principalfixed income securities typically have a lower rate of return than many other investments including stocksinflation risk can be an issue if prices rise by a faster rate than the interest rate on the fixed income securitymarket interest rates may rise higher than the rate on a fixed income securityfixed income securities provide steady interest income to investors reduce risk in an investment portfolio and protect against volatility or fluctuations in the market equities are traditionally more volatile than bonds so investors may allocate a portion of their portfolios to fixed income investments to reduce their risk level fixed income securities are also available in mutual funds and exchange traded funds etfs the prices of bonds and fixed income securities increase and decrease although the interest payments of fixed income securities are steady their prices are not guaranteed to remain stable throughout the life of the holding if investors sell a fixed income security before maturity gains or losses are based on the difference between the purchase price and the sale price besides the risk of price fluctuations bonds also have the risk of a potential default u s government bonds are considered incredibly low risk as they are backed by the full faith and credit of the united states government 2 corporate bonds depend on the financial viability of a company and have a higher risk of default than government bonds however corporate bonds have a good chance to be repaid if a company declares bankruptcy since bondholders will be repaid before common and even preferred stockholders fixed income securities commonly have low returns and slow capital appreciation or price increases this is the trade off for lower risk their prices tend to decrease slower as well the initial principal amount is often inaccessible particularly with long term bonds with maturities greater than ten years however the bond can be sold to get the investment back early if the current market value is equal or greater to the amount invested fixed income securities provide a fixed interest payment regardless of where market interest rates move an investor that purchased a bond paying 2 per year will lose out on income if market interest rates rise above that level and the investor s money is tied up in the 2 bond this is also what causes a decline in the market price of bonds if rates rise above the bond s interest rate its market value declines inflation may erode the return on fixed rate securities if the inflation rate is higher than the interest rate of the fixed income instrument all bonds have credit or default risk since the securities are tied to the issuer s financial viability investing in international bonds can increase the risk of default if the country is economically or politically unstable real world exampletreasury bonds are long term bonds with a maturity of 20 or 30 years t bonds provide semiannual interest payments and are sold in increments of 100 a 30 year treasury bond was issued on march 15 2024 with a rate of 4 250 investors are paid 4 25 per 100 dollars invested each year the principal is repaid in 30 years 3a 10 year treasury note was issued on march 15 2024 with a rate of 4 000 the note also pays semiannual interest payments at fixed coupon rates and is sold in 100 increments each note of 100 would pay 4 00 per year until maturity and return the principal after 10 years 1 | |
how can you invest in fixed income securities | investors can purchase u s government fixed income instruments through treasurydirect or on the secondary market through a broker corporate bonds or bond funds can be purchased through a financial broker certificates of deposit are purchased through financial brokers or banks | |
what are the risks of investing in fixed income instruments | fixed income instruments require investors to commit their money for an extended period sometimes up to 30 years although there is a way out selling the bond this can result in a gain or less depending on how its value has shifted as interest rates change a bond s market prices shifts if interest rates rise the bond s market price will decline and if interest rates fall the bond s market value will rise in the case that interest rates rise the investor is missing out on higher rates from newer bonds and at the time they would lose money if they sold the bond inflation can also affect the market value of fixed income securities as well as erode the real value of its yield | |
what does it mean to default on a fixed income security | default is the failure to make required interest or principal repayments on a debt whether that debt is a loan or a security individuals businesses and even countries can default on their debt obligations the bottom linea fixed income security is an investment that provides a steady interest income stream for a certain period types include government bonds corporate bonds and certificates of deposit there are also mutual funds and etfs which hold a large number of bonds in one fund allowing investors to easily diversify their fixed income investments fixed income securities are rated by credit agencies that assess the default risk for investors these investments typically have a lower rate of return than stocks | |
what is a fixed interest rate | a fixed interest rate is an unchanging rate charged on a liability such as a loan or a mortgage it might apply during the entire term of the loan or for just part of the term but it remains the same throughout a set period mortgages can have multiple interest rate options including one that combines a fixed rate for some portion of the term and an adjustable rate for the balance these are referred to as hybrids | |
how fixed interest rates work | a fixed interest rate is attractive to borrowers who don t want their interest rates fluctuating over the term of their loans potentially increasing their interest expenses and by extension their mortgage payments this type of rate avoids the risk that comes with a floating or variable interest rate in which the rate payable on a debt obligation can vary depending on a benchmark interest rate or index sometimes unexpectedly 1borrowers are more likely to opt for fixed interest rates when the interest rate environment is low when locking in the rate is particularly beneficial the opportunity cost is still much less than during periods of high interest rates if interest rates end up going lower fixed rates are typically higher than adjustable rates loans with adjustable or variable rates usually offer lower introductory or teaser rates than fixed rate loans making these loans more appealing than fixed rate loans when interest rates are high the consumer financial protection bureau cfpb provides a range of interest rates borrowers can expect at any given time depending on their location the rates are updated biweekly and consumers can input information such as their credit score down payment and loan type to get a closer idea of what fixed interest rate they might pay at any given time and weigh this against an adjustable rate mortgage arm the interest rate on a fixed rate loan remains the same during the life of the loan because the borrower s payments stay the same it s easier to budget for the future | |
how to calculate fixed interest costs | calculating fixed interest costs for a loan is relatively simple you just need to know remember that your credit scores and income can influence the rates you pay for loans regardless of whether you choose a fixed or variable rate option online loan calculators can help you quickly and easily calculate fixed interest rate costs for personal loans mortgages and other lines of credit fixed vs variable interest ratesvariable interest rates on arms change periodically a borrower typically receives an introductory rate for a set period of time often for one three or five years the rate adjusts on a periodic basis after that point such adjustments don t occur with a fixed rate loan that s not designated as a hybrid 2in our example a bank gives a borrower a 3 5 introductory rate on a 300 000 30 year mortgage with a 5 1 hybrid arm their monthly payments are 1 347 during the first five years of the loan but those payments will increase or decrease when the rate adjusts based on the interest rate set by the federal reserve or another benchmark index if the rate adjusts to 6 the borrower s monthly payment would increase by 452 to 1 799 which might be hard to manage but the monthly payments would fall to 1 265 if the rate dropped to 3 if on the other hand the 3 5 rate were fixed the borrower would face the same 1 347 payment every month for 30 years the monthly bills might vary as property taxes change or the homeowners insurance premiums adjust but the mortgage payment remains the same fixed rate loans can be counted on whereas there s always a bit of uncertainty associated with variable interest rates advantages and disadvantages of fixed interest ratesfixed interest rates can offer both pros and cons for borrowers looking at the advantages and disadvantages side by side can help decide whether to choose a fixed or variable rate loan product fixed interest rates provide consumers with some degree of predictability this means that your monthly loan or mortgage payments remain the same for the lifetime of the loan even if conditions change and rates go up your rate remains the same as such you won t have to budget for increases in your payments later on down the road | |
when interest rates are low or near historic lows a loan that comes with a fixed interest rate can become more attractive taking out a loan with adjustable or variable rates probably won t be a good option especially since there s a risk that rates may go up in the future | a fixed interest rate on a mortgage loan or line of credit makes it easier to calculate the lifetime cost of borrowing because the rate doesn t change this allows you to budget for other expenses including any extras like vacations or a new car it also gives you the opportunity to plan for any savings fixed interest rates tend to be higher than adjustable rates depending on the overall interest rate environment it is highly possible that a loan with a fixed rate may carry a higher interest rate than an adjustable rate loan you ll also want to consider declining rates when it comes to fixed interest rates that s because if interest rates decline you could be locked into a loan with a higher rate whereas a variable rate loan would keep pace with its benchmark rate refinancing is another drawback when you refinance your loan from one fixed rate product to another of the same type or to a variable rate loan you could save money when rates drop but it can be time consuming and closing costs can be high offer predictabilitymore attractive when interest rates are loweasier to calculate long term costs of borrowingmay be higher than adjustable ratesif rates decline you may pay more for your loanrefinancing to a lower rate can be time consuming and expensiveexample of fixed interest ratelet s take a look at a couple of examples to show how fixed interest rates work assume that you re taking out a 30 000 debt consolidation loan to be repaid over 60 months at 5 interest your estimated monthly payment would be 566 and your total interest paid would be 3 968 22 this assumes you don t repay the loan early by increasing your monthly payment amount or making lump sum payments toward the principal here s another example say you get a 300 000 30 year mortgage at 3 5 your monthly payments would be 1 347 and your total mortgage costs with interest included would come to 484 968 | |
how do fixed interest rates work | fixed interest rates remain constant throughout the lifetime of the loan this means that when you borrow from your lender the interest rate doesn t rise or fall but remains the same until your debt is paid off you do run the risk of losing out when interest rates start to drop but you won t be affected if rates start to rise having a fixed interest rate on your loan means you ll know exactly how much you ll pay each month so there are no surprises as such you can plan and budget for your other expenses accordingly | |
what s the difference between fixed and variable interest rates | fixed interest rates remain constant throughout the lifetime of the debt this means they aren t susceptible to changes in the economy so if you have a mortgage with a fixed rate of 6 it will never change until you pay off the debt variable interest rates on the other hand are privy to change based on the interest rate environment when interest rates drop or rise the rate on your loan will follow suit so your loan may be come cheaper or more expensive depending on if rates drop or rise | |
what s the benefit of a fixed interest loan | there are a few benefits to taking out a loan with a fixed interest rate fixed rates provide some degree of predictability because your interest rate is locked in you know exactly how much you ll have to pay each month this allows you to budget for other expenses you also benefit during low interest rate environments because you lock your rate for the life of the debt the bottom lineif you ve ever taken out a loan you know that you can t avoid paying interest but understanding how they work can certainly help you save some money they come in many different shapes and sizes including fixed interest rates this type of interest rate is locked in for the entire life of your debt whether that s a car loan line of credit or mortgage unlike variable rates which change according to the interest rate environment you ll know how much you have to pay each month and your interest rate will never change until you either pay off the debt or you refinance | |
what is a fixed rate mortgage | the term fixed rate mortgage refers to a home loan that has a fixed interest rate for the entire term of the loan this means that the mortgage carries a constant interest rate from beginning to end fixed rate mortgages are popular products for consumers who want to know how much they have to pay every month fixed rate mortgages may be open or closed with specific terms of 15 or 30 years or they may run for a length of time agreed upon by the lender and borrower | |
how a fixed rate mortgage works | several kinds of mortgage products are available on the market but they boil down to two basic categories variable rate loans and fixed rate loans with variable rate loans the interest rate is set above a certain benchmark it then fluctuates which means it changes at certain periods fixed rate mortgages carry the same interest rate throughout the entire length of the loan unlike variable and adjustable rate mortgages fixed rate mortgages don t fluctuate with the market so the interest rate in a fixed rate mortgage stays the same regardless of where interest rates go up or down most mortgagors who purchase a home for the long term end up locking in an interest rate with a fixed rate mortgage they prefer these mortgage products because they re more predictable in short borrowers know how much they ll be expected to pay each month so there are no surprises the mortgage term is basically the life span of the loan that is how long you have to make payments on it in the united states terms can range anywhere from 10 to 30 years for fixed rate mortgages 10 15 20 and 30 years are the usual increments of all the term options the most popular is 30 years followed by 15 years an open fixed rate mortgage allows borrowers to pay down the principal balance before the loan s maturity date without any additional fees and charges borrowers must pay additional fees if they pay off a closed mortgage before it matures | |
how to calculate fixed rate mortgage costs | the actual amount of interest that borrowers pay with fixed rate mortgages varies based on how long the loan is amortized that is the period for which the payments are spread out while the interest rate on the mortgage and the amounts of the monthly payments themselves don t change the way that your money is applied does mortgagors pay more toward interest in the initial stages of repayment later on their payments are going more into the loan principal so the mortgage term comes into play when calculating mortgage costs the basic rule of thumb the longer the term the more interest that you pay someone with a 15 year term for example will pay less in interest than someone with a 30 year fixed rate mortgage crunching the numbers can be a bit complicated to determine exactly what a particular fixed rate mortgage costs or to compare two different mortgages it s simplest to use a mortgage calculator you plug in a few details typically home price down payment loan terms and interest rate push the button and get your monthly payments some calculators break those down showing what goes to interest principal and even if you so designate property taxes they ll also show you an overall amortization schedule which illustrates how those amounts change over time the 30 year fixed rate mortgage is the product of choice for nearly 90 of today s homeowners 1if you re into crunching numbers there s a standard formula to calculate your monthly mortgage payment by hand | |
where | so to solve for the monthly mortgage payment m you plug in the principal p the monthly interest rate i and the number of months n if you want to calculate the mortgage interest alone here s a fast formula for that fixed rate mortgages vs adjustable rate mortgages arms adjustable rate mortgages arms are something of a hybrid between fixed and variable rate loans they have both fixed and variable rate components and are also usually issued as amortized loans with steady installment payments over the life of the loan they require a fixed rate of interest in the first few years of the loan followed by variable rate interest after that amortization schedules can be slightly more complex since rates for a portion of these loans are variable thus investors can expect to have varying payment amounts rather than consistent payments as with a fixed rate loan people who don t mind the unpredictability of rising and falling interest rates may favor arms borrowers who know that they either will refinance or won t hold the property for a long period of time also tend to prefer arms these borrowers typically bet on rates to fall in the future if rates do fall then a borrower s interest decreases over time fixed rate amortized vs non amortized mortgagesmost amortized loans come with fixed interest rates although there are cases where non amortizing loans have fixed rates too amortized fixed rate mortgage loans are among the most common types of mortgages offered by lenders these loans have fixed rates of interest over the life of the loan and steady installment payments a fixed rate amortizing mortgage loan requires a basis amortization schedule to be generated by the lender you can easily calculate an amortization schedule with a fixed rate interest when a loan is issued that s because the interest rate in a fixed rate mortgage doesn t change for every installment payment this allows a lender to create a payment schedule with constant payments over the life of the loan as the loan matures the amortization schedule requires the borrower to pay more principal and less interest with each payment this differs from a variable rate mortgage where a borrower has to contend with varying loan payment amounts that fluctuate with interest rate movements fixed rate mortgages can also be issued as non amortized loans these are usually referred to as balloon payment loans or interest only loans lenders have some flexibility in how they can structure these alternative loans with fixed interest rates a common structuring for balloon payment loans is to charge borrowers annual deferred interest this requires interest to be calculated annually based on the borrower s annual interest rate interest is then deferred and added to a lump sum balloon payment at the end of the loan in an interest only fixed rate loan borrowers pay only interest in scheduled payments these loans typically charge monthly interest based on a fixed rate borrowers make monthly payments of interest with no payment of principal required until a specified date if you have a fixed rate mortgage you may be able to refinance it at the prevailing rate if it is lower keep in mind though that you may have to pay additional fees to do so advantages and disadvantages of fixed rate mortgagesvarying benefits and risks are involved for both borrowers and lenders in fixed rate mortgage loans what may be a benefit for one is often a drawback for the other the following are the most common pros and cons of fixed rate mortgages many consumers prefer fixed rate mortgages because the rate remains constant for the life of the loan this provides them with a guarantee that the loan won t change even if interest rates go up it also provides borrowers with predictability since they always know how much they ll have to pay this allows them to budget for other financial obligations lenders also benefit from fixed rate products this is especially true when interest rates drop in environments where rates are low lenders can profit from the higher interest payments made by borrowers on their fixed rate home loans borrowers have no flexibility when it comes to interest rates or payments with fixed rate mortgages so when interest rates drop fixed rate borrowers end up paying more than people who have adjustable rate mortgages borrowers typically seek to lock in lower rates of interest to save money over time when rates rise a borrower maintains a lower payment compared to current market conditions a lending bank on the other hand doesn t earn as much as it could from the prevailing higher interest rates foregoing profits from issuing fixed rate mortgages that could be earning higher interest over time in a variable rate scenario protects borrowers against interest rate volatilitypredictable payments for borrowershigher profits for lenders when rates are lowno flexibility for borrowersborrowers pay more when rates are lowlenders earn less when rates are high | |
why should i choose a fixed rate over an adjustable rate mortgage | there are several reasons why you may want to choose a fixed rate mortgage over an arm fixed rate loans provide with you stability and predictability your rate is locked in for the entire length of the loan even when rates go up fixed rates take the guesswork of figuring out how much you have to pay this means you ll know exactly what your payment is allowing you to budget for other financial obligations and for your savings | |
how would an economic slump affect my fixed rate mortgage | interest rates tend to drop when times are tough and the economy becomes sluggish if you already have a fixed rate mortgage not much will change because your interest rate remains the same throughout the lifetime of your loan but you stand to benefit from a low rate if you re in the market for a new home if you can afford it as the economy slows down or if you are able to refinance with your lender | |
what are the benefits of a fixed rate mortgage | the main benefits of having a fixed rate mortgage include protection against interest rate volatility and predictability this means that your rate won t change in an environment where interest rates rise and you can plan your finances around because you ll know how much your payments are each month the bottom linemost of us can t afford to pay cash for our homes which is why we need to take out mortgages there are so many different products on the market for homeowners so it s important to do your research to see which one fits your needs fixed rate mortgages provide you with the security of knowing that your rate won t change and how much you ll have to pay keep in mind that you won t benefit if rates drop which means you will pay more during an economic slowdown | |
what is a fixed rate payment | a fixed rate payment is an installment loan with an interest rate that cannot be changed during the life of the loan the payment amount also will remain the same though the proportions that go toward paying off the interest and paying off the principal will vary 1 a fixed rate payment is sometimes referred to as a vanilla wafer payment presumably because it is very predictable and contains no surprises | |
how a fixed rate payment works | a fixed rate payment agreement is most often used in mortgage loans homebuyers generally have a choice of fixed rate mortgage loans or adjustable rate arm mortgage loans adjustable rate mortgage loans are also known as floating rate loans homebuyers typically can decide which loan type is the better choice for them a bank will generally offer a variety of fixed rate payment mortgage loans each with a slightly different interest rate typically a homebuyer can choose a 15 year term or a 30 year term 2 slightly lower rates are offered for veterans and for federal housing authority fha loans although loans for veterans and those available through the fha have lower interest rates borrowers are typically required to purchase additional mortgage insurance to protect against default 3 banks also offer options for adjustable rate loans historically these could have a substantially lower starting interest rate than fixed rate payment loans in times when interest rates were low the homebuyer could usually get an even lower introductory rate on an adjustable rate mortgage offering a break on the payments in the months immediately after the purchase when the introductory period ended the bank raised the rate and the payment amounts as interest rates were rising when interest rates were high a bank was more inclined to offer the introductory rate break on fixed rate loans because it anticipated that rates on new loans will go lower however with mortgage rates hovering below 5 since the 2008 housing crisis the gap between fixed rate and variable rate loans has practically closed as of aug 13 2020 the average interest rate nationwide on a 30 year fixed mortgage was 2 96 the rate for a comparable adjustable rate loan was 2 9 4 the latter is a so called 5 1 arm meaning the rate remains fixed for at least five years after five years it may be adjusted upward annually 5 the difference between the average interest rate for a 30 year fixed rate mortgage and the average rate for a 30 year adjustable rate mortgagespecial considerationsthe amount paid for a fixed rate payment loan remains the same month after month but the proportions that go to pay off principal and interest change every month the earliest payments are made up of more interest than principal month by month the amount of interest paid declines gradually while the principal paid increases this is called loan amortization 6 the term is used in the home loan industry to refer to payments under a fixed rate mortgage which are indexed on a common amortization chart for example the first few lines of an amortization schedule for a 250 000 30 year fixed rate mortgage with a 4 5 interest rate look like the table below note that the interest payment goes down from month to month albeit slowly while the principal payment increases slightly the overall loan balance goes down however the monthly payment of 1 266 71 remains the same | |
understanding flat | flat in the securities market is a price that is neither rising nor declining under fixed income terminology a bond that is trading without accrued interest is said to be flat in forex flat refers to the condition of being neither long nor short in a particular currency and is also referred to as being square | |
what is a flat tax | a flat tax is a single tax rate applied to all taxpayers regardless of income employing a flat tax means that taxpayers cannot take deductions or exemptions most flat tax systems or arguments for a flat tax system do not tax income from dividends distributions capital gains or other investments the opposite of a flax tax is a progressive tax where taxation rises with a taxpayer s income | |
the flat yield curve is a yield curve with little difference between short term and long term rates for bonds of the same credit quality typically treasurys this flattening of what is by definition usually a curve is often seen during transitions between normal and inverted curves a normal yield curve slopes upward 1 | understanding the flat yield curvea flat yield curve means investors get about the same return on short term investments as long term ones when short and long term bonds offer very similar yields there is usually little benefit in holding the longer term instrument the investor does not gain any more returns for the risk or opportunity costs of holding longer term securities 2for example a flat yield curve on u s treasury bonds is one in which the yield on a two year bond is 5 and the yield on a 30 year bond is 5 1 a flattening yield curve may result from long term interest rates falling more than short term interest rates or short term rates increasing more than long term rates a flat yield curve typically indicates that investors are worried about the macroeconomic outlook one reason the yield curve may flatten is that market participants expect inflation to decrease or the federal reserve to raise the federal funds rate soon for example if the federal reserve increases its short term target over a specified period long term interest rates may remain stable or rise however short term interest rates would rise so the yield curve s slope would flatten as short term rates increase more than long term rates this occurred for instance as the federal reserve increased rates rapidly from 2022 to 2023 to combat pandemic era inflation 3flat yield curves are associated with economic uncertainty and hint that a slowdown could be around the corner federal reserve s impact on the yield curvethe federal reserve influences the cost of borrowing and as a result the economy s direction through the federal funds rate changing this rate at which banks lend to each other overnight usually affects other interest rates and the general cost of borrowing 4an increase in the federal fund rate raises short term interest rates but doesn t necessarily have the same impact on long term interest rates sometimes both rates will move up other times only short term rates will rise leading to a flattening yield curve this is more common when the market expects a short period of interest rate rises followed by a move to cut them as the economy contracts 5movements in the federal reserve s fund rate influence the cost to borrow money particularly in the short term | |
what a flat yield curve means to lenders | banks tend to profit more when the long term rates they lend at are higher than the short term rates at which they borrow so their profit margins tend to tighten when the yield curve flattens given this logic a flattening yield curve could lead to lenders becoming more cautious about extending credit the threat of a forthcoming economic slowdown compounds that sense of caution 2however it s not always straightforward and the impact of a flat yield curve on banks may not be a bad signal for example many loans have variable rates tied to short term benchmarks and banks tend to pay savers a lot less to borrow funds 6 | |
what a healthy yield curve looks like | a healthy or normal yield curve gently slopes upward from left to right this indicates stable economic conditions and that the market expects the economy to grow steadily image by julie bang investopedia 2019a normal yield curve shows yields rising for bonds with longer maturities sample yields on the curve may include a two year bond that offers a yield of 1 a five year bond that provides a yield of 1 8 a 10 year bond that offers a yield of 2 5 a 15 year bond that provides a yield of 3 0 and a 20 year bond that offers a yield of 3 5 if the curve steepens this implies strong economic growth leading to higher inflation and higher interest rates if it flattens this suggests uncertainty and reflects caution the barbell strategythe barbell strategy could benefit investors in a flattening yield curve environment or if the federal reserve is looking to raise the federal funds rate 7 however this strategy could underperform should the yield curve grow steeper in a barbell strategy half of a portfolio has long term bonds while the rest has short term bonds for example assume the yield spread is 8 and investors believe the yield curve will flatten investors could allocate half their fixed income portfolio to u s treasury 10 year notes and the other half to u s treasury two year notes this way investors have some flexibility and can react to changes in the bond markets however portfolios like this could fall significantly if there s a meteoric increase in long term rates | |
what is the purpose of the yield curve for investors | the yield curve functions as a signal of where investors think interest rates are heading in other words it is a forecast of economic growth and inflation this is important to investors for many reasons the state of interest rates and economic growth have a bearing on the type of investments that are likely to outperform | |
what are the types of yield curve | the yield curve can look different depending on what investors think is in store for interest rates and the economy usually it will be described as either normal flat or inverted | |
is an inverted yield curve good or bad | an inverted yield curve occurs when short term interest rates exceed long term rates this isn t usually a great sign 1 historically an inverted yield curve has been viewed as a signal of a looming recession the bottom linethe yield curve shows the cost of borrowing money over different periods when it is flat this usually means investors don t expect much change in interest rates and a two year bond could pay the same return as a 30 year bond this isn t a positive outlook a flattening yield curve hints that investors are worried about the economy s direction and are expecting a slowdown | |
what is a flexible manufacturing system fms | a flexible manufacturing system fms is a production method that is designed to easily adapt to changes in the type and quantity of the product being manufactured machines and computerized systems can be configured to manufacture a variety of parts and handle changing levels of production 1understanding a flexible manufacturing system fms a flexible manufacturing system fms can improve efficiency and reduce production costs which are crucial concerns in the process of business development flexible manufacturing also can be a key component of a make to order strategy that allows customized products and keeps inventories low such flexibility can come with higher up front costs purchasing and installing the specialized equipment that allows for such customization may be costly compared with more traditional systems 2the concept of flexible manufacturing was developed by jerome h lemelson 1923 1997 an american industrial engineer and inventor who filed a number of related patents in the early 1950s his original design was a robot based system that could weld rivet convey and inspect manufactured goods 3lemelson did not build his system indeed when he posited it the ability to build it was still out of reach eventually however it became possible to build one and the fms debuted on factory floors in the united states and europe in the late 1960s and started to proliferate in the 1970s 2an fms may include a configuration of interconnected workstations with computer terminals that process the end to end creation of a product functions may include loading and unloading machining and assembly storing quality testing and data processing the system can be programmed to run a batch of one set of products in a particular quantity and then automatically switch over to another set of products in another quantity 2flexible manufacturing can be a key component of a make to order strategy that allows buyers to order customized products pros and cons of an fmsthe main benefit is the enhancement of production efficiency downtime is reduced because the production line does not have to be shut down to set up for a different product 1the disadvantages of an fms include its higher up front costs and the greater time required to design the system specifications for a variety of future needs specialized technicians needed to run monitor and maintain the fms also add expense however advocates of fms maintain that the increase in automation typically results in a net reduction in labor costs 2 | |
how is a flexible management system fms set up | an fms may be set up in a number of ways after all its main lure is its adaptability one configuration might involve interconnected computer workstations that process the end to end creation of a product this starts with loading unloading functions and proceeds to machining and assembly storing quality testing and data processing the fms programming can automatically switch from one set of products in a certain amount to another set in a different amount | |
what are the benefits and drawbacks of an fms | the main benefit of an fms is that it makes production more efficient delays are reduced as production doesn t have to be shut down to set up for a different product drawbacks include higher up front costs and the greater time required to design the system specifications for a variety of future needs there is also an additional cost for the specialized technicians who work the fms nevertheless the system s automation generally leads to an overall reduction in labor costs who invented the fms jerome h lemelson 1923 1997 an american industrial engineer and inventor is credited with developing the concept of flexible manufacturing his initial design featured a robot based system that could weld rivet convey and inspect manufactured goods systems based on his design began showing up on factory floors in the united states and europe in the late 1960s becoming even more popular in the 1970s | |
what is a flexible spending account fsa | a flexible spending account fsa is a type of savings account that provides the account holder with specific tax advantages an fsa is sometimes called a flexible spending arrangement and can be established by an employer for employees the account allows you to contribute a portion of your regular earnings before tax employers also can contribute to employees fsas distributions from the account must be used to reimburse the employee for qualified expenses related to medical and dental services 1another type of fsa is a dependent care flexible spending account which is used to pay for childcare expenses for children age 12 and under and also can be used to pay for the care of qualifying adults including a spouse who can t care for themselves and meet specific internal revenue service irs guidelines a dependent care fsa has different maximum contribution rules than a medical related fsa 2 | |
how a flexible spending account fsa works | one of the key benefits of a flexible spending account is that the funds contributed to the account are deducted from your earnings before taxes lowering your taxable income as a result regular contributions to an fsa can reduce your annual tax liability 3the irs limits how much can be contributed to an fsa each year for medical expense fsa accounts the annual contribution limit is 3 200 for 2024 4if you are married your spouse also can put aside up to the annual contribution limit through their employer employers can choose to contribute to an fsa but they don t have to if they do their contribution doesn t reduce the amount that you are permitted to contribute you aren t taxed on employer contributions for 2024 the contribution limit for a dependent care fsa is 5 000 for joint and individual tax returns and 2 500 for married taxpayers filing separately 5the irs in 2021 released guidance that allowed employers more flexibility for benefit plans during the covid 19 crisis including special provisions for health flexible spending arrangements fsas most of these provisions ended at the beginning of 2023 except for some carryover periods for leftover funds that extend into the first months of the year 6pros and cons of flexible spending accounts fsas besides their tax benefits fsas offer several advantages for account holders but they don t cover all manner of medical or dental expenses here are some of their pros and cons reimburse medical care paymentspay spouses and dependents qualified medical expensescover many medical equipment purchasesreimburse amounts paid for insurance plan deductiblessome procedures or health related expenses aren t coveredfunds have a use it or lose it provisioncan t be used to pay for insurance premiumsthe coronavirus aid relief and economic security cares act enacted in 2020 expanded reimbursable qualified medical expenses for 2020 and later years to include the cost of over the counter drugs without a doctor s prescription the act also permitted the use of fsa funds to reimburse the costs of menstrual care products both these cares provisions are permanent 9taxpayers in september 2021 were notified by the irs that at home covid 19 tests and personal protective equipment such as face masks and hand sanitizer were considered eligible medical expenses that can be paid for or reimbursed by fsas health savings accounts hsas and health reimbursement arrangements hras 12special considerations | |
when the year ends or the grace period expires any funds that remain in your fsa are lost thus you should carefully calibrate the amount of money you plan to put into your account and how you intend to spend it over the course of the year | a different type of fsa a limited purpose flexible spending arrangement lpfsa refers to a savings plan that can be used with a health savings account hsa which isn t allowed for a standard fsa contributions are made using pretax earnings a limited purpose fsa is more restrictive because the arrangement is reserved for paying dental and vision expenses it is often used in conjunction with an high deductible health plan hdhp in which a hsa is used for medical expenses associated with the hdhp 13 | |
how much should i contribute to my fsa | no specific amount is correct for everyone and fsa elections vary depending on each indidvidual s particular situation make your election by carefully examining your expected out of pocket healthcare expenses for the coming year | |
what if my spouse is enrolled in a different health insurance plan | you can use funds from your healthcare fsa to pay for eligible medical costs for both your spouse and tax dependents regardless of the medical insurance in which they are enrolled to use funds for your dependents they must be claimed on your tax return and dependents can t file their own return 14can i use an fsa with a health insurance marketplace high deductible plan you can t use an fsa with a marketplace plan instead you can set up a similar product called a health savings account hsa these let you to set aside money on a pretax basis to pay some health expenses if you have this type of health insurance 15the bottom linea flexible spending account fsa lets you set aside a portion of your earnings before tax for medical and dental expenses it s established by an employer for employees employers also can contribute to employees fsas distributions from the account must be used to reimburse the employee for qualified expenses related to medical and dental services another type of fsa is available for dependents care there s a maximum contribution limit for individuals each year and most of the money must be spent in the calendar year it s saved so fsa account holders need to carefully plan their contribution amounts to avoid losing unused funds | |
what is a flip | a flip generally refers to a dramatic directional change in the positioning of investments for instance from long to short depending on the context or kind of investment the word flip can have different meanings at least four different examples exist including technical trading real estate investment initial public offering ipo investing and professional fund management understanding flipsa flip or reversal of one s position in the market can be an effective way to generate profits from a new technical trend often the notion of a flip is thought of as a short term strategy but this is not necessarily the case below we look more closely at different uses of the term flip in finance | |
what is the float | in financial terms the float is money within the banking system that is briefly counted twice due to time gaps in registering a deposit or withdrawal these time gaps are usually due to the delay in processing paper checks a bank credits a customer s account as soon as a check is deposited however it takes some time to receive a check from the payer s bank and record it until the check clears the account it is drawn on the amount it is written for exists in two different places appearing in the accounts of both the recipient s and payer s banks float is significantly less common today compared to past decades due to declining use of paper checks and adoption of digital payment services understanding the floatthe federal reserve the fed has defined various types of float holdover float results from delays at the processing institution typically due to the weekend and seasonal backlogs transportation float occurs due to inclement weather and air traffic delays and is therefore highest in the winter months the fed which processes one third of all checks in the united states observes that although the amount of float fluctuates randomly there are definite weekly and seasonal trends the federal reserve uses these trends to forecast float levels which are then used in the actual day to day implementation of monetary policy 1the formula to calculate float is the float represents the net effect of checks in the process of clearing a common measure of a float is the average daily float calculated by dividing the total value of checks in the collection process during a specified period by the number of days in the period the total value of checks in the collection process is calculated by multiplying the amount of float by the number of days it is outstanding for example a company with 15 000 of float outstanding for the first 14 days of the month and 19 000 for the last 17 days of the month will calculate its average daily float as individuals often use float to their advantage for example amanda has a credit card payment for 500 due april 1 on march 23 she writes and mails a check in that amount even though she doesn t have 500 in her bank account however she knows that her paycheck will be deposited in her checking account by march 25 and she counts on the fact that the credit card company probably won t receive and present her check for payment until april 1 she has 500 worth of float the time between the writing of her check and the time her check clears for those days if she were tech savvy she could essentially do the same thing by going online on march 23 and scheduling an electronic payment on the credit card company s website for april 1 again counting for her bank to have posted her paycheck by march 25 technological advances have spurred the adoption of measures that substantially speed up payment and hence reduce float these measures include the widespread use of electronic payments and electronic funds transfers the direct deposit of employee paychecks by companies and the scanning and electronic presentation of checks instead of their physical transfer the steady decline in the number of checks written each year combined with the rapid adoption of innovative and convenient payment services may make float a thing of the past real world example of floatlarge companies and financial institutions also often play the float with larger sums for profit namely the interest income they earn on an amount by speeding up its deposit into their accounts or slowing down a presentation for payment such moves are not illegal either for individuals or for institutions if the money involved is all their own however playing with float can spill into the realm of wire fraud or mail fraud if it involves the use of others funds in 1985 the brokerage firm e f hutton company now defunct pleaded guilty to 2 000 charges for deliberately and systematically overdrawing some accounts to fund other accounts 2 the firm was writing checks on money it did not have to profit from the float in effect getting millions in loans from the banks without the banks knowledge and without paying fees or interest it was in essence a floating scheme executed on a grandiose scale for years since the float is essentially double counted money it can distort the measurement of a nation s money supply by briefly inflating the amount of money in the banking system | |
what is a floating charge | a floating charge also known as a floating lien is a security interest or lien over a group of non constant assets that may change in quantity and value companies will use floating charges as a means of securing a loan typically a loan might be secured by fixed assets such as property or equipment however with a floating charge the underlying assets are usually current assets or short term assets that can change in value understanding a floating chargefloating charges allow business owners to access capital secured with dynamic or circulating assets the assets backing the floating charge are short term current assets usually consumed by a company within one year the floating charge is secured by the current assets while allowing the company to use those assets to run its business operations current assets are those business possessions that the firm can quickly liquidate for cash and include the accounts receivable inventory and marketable securities among other items for example if inventory is used as collateral for a loan the company can still sell restock and change the value and quantity of its inventory in other words the value of the inventory changes over time or floats in value and quantity a floating charge is helpful to companies because it allows them to finance their operations by using current assets such as inventory crystallization of floating to fixed chargescrystallization is the process by which a floating charge converts into a fixed charge if a company fails to repay the loan or enters liquidation the floating charge becomes crystallized or frozen into a fixed charge with a fixed charge the assets become fixed by the lender so the company cannot use the assets or sell them crystallization can also happen if a company ends operations or if the borrower and lender go to court and the court appoints a receiver once crystallized the now fixed rate security cannot be sold and the lender may take possession of it typically fixed charges are secured by tangible assets such as buildings or equipment for example if a company takes out a mortgage on a building the mortgage is a fixed charge and the business cannot sell transfer or dispose of the underlying asset the building until it repays the loan or meets other conditions outlined in the mortgage contract floating charge examplemacy s inc is one of the largest department stores in the u s let s say the company has entered into a loan with a bank using its inventory as collateral the lender has ownership of the inventory or a floating charge as stipulated within the terms of the loan below is a copy of macy s balance sheet for the quarter ending november 3 2018 | |
what is a floating exchange rate | a floating exchange rate is a regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies this is in contrast to a fixed exchange rate in which the government entirely or predominantly determines the rate investopedia sabrina jiang | |
how a floating exchange rate works | floating exchange rate systems mean long term currency price changes reflect relative economic strength and interest rate differentials between countries short term moves in a floating exchange rate currency reflect speculation rumors disasters and everyday supply and demand for the currency if supply outstrips demand that currency will fall and if demand outstrips supply that currency will rise extreme short term moves can result in intervention by central banks even in a floating rate environment because of this while most major global currencies are considered floating central banks and governments may step in if a nation s currency becomes too high or too low a currency that is too high or too low could affect the nation s economy negatively affecting trade and the ability to pay debts the government or central bank will attempt to implement measures to move their currency to a more favorable price floating vs fixed exchange ratescurrency prices can be determined in two ways a floating rate or a fixed rate as mentioned above the floating rate is usually determined by the open market through supply and demand therefore if the demand for the currency is high the value will increase if demand is low this will drive that currency price lower a fixed or pegged rate is determined by the government through its central bank the rate is set against another major world currency such as the u s dollar euro or yen to maintain its exchange rate the government will buy and sell its own currency against the currency to which it is pegged some countries that choose to peg their currencies to the u s dollar include china and saudi arabia the currencies of most of the world s major economies were allowed to float freely following the collapse of the bretton woods system between 1968 and 1973 1history of floating exchange rates via the bretton woods agreementthe bretton woods conference which established a gold standard for currencies took place in july 1944 a total of 44 countries met with attendees limited to the allies in world war ii the conference established the international monetary fund imf and the world bank and it set out guidelines for a fixed exchange rate system 2the system established a gold price of 35 per ounce with participating countries pegging their currency to the dollar adjustments of plus or minus 1 were permitted the u s dollar became the reserve currency through which central banks carried out intervention to adjust or stabilize rates 3the first large crack in the system appeared in 1967 with a run on gold and an attack on the british pound that led to a 14 3 devaluation president richard nixon took the united states off the gold standard in 1971 45by late 1973 the system had collapsed and participating currencies were allowed to float freely 1failed attempt to intervene in a currencyin floating exchange rate systems central banks buy or sell their local currencies to adjust the exchange rate this can be aimed at stabilizing a volatile market or achieving a major change in the rate groups of central banks such as those of the g 7 nations canada france germany italy japan the united kingdom and the united states often work together in coordinated interventions to increase the impact an intervention is often short term and does not always succeed a prominent example of a failed intervention took place in 1992 when financier george soros spearheaded an attack on the british pound the currency entered the european exchange rate mechanism erm in oct 1990 the erm was designed to limit currency volatility as a lead in to the euro which was still in the planning stages 6soros believed that the pound had entered at an excessively high rate and he mounted a concerted attack on the currency the bank of england was forced to devalue the currency and withdraw from the erm the failed intervention cost the u k treasury a reported 3 3 billion soros on the other hand made over 1 billion 7central banks can also intervene indirectly in the currency markets by raising or lowering interest rates to impact the flow of investors funds into the country since attempts to control prices within tight bands have historically failed many nations opt to free float their currency and then use economic tools to help nudge it in one direction or the other if it moves too far for their comfort | |
what is an example of a floating exchange rate | an example of a floating exchange rate would be on day 1 1 usd is equal to 1 4 gbp on the next day 1 usd is equal to 1 6 gbp and on day three 1 usd is equal to 1 2 gbp this shows that the value of the currencies float meaning they change constantly due to the supply and demand of those currencies the opposite would be a fixed currency where 1 usd would always equal 1 4 gbp for example | |
is the u s dollar a floating exchange rate | yes the u s dollar is a floating currency meaning that its value depends on the supply and demand of the dollar and no other factor the value of the u s dollar used to be based on its store of gold but the currency is no longer backed by gold | |
what are the benefits of a floating exchange rate | the benefits of a floating currency exchange rate are the lack of a need for large reserves the lack of need for another commodity the currency would be tied to the ability to manage inflation and the ability to pursue internal controls such as full employment the bottom linefloating exchange rates are primarily how most currencies are valued today this means the value of a currency is based on the supply and demand of it this contrasts with other methods such as the value of a currency based on the value of certain assets it holds historically gold or a country deciding to fix or peg its currency | |
what is a floating interest rate | a floating interest rate is an interest rate that changes periodically the rate of interest moves up and down or floats reflecting economic or financial market conditions often it moves in tandem with a particular index or benchmark or with general market conditions a floating interest rate can also be referred to as an adjustable or variable interest rate because it can vary over the term of a debt obligation understanding floating interest ratesa floating interest rate rises or falls with the rest of the market or along with a benchmark interest rate the underlying benchmark interest rate or index depends on the type of loan or security but it is often either the london interbank offered rate libor the federal funds rate or the prime rate the interest rate financial institutions charge their most creditworthy corporate customers 1 | |
when it comes to consumer loans and other debt e g mortgages car loans or credit cards banks and financial institutions charge a spread over this benchmark rate with the spread depending on several factors such as the type of asset and the consumer s credit rating thus a floating rate might define itself as the libor plus 300 basis points or plus 3 | all sorts of loans and debt instruments carry floating interest rates but they tend to be especially common with credit cards and mortgages floating interest rates may be adjusted quarterly semiannually or annually | |
what is a floating rate fund | a floating rate fund is a fund that invests in financial instruments that pays a variable or floating interest rate a floating rate fund which can be a mutual fund or an exchange traded fund etf invests in bonds and debt instruments whose interest payments fluctuate with an underlying interest rate level typically a fixed rate investment will have a stable predictable income however as interest rates rise fixed rate investments lag behind the market since their returns remain fixed floating rate funds aim to provide investors with a flexible interest income in a rising rate environment as a result floating rate funds have gained in popularity as investors look to boost the yield of their portfolios | |
how a floating rate fund works | although there is no formula to calculate a floating rate fund there can be various investments that comprise a fund floating rate funds can include preferred stock corporate bonds and loans that have maturities from one month to five years floating rate funds can include corporate loans and mortgages as well floating rate loans are loans made by banks to companies these loans are sometimes repackaged and included in a fund for investors floating rate loans are similar to mortgage backed securities which are packaged mortgages that investors can buy into and receive an overall rate of return from the numerous mortgage rates in the fund floating rate loans are considered senior debt meaning they have a higher claim on a company s assets in the event of default however the term senior doesn t represent credit quality only the pecking order of claiming a company s assets to pay back the loan if the company defaulted floating rate funds can include floating rate bonds which are debt instruments whereby the interest paid to an investor adjusts over time the rate on a floating rate bond can be based on the fed funds rate which is the rate set by the federal reserve bank however the return on the floating rate bond is typically the fed funds rate plus a set spread added to it as interest rates rise so does the return on the floating rate bond fund | |
what does a floating rate fund tell you | the biggest advantage of a floating rate fund is its lower degree of sensitivity to changes in interest rates compared with a fund or instrument with a fixed payment rate or fixed bond coupon rate floating rate funds appeal to investors when interest rates are rising since the fund will yield a higher level of interest or coupon payments floating rate funds are an attractive investment for the fixed income or conservative portion of any portfolio a floating rate fund can hold various types of floating rate debt including bonds and loans these funds are managed with varying objectives similar to other credit funds strategies can target credit quality and duration the rates payable on a floating rate instrument held within a floating rate fund adjust with a defined interest rate level or a set of parameters as a result floating rate funds are less sensitive to duration risk duration risk is the risk that interest rates will rise while an investor is holding a fixed income investment and thus missing out on higher rates in the market income paid from a floating rate fund s underlying investments is managed by the portfolio managers and paid to shareholders through regular distributions distributions may include income and capital gains distributions are often paid monthly but they can also be paid quarterly semi annually or annually apart from their lower sensitivity to interest rate changes and the ability to reflect current interest rates a floating rate fund enables an investor to diversify fixed income investments since fixed rate instruments often comprise the majority of bond holdings for most investors another benefit is that a floating rate fund enables an investor to acquire a diversified bond or loan portfolio at a relatively low investment threshold rather than to invest in individual instruments at a larger dollar amount in evaluating a floating rate fund investors must ensure that the securities in the fund are adequate for their risk tolerance floating rate funds offer varying levels of risk across the credit quality spectrum with high yield lower credit quality investments carrying considerably higher risks however along with the higher risk comes the potential for higher returns examples of floating rate fund investmentsfloating rate funds can include any type of floating rate instrument the majority of floating rate funds typically invest in floating rate bonds or loans below are two popular floating rate funds the flot seeks results that correspond to both the price and yield performance of the barclays capital us floating rate note 5 years index 1 in other words each note has a maturity of fewer than five years but typically the coupon rates are an aggregate of the one to three month libor rate plus a spread added to it libor represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short term loans libor is an average value of the interest rate which is calculated from estimates submitted by the leading global banks on a daily basisthe flot holds investment grade floating rate notes which include holdings or notes from goldman sachs group inc inter american development bank and morgan stanley the fund has an expense ratio of 0 20 and a 12 month yield of 1 89 with over 5 79 trillion in assets under management as september 2020 1 the ishares short term corporate bond etf invests in corporate bonds that are investment grade and have maturities of one to three years remaining the fund has an expense ratio of 0 06 and a 12 month yield of 2 62 with 20 2 billion in assets under management 2 the difference between money market funds and floating rate fundsa money market fund is a kind of mutual fund which invests only in highly liquid cash and cash equivalent securities that have high credit ratings also called a money market mutual fund these funds invest primarily in debt based securities which have a short term maturity of fewer than 13 months and offer high liquidity with a very low level of risk money market funds typically pay a lower rate compared to floating rate funds however floating rate funds carry a higher risk than their money market counterparts money market funds invest in high quality securities versus floating rate funds which can invest in below investment grade securities such as loans the limitations of using floating rate fundscredit risk of floating rate funds can be a concern for investors who seek yield but are hesitant to take on the added risk to achieve that yield if u s treasury yields are low floating rate funds tend to appear more attractive than treasuries however treasuries offer safety since they re back to the u s government floating rate funds could have holdings that include corporate bonds that are close to junk status or loans that have default risk although floating funds offer yields in a rising rate environment since they fluctuate with rising rates investors must weigh the risks of investing in the funds and research the fund holdings there are other short term bond funds that primarily invest in treasuries but these funds might offer a fixed rate or a lower yield than floating rate funds investors need to weigh the risks and returns of each investment before making a decision | |
what is a floating rate note frn | a floating rate note frn is a debt instrument with a variable interest rate the interest rate for an frn is tied to a benchmark rate benchmarks include the u s treasury note rate the federal reserve funds rate known as the fed funds rate the london interbank offered rate libor or the prime rate floating rate notes or floaters can be issued by financial institutions governments and corporations in maturities of two to five years investopedia zoe hansenunderstanding floating rate notes frns floating rate notes frns make up a significant component of the u s investment grade bond market compared with fixed rate debt instruments floaters allow investors to benefit from a rise in interest rates since the rate on the floater adjusts periodically to current market rates floaters are usually benchmarked against short term rates like the fed funds rate which is the rate the federal reserve bank sets for short term borrowing between banks typically the rate or yield paid to an investor on a bond or u s treasury product rises with the length of time until maturity the rising yield curve compensates investors for holding longer term securities in other words the yield on a bond with a 10 year maturity should pay under normal market conditions a higher yield than a bond with a two month maturity as a result floating rate notes usually pay a lower yield to investors than their fixed rate counterparts because floaters are benchmarked to short term rates the investor gives up a portion of the yield for the security of having an investment that rises as its benchmark rate rises however if the rate of the short term benchmark falls so too does the rate on the frn there s no guarantee that the frn s rate will rise as fast as interest rates in a rising rate environment it all depends on the performance of the benchmark rate as a result an frn bondholder can still have interest rate risk meaning the bond s rate underperforms the overall market since the bond s rate can adjust to market conditions an frn s price tends to have less volatility or price fluctuations traditional fixed rate bonds typically slide when rates rise because existing bondholders are losing out by holding a product returning a lower rate frns avoid some of the market price volatility since there s less opportunity cost for the bondholders in a rising rate market as with any bond frns are susceptible to default risk which occurs when the company or government can t pay back the principal or original amount that was paid by the investor since floaters have variable rates they tend to have unpredictable coupon payments a coupon payment is the interest payment for a bond sometimes a floater may have a cap and a floor which allows an investor to know the maximum and minimum interest rates paid by the note an frn s interest rate can change as often or as frequently as the issuer chooses from once a day to once a year the reset period which is outlined in the bond s prospectus tells the investor how often the rate adjusts the issuer may pay interest monthly quarterly semiannually or annually callable floating rate note vs non callable floating rate notefrns may be issued with or without a callable option which means the issuer has the right to return the investor s principal amount and stop making interest payments the callable feature is known upfront and allows the issuer to pay off the bond before maturity floating rate notes allow investors to benefit from rising rates as the frn s rate adjusts to the marketfrns are impacted less by price volatilityfrns are available in u s treasuries and corporate bondsfrns may still have interest rate risk if market rates rise to a greater extent than the rate resetsfrns can have default risk if the issuing company or corporation can t pay back the principalif market interest rates fall the frn rates may fall as wellfrns typically pay a lower rate than their fixed rate counterpartsexample of a floating rate note frn the u s treasury department began issuing floating rate notes in 2014 the notes have the following characteristics and requirements | |
what is floating stock | floating stock is the number of shares available for trading of a particular stock low float stocks are those with a low number of shares floating stock is calculated by subtracting closely held shares and restricted stock from a firm s total outstanding shares closely held shares are those owned by insiders major shareholders and employees restricted stock refers to insider shares that cannot be traded because of a temporary restriction such as the lock up period after an initial public offering ipo a stock with a small float will generally be more volatile than a stock with a large float this is because with fewer shares available it may be harder to find a buyer or seller this results in larger spreads and often lower volume understanding floating stocka company may have a large number of shares outstanding but limited floating stock for example assume a company has 50 million shares outstanding of that 50 million shares large institutions own 35 million shares management and insiders own 5 million and the employee stock ownership plan esop holds 2 million shares floating stock is therefore only 8 million shares 50 million shares minus 42 million shares or 16 of the outstanding shares the amount of a company s floating stock may rise or fall over time this can occur for a variety of reasons for example a company may sell additional shares to raise more capital which then increases the floating stock if restricted or closely held shares become available then the floating stock will also increase on the flip side if a company decides to implement a share buyback then the number of outstanding shares will decrease in this case the floating shares as a percentage of outstanding stock will also go down a stock split will increase floating shares while a reverse stock split decreases float | |
why floating stock is important | a company s float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public low float is typically an impediment to active trading this lack of trading activity can make it difficult for investors to enter or exit positions in stocks that have limited float institutional investors will often avoid trading in companies with smaller floats because there are fewer shares to trade thus leading to limited liquidity and wider bid ask spreads instead institutional investors such as mutual funds pension funds and insurance companies that buy large blocks of stock will look to invest in companies with a larger float if they invest in companies with a big float their large purchases will not impact the share price as much special considerationsa company is not responsible for how shares within the float are traded by the public this is a function of the secondary market therefore shares that are purchased sold or even shorted by investors do not affect the float because these actions do not represent a change in the number of shares available for trade they simply represent a redistribution of shares similarly the creation and trading of options on a stock do not affect the float example of floating stockas of september 2023 general electric ge had 1 088 billion shares outstanding 1 of this 0 20 were held by insiders and 75 81 were held by large institutions 2 therefore a total of 76 or 830 million shares were likely not available for public trading the floating stock is therefore about 260 million shares 1 088 billion 830 million it is important to note that institutions don t hold a stock forever the institutional ownership number will change regularly although not always by a significant percentage falling institutional ownership coupled with a falling share price could signal that institutions are dumping the shares increasing institutional ownership shows that institutions are accumulating shares | |
is floating stock good or bad | stock float isn t good or bad but it can affect an investor s decisions the amount of floating stock a company has the shares made available to trade can affect the liquidity of that stock stocks with a smaller float tend to have high volatility while stocks with a larger float tend to have lower volatility some investors may prefer stocks with higher float because it s easier to enter and exit positions for these stocks | |
what is stock flotation | stock flotation is when a company issues new shares to the public it can help the company raise capital the opposite of stock flotation is a float shrink such as with stock buybacks fewer shares are available to trade | |
what is the difference between floating and non floating shares | the floating shares are the shares available to trade while non floating shares are those held by shareholders and company insiders and are not available for trading the bottom linea company s floating stock is the shares it has available to trade on the open market traders tend to prefer stocks with larger floats as they find it easier to enter and exit a stock that has greater liquidity stocks with larger floats have more shares available making them more liquid and easier for investors to buy or sell | |
what is the floor area ratio | the floor area ratio is the relationship between the total amount of usable floor area that a building has or has been permitted to have and the total area of the lot on which the building stands a higher ratio would likely indicate a dense or urban construction local governments use the floor area ratio for zoning codes | |
how to calculate the floor area ratio | you can determine the ratio by dividing the total or gross floor area of the building by the gross area of the lot 1floor area ratio total building floor areagross lot area begin aligned text floor area ratio frac text total building floor area text gross lot area end aligned floor area ratio gross lot areatotal building floor area | |
what does the floor area ratio tell you | the floor area ratio accounts for the entire floor area of a building not simply the building s footprint unoccupied areas such as basements parking garages stairs and elevator shafts are excluded from the square footage calculation buildings with a different number of stories can have the same floor area ratio value every city has a limited capacity or limited space that can be utilized safely any use beyond this point puts undue stress on a city this is sometimes known as the safe load factor the floor area ratio is variable because population dynamics growth patterns and construction activities vary and because the nature of the land or space where a building is placed can vary industrial residential commercial agricultural and nonagricultural spaces have differing safe load factors so they typically have differing floor area ratios as well local governments establish regulations and restrictions that determine the floor area ratio the floor area ratio is a key determining factor for development in any country a low floor area ratio is generally a deterrent to construction many industries and specifically the real estate industry seek hikes in the floor area ratio to open up space and land resources to developers an increased floor area ratio allows a developer to complete more building projects and this inevitably leads to greater sales decreased expenditures per project and greater supply to meet demand examples of the floor area ratiothe floor area ratio of a 1 000 square foot building with one story situated on a 4 000 square foot lot would be 0 25x a two story building on the same lot where each floor was 500 square feet would have the same floor area ratio value a lot has a floor area ratio of 2 0x and the square footage is 1 000 a developer could construct a building that covers as much as 2 000 square feet in this scenario it could include a 1 000 square foot building with two stories consider an apartment building for sale in charlotte north carolina the asking price for the apartment complex is 3 million and it spans 17 350 square feet the entire lot is 1 81 acres or 78 843 square feet the floor area ratio is 0 22x or 17 350 divided by 78 843 | |
what does bulk mean in zoning ordinances | the term bulk relates to the size and shape of buildings located on a lot as well as associated features of the lot that aren t necessarily part of one or more buildings bulk regulations include rules such as how closely these can be situated to lot lines as well as the floor area ratio 2 | |
what s the difference between floor area ratio and lot coverage | the floor area ratio calculates the size of the building relative to the lot but lot coverage takes the size of all buildings and structures into account the lot coverage ratio includes structures such as garages swimming pools and sheds including nonconforming buildings 3 | |
what is the law of supply and demand | the law of supply and demand explains a delicate economic balance supply is how much of a given product that manufacturers have produced and want to sell demand measures how badly consumers want that product and how much of it they re willing to buy these two factors are ideally equal but that doesn t always occur 4the bottom linethe impact that the floor area ratio has on land value cuts both ways an increased floor area ratio may make a property more valuable if an apartment complex can be built that allows for more spacious rentals or more tenants but a developer who can build a larger apartment complex on one piece of land may decrease the value of an adjoining property with a high sale value bolstered by a view that has become obstructed | |
what is a floor trader | a floor trader is an exchange member who executes transactions from the floor of the exchange exclusively for their own account floor traders used to use the open outcry method in the pit of a commodity or stock exchange but now most of them use electronic trading systems and do not appear in the pit floor traders fulfill an important role in commodity and stock markets by providing liquidity and narrowing bid ask spreads floor traders may also be referred to as individual liquidity providers or registered competitive traders understanding the floor traderfloor traders are the traders typically represented in movies when a scene of a securities exchange is shown these traders are often depicted as being emotionally invested in the trades they are executing because they are trading with their own money in reality most traders are not floor traders and floor traders are increasingly rare primarily because most traders who use their own money have switched to electronic trading which is not conducted in the pit a floor trader is required to pass a screening process before trading on an exchange the national futures association requires floor trader applicants to file the following form 8 r completed online fingerprint cards proof from a contract market that the individual has been granted trading privileges and a non refundable application fee of 85 1 other exchanges have their own screening requirements floor traders market makers and brokersfloor traders are in the pit with market makers and brokers but they play different roles brokers work on behalf of clients while market makers mostly provide liquidity floor traders also provide liquidity but their primary motivation is making profits with their own money however all parties are looking for the best order execution possible depending on the rules of the exchange a floor broker may be given permission to trade for their own account in addition to that of the firm or client they represent in this case a person can be both a floor broker and a floor trader the future of floor tradingfloor trading has become increasingly rare as electronic trading has become faster and cheaper with many exchanges closing their trading floors altogether the 2020 crisis has added more uncertainty to the future of floor trading the outbreak led the new york stock exchange and many others to temporary close their trading floors beginning in march 2020 2 many exchanges are resuming floor trading in phases but the future of the floor trader as an occupation is anything but assured | |
what is flotation | flotation is the process of converting a private company into a public company by issuing shares available for the public to purchase it allows companies to obtain financing externally instead of using retained earnings to fund new projects or expansion the term flotation is commonly used in the united kingdom whereas the term going public is more widely used in the united states understanding flotationflotation requires careful consideration regarding timing company structure the company s ability to withstand public scrutiny increased regulatory compliance costs and the time needed to execute the flotation and attract new investors while flotation provides access to new sources of capital the extra expenses associated with issuing new stock must be accounted for when considering the switch from a private to a public company companies in mature phases of growth may need additional funding for various reasons including expansion inventory research and development and new equipment for this reason the time and monetary costs of becoming a company that is traded publicly are often deemed worth it | |
when a company decides to pursue flotation they typically enlist an investment bank as an underwriter the underwriting investment bank typically leads the process for conducting an ipo and helps the company determine the amount of money it seeks to raise from the public market issuance | the investment bank also assists in the documentation requirements for becoming a public company the bank will develop an investment prospectus and will also market the company s offering in a roadshow prior to the initial stock issuance a roadshow is a sales pitch to potential investors by the underwriting firm and executive management team of the company about to go public gauging demand during the roadshow is an important step in determining the final ipo share price as well as in determining the ultimate number of shares to make available for issuance advantages and disadvantages of flotation | |
when considering flotation as a means of raising capital companies may also look to other private funding sources before deciding to become a public company these alternative sources of funding may include small business loans equity crowdfunding angel investors or investment from venture capitalists however when seeking additional private funding companies will still incur legal fees and extra costs for deal structuring and accounting | many private companies choose to receive private funds for the benefit of fewer transparency requirements private companies may also wish to remain privately funded because of the high costs associated with restructuring and an initial public offering ipo | |
what is a flotation cost | flotation costs are incurred by a publicly traded company when it issues new securities and incurs expenses such as underwriting fees legal fees and registration fees companies must consider the impact these fees will have on how much capital they can raise from a new issue flotation costs expected return on equity dividend payments and the percentage of earnings the business expects to retain are all part of the equation to calculate a company s cost of new equity | |
what do flotation costs tell you | companies raise capital in two ways debt via bonds and loans or equity some companies prefer issuing bonds or obtaining a loan especially when interest rates are low and because the interest paid on many debts is tax deductible while equity returns are not the biggest appeal of equity is that it does not need to be paid back however there are also downsides selling equity entails giving up an ownership stake in the company and the process can be expensive there are flotation costs associated with issuing new equity or newly issued common stock these include costs such as investment banking and legal fees accounting and audit fees and fees paid to a stock exchange to list the company s shares the difference between the cost of existing equity and the cost of new equity is the flotation cost the flotation cost is expressed as a percentage of the issue price and is incorporated into the price of new shares as a reduction it essentially reduces the final price of the issued securities and lowers the amount of capital that a company can raise flotation costs are expressed as a percentage of the issue price a company will often use a weighted average cost of capital wacc calculation to determine what share of its funding should be raised from new equity and what portion from debt flotation cost formulathe equation for calculating the flotation cost of new equity using the dividend growth rate is dividend growth rate d 1 p 1 f g text dividend growth rate frac d 1 p left 1 f right g dividend growth rate p 1 f d1 g | |
what are flow of funds fof | flow of funds fof are financial accounts that are used to track the net inflows and outflows of money to and from various sectors of a national economy macroeconomic data from flow of funds accounts are collected and analyzed by a country s central bank in the united states this data is released by the federal reserve bank approximately 10 weeks after the end of each quarter 12note that a different term fund flows is used to denote the amount of assets moving in and out of different types of mutual funds e g among equity and fixed income funds understanding flow of funds accountsthe fof accounts are used primarily as an economy wide performance indicator the data from the fof accounts can be compared to prior data to analyze the financial strength of the economy at a certain time and to see where the economy may go in the future the accounts can also be used by governments to formulate monetary and fiscal policy the accounts use double entry bookkeeping to track the changes in assets and liabilities in all sectors of the economy households nonprofit organizations corporations farms the government federal state and local and the foreign sector a wide range of financial instruments is accounted for treasury assets american deposits abroad savings deposits money market funds pension funds corporate equities and bonds mutual fund shares mortgages and consumer credits are just a few examples the fed s annual flow of funds data extends back to 1945 with quarterly data available from the beginning of 1952 3 the data provide a nuanced picture of how the size and composition of the u s economy have changed since world war ii flow of funds datathe fed issues reports on the financial accounts of the u s on a trailing quarterly basis including data on flow of funds the release which the fed labels z 1 shows the assets and liabilities of each sector of the economy at the end of the period in question it also shows how each sector has served as a source and use of funds it includes a times series of outstanding debt for each sector of the economy the derivation of net wealth in the country by asset and the distribution of gross domestic product gdp detailed statements for each account show how net capital has shifted to or from various sectors allowing for a granular look at the movement of funds within the economy as well as into and out of it 1 | |
what is a flow through entity | a flow through entity is a legal business entity that passes any income it makes straight to its owners shareholders or investors as a result only these individuals and not the entity itself are taxed on the revenues flow through entities are a common device used to avoid double taxation which happens with income from regular corporations understanding a flow through entityboth businesses and individuals are taxable entities that is liable to pay taxes on the money they earn individuals pay income tax on their wages and companies pay corporate tax on their revenues but businesses that are set up as flow throughs are not subject to corporate income tax instead the income generated by a flow through entity aka a pass through entity is treated solely as income of the investors stockholders or owners any earnings directly pass or flow through to the individuals and so does the tax liability these individual stakeholders pay taxes on business income as though it is personal income and it is taxed at their ordinary income rate in addition the owners can apply losses of the company against their personal income 1although flow through businesses generally face the same tax rules as c corporations for inventory accounting depreciation and other provisions affecting the measurement of business profits they are in effect taxed only once earnings generated by c corporations on the other hand are subject to double taxation income is taxed at the corporate tax rate first and then taxed again when paid out as dividends to shareholders or when shareholders realize capital gains arising from retained earnings 2types of flow through entitiesflow through entities are commonly grouped into sole proprietorships partnerships limited general and limited liability partnerships and s corporations along with income trusts and limited liability companies a sole proprietor reports all their business income on their personal income tax return the internal revenue service irs considers this form of company as a flow through given that the business is not taxed separately 3s corporation profits flow through to shareholders who report the income on schedule e of their personal income tax 4 although s corporation owners do not pay the self employed contributions act seca tax on their profits they are required to pay themselves reasonable compensation which is subject to the regular social security tax 5in canada a flow through entity can be an investment corporation a mortgage investment corporation a mutual fund corporation a partnership or a trust 6although flow throughs are considered non entities for tax purposes partnerships and s corporations are still required to file an annual k 1 statement as regular public companies do 78the disadvantages of flow through entitiesone important potential downside to a business that elects to operate as a flow through entity is that the owners will still be taxed on income that they do not directly receive for instance if the business does not distribute its profits to owners in the form of dividends but plows them back into the company the investors are still required to report their share of the profits and could owe taxes on them 9also while they avoid corporate tax some pass through entities owners may be subject to self employment tax 71011 | |
is a flow through entity the same as a pass through entity | yes a flow through entity is the same as a pass through entity | |
when it comes to the big advantage of a pass through entity we have two words for you tax treatment | regular incorporated businesses pay a flat corporate income tax on any profits before they distribute those earnings to stockholders and owners these shareholders must report their dividends or other distributions on their personal tax returns so the same dollars effectively get taxed twice a pass through entity allows profits to avoid this double taxation specifically the initial corporate tax round a pass through is exempt from business taxes it passes earnings straight through to stakeholders who do owe taxes on it but the money is only taxed once a pass through entity also affords owners and investors an extra deduction on their personal taxes in some cases if the business suffers a loss that also gets passed through and can be used to reduce overall taxable income | |
does a disregarded entity pay taxes | yes a disregarded entity pays taxes but since by definition it s usually a single person business or company it s not treated or taxed separately from its owner by the irs it reports its income on the owner s personal tax return disregarded entities pay two types of taxes similar to sole proprietorships | |
is a single member llc automatically a disregarded entity | yes a single member llc is automatically a disregarded entity it can request to be taxed differently 11can a disregarded entity have employees yes a disregarded entity can have employees the disregarded entity status is recognized only for the purposes of federal income taxes it doesn t affect employment and in fact a disregarded entity with workers might have to pay employment taxes however the irs and courts have ruled that a single member llc one of the most common types of disregarded entities cannot classify an owner as both an employee and a partner 12the bottom lineflow through entities can save you from double taxation on a company s profits sole proprietorships partnerships llcs and s corps can take advantage of pass through taxation however it s possible for owners or investors of a pass through entity to be taxed on income they didn t actually receive for instance if the income was put back into the business also some flow through entities such as sole proprietors are subject to self employment tax too therefore it s important to understand the tax implications of your particular situation | |
what is a folio number | in mutual funds a folio number is a unique number identifying your account with the fund like a bank account number the folio number can be used as a way to uniquely identify fund investors a folio number also records items such as how much money each investor has placed with the fund their transaction history and contact details a folio number can also be used to identify journal entries or parcels of land different fund houses and providers of similar folio numbers will all use a slightly different method to create a number value understanding folio numbersthe word folio leaf in latin can mean either a single sheet of paper or the page number printed on a single sheet of paper to identify its proper location in a larger tome in accounting the folio number is a way to reference a bookkeeping entry most often numbered in chronological or sequential order by referencing an entry s folio number its details can be found and analyzed all mutual funds need some sort of record keeping system in place this information is necessary for ensuring each investor is returned the money they are entitled to and for determining what fee structure applies to each investor while record keeping is most often facilitated by the broker in some cases an investor may be asked for a folio number by the fund provider to help ensure accuracy this folio number may be present on investment statements or may be obtained through your broker you can make numerous or multiple purchases using one folio number but the purchases must be in the mutual fund when using the same digits folio numbers are useful to bank creditors lawyers and regulators their utility extends beyond just mutual funds and their unitholders for instance in the case of suspected fraud investigators will reference folio numbers as they construct an audit trail to trace where certain funds or assets have flown in or out identifying new folio numbers along the way folio numbers are also useful in catching duplicated ledger entries and ensuring the accuracy and fidelity of a company s financial statements a folio number is a unique number to identify accounts with a mutual fund and you can get your folio number from your investment statements or through a broker special considerationsan investor can have multiple folio numbers kept with the same mutual fund company but they can ask the fund company to consolidate them into a single number this can help investors when it comes to their own personal accounting and for tax reporting purposes note that the increase in electronic record keeping further necessitates the need for effective digital tracking options but also minimizes mistakes and allows for easier reconciliation of multiple entries | |
what is a follow on offering fpo | a follow on offering fpo is an issuance of stock shares following a company s initial public offering ipo there are two types of follow on offerings diluted and non diluted a diluted follow on offering results in the company issuing new shares after the ipo which causes the lowering of a company s earnings per share eps during a non diluted follow on offering shares coming into the market are already existing and the eps remains unchanged any time a company plans to offer additional shares it must register the fpo offering and provide a prospectus to regulators | |
how a follow on offering fpo works | an initial public offering ipo bases its price on the health and performance of the company and the price the company hopes to achieve per share during the initial offering the pricing of a follow on offering is market driven since the stock is already publicly traded investors have a chance to value the company before buying the price of follow on shares is usually at a discount to the current closing market price also fpo buyers need to understand that investment banks directly working on the offering will tend to focus on marketing efforts rather than purely on valuation companies perform follow on offerings for a wide variety of reasons in some cases the company might simply need to raise capital to finance its debt or make acquisitions in others the company s investors might be interested in an offering to cash out of their holdings some companies may also conduct follow on offerings in order to raise capital to refinance debt during times of low interest rates investors should be cognizant of the reasons that a company has for a follow on offering before putting their money into it types of follow on offerings fpos a follow on offering can be either diluted or non diluted diluted follow on offerings happen when a company issues additional shares to raise funding and offer those shares to the public market as the number of shares increases the earnings per share eps decreases the funds raised during an fpo are most frequently allocated to reduce debt or change a company s capital structure the infusion of cash is good for the long term outlook of the company and thus it is also good for its shares non diluted follow on offerings happen when holders of existing privately held shares bring previously issued shares to the public market for sale cash proceeds from non diluted sales go directly to the shareholders placing the stock into the open market in many cases these shareholders are company founders members of the board of directors or pre ipo investors since no new shares are issued the company s eps remains unchanged non diluted follow on offerings are also called secondary market offerings example of a follow on offering fpo a well publicized follow on offering was that of alphabet inc subsidiary google goog which conducted a follow on offering in 2005 the mountain view company s initial public offering ipo was conducted in 2004 using the dutch auction method it raised approximately 1 67 billion at a price of 85 per share the lower end of its estimates in contrast the follow on offering conducted in 2005 raised more than 4 billion at 295 the company s share price a year later 123in early 2022 afc gamma a commercial real estate company that makes loans to companies in the cannabis industry announced that it would be conducting a follow on offering the company would look to offer 3 million shares of its common stock at a price of 20 50 per share the underwriters of the offering have a 30 day period in which they can opt to buy an additional 450 000 shares 4the company estimates gross proceeds from the sale to be approximately 61 5 million the proceeds from the sale of additional common stock will be to fund loans made to companies in the industry and for working capital needs 4 | |
is a follow on offering a primary or secondary offering | there are two types of follow on offerings primary and secondary a primary follow on offering is a direct sale of a company s shares from the company that are newly issued a secondary follow on offering is a public resale of existing shares from current stockholders a primary offering is dilutive while a secondary offering is non dilutive | |
what is the difference between a follow on offering and an initial public offering | an initial public offering ipo is when a private company goes public listing its shares on an exchange for the first time for the public to purchase a follow on offering is when an already existing public company one that has completed an ipo sells more shares to the public to raise additional capital | |
what is follow on financing | follow on financing is when a startup that has already raised capital raises additional capital through another round of funding this is in the private space before the start up has gone public | |
what is a follow on offering fpo | a follow on offering fpo is an issuance of stock shares following a company s initial public offering ipo there are two types of follow on offerings diluted and non diluted a diluted follow on offering results in the company issuing new shares after the ipo which causes the lowering of a company s earnings per share eps during a non diluted follow on offering shares coming into the market are already existing and the eps remains unchanged any time a company plans to offer additional shares it must register the fpo offering and provide a prospectus to regulators | |
how a follow on offering fpo works | an initial public offering ipo bases its price on the health and performance of the company and the price the company hopes to achieve per share during the initial offering the pricing of a follow on offering is market driven since the stock is already publicly traded investors have a chance to value the company before buying the price of follow on shares is usually at a discount to the current closing market price also fpo buyers need to understand that investment banks directly working on the offering will tend to focus on marketing efforts rather than purely on valuation companies perform follow on offerings for a wide variety of reasons in some cases the company might simply need to raise capital to finance its debt or make acquisitions in others the company s investors might be interested in an offering to cash out of their holdings some companies may also conduct follow on offerings in order to raise capital to refinance debt during times of low interest rates investors should be cognizant of the reasons that a company has for a follow on offering before putting their money into it types of follow on offerings fpos a follow on offering can be either diluted or non diluted diluted follow on offerings happen when a company issues additional shares to raise funding and offer those shares to the public market as the number of shares increases the earnings per share eps decreases the funds raised during an fpo are most frequently allocated to reduce debt or change a company s capital structure the infusion of cash is good for the long term outlook of the company and thus it is also good for its shares non diluted follow on offerings happen when holders of existing privately held shares bring previously issued shares to the public market for sale cash proceeds from non diluted sales go directly to the shareholders placing the stock into the open market in many cases these shareholders are company founders members of the board of directors or pre ipo investors since no new shares are issued the company s eps remains unchanged non diluted follow on offerings are also called secondary market offerings example of a follow on offering fpo a well publicized follow on offering was that of alphabet inc subsidiary google goog which conducted a follow on offering in 2005 the mountain view company s initial public offering ipo was conducted in 2004 using the dutch auction method it raised approximately 1 67 billion at a price of 85 per share the lower end of its estimates in contrast the follow on offering conducted in 2005 raised more than 4 billion at 295 the company s share price a year later 123in early 2022 afc gamma a commercial real estate company that makes loans to companies in the cannabis industry announced that it would be conducting a follow on offering the company would look to offer 3 million shares of its common stock at a price of 20 50 per share the underwriters of the offering have a 30 day period in which they can opt to buy an additional 450 000 shares 4the company estimates gross proceeds from the sale to be approximately 61 5 million the proceeds from the sale of additional common stock will be to fund loans made to companies in the industry and for working capital needs 4 | |
is a follow on offering a primary or secondary offering | there are two types of follow on offerings primary and secondary a primary follow on offering is a direct sale of a company s shares from the company that are newly issued a secondary follow on offering is a public resale of existing shares from current stockholders a primary offering is dilutive while a secondary offering is non dilutive | |
what is the difference between a follow on offering and an initial public offering | an initial public offering ipo is when a private company goes public listing its shares on an exchange for the first time for the public to purchase a follow on offering is when an already existing public company one that has completed an ipo sells more shares to the public to raise additional capital | |
what is follow on financing | follow on financing is when a startup that has already raised capital raises additional capital through another round of funding this is in the private space before the start up has gone public |
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