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what is long term care ltc insurance | long term care ltc insurance is coverage that provides nursing home care home health care and personal or adult daycare for individuals age 65 or older or with a chronic or disabling condition that needs constant supervision 1 ltc insurance offers more flexibility and options than many public assistance programs such as medicaid understanding long term care ltc insurancemany people are unable to rely on children or family members for support and buy long term care insurance to help cover out of pocket expenses otherwise long term care expenses would quickly deplete the savings of an individual and or their family while the costs of long term care differ by region it is usually very expensive in 2021 for example the average cost of a private room in a skilled nursing facility or nursing home was 108 405 a year according to a report on long term care by genworth a home health aide costs an average of 61 776 annually 2in the united states medicaid provides for low income individuals or those who spend down savings and investments because of care and exhaust their assets each state has its own guidelines and eligibility requirements in most states you can keep up to 2 000 as an individual and 3 000 for a married couple outside of your countable assets which include checking and savings account balances cds stocks and bonds 3 your home car personal belongings or savings for funeral expenses don t count as assets long term care insurance usually covers all or part of assisted living facilities and in home care medicaid rarely does full home care coverage is an option with long term care insurance it will cover expenses for a visiting or live in caregiver companion housekeeper therapist or private duty nurse up to seven days a week 24 hours per day up to the policy benefit maximum most long term care policies will cover only a specific dollar amount for each day you spend in a nursing facility or for each home care visit so when considering a policy read the fine print carefully and compare the benefits to determine which policy will best meet your own needs special considerationsmany experts suggest shopping for long term care insurance between the ages of 45 and 55 as part of an overall retirement plan to protect assets from the high costs and burdens of extended healthcare long term care insurance is also cheaper if you buy it younger in 2021 the average annual premium for a couple both 55 years old was 2 080 according to the american association for long term care insurance 4long term care insurance premiums can be tax deductible if the policy is tax qualified and the policyholder itemizes tax deductions among other factors usually companies that pay long term care premiums for an employee can deduct them as a business expense 5while premiums can cost less if you buy a policy at a younger age you will be paying for coverage many years before you are likely to need it so weigh your options carefully due to the high cost of this product a number of alternative ways of paying for health needs in later years have come on the market they include critical illness insurance and annuities with long term care riders think through what would make the most sense for you and your family especially if you re a couple with a significant age or health difference that could affect your lives going forward if you don t have a financial advisor this could be a reason to hire one who specializes in eldercare issues to work through these issues with you if you can bear to face them it makes sense to do your best to shape your own future instead of leaving it to family members in the flurry of a health emergency | |
what is long term debt | long term debt is debt that matures in more than one year long term debt can be viewed from two perspectives financial statement reporting by the issuer and financial investing in financial statement reporting companies must record long term debt issuance and all of its associated payment obligations on its financial statements on the flip side investing in long term debt includes putting money into debt investments with maturities of more than one year investopedia jiaqi zhouunderstanding long term debtlong term debt is debt that matures in more than one year entities choose to issue long term debt with various considerations primarily focusing on the timeframe for repayment and interest to be paid investors invest in long term debt for the benefits of interest payments and consider the time to maturity a liquidity risk overall the lifetime obligations and valuations of long term debt will be heavily dependent on market rate changes and whether or not a long term debt issuance has fixed or floating rate interest terms | |
why companies use long term debt instruments | a company takes on debt to obtain immediate capital for example startup ventures require substantial funds to get off the ground this debt can take the form of promissory notes and serve to pay for startup costs such as payroll development ip legal fees equipment and marketing mature businesses also use debt to fund their regular capital expenditures as well as new and expansion capital projects overall most businesses need external sources of capital and debt is one of these sourceslong term debt issuance has a few advantages over short term debt interest from all types of debt obligations short and long are considered a business expense that can be deducted before paying taxes longer term debt usually requires a slightly higher interest rate than shorter term debt however a company has a longer amount of time to repay the principal with interest financial accounting for long term debta company has a variety of debt instruments it can utilize to raise capital credit lines bank loans and bonds with obligations and maturities greater than one year are some of the most common forms of long term debt instruments used by companies all debt instruments provide a company with cash that serves as a current asset the debt is considered a liability on the balance sheet of which the portion due within a year is a short term liability and the remainder is considered a long term liability companies use amortization schedules and other expense tracking mechanisms to account for each of the debt instrument obligations they must repay over time with interest if a company issues debt with a maturity of one year or less this debt is considered short term debt and a short term liability which is fully accounted for in the short term liabilities section of the balance sheet | |
when a company issues debt with a maturity of more than one year the accounting becomes more complex at issuance a company debits assets and credits long term debt as a company pays back its long term debt some of its obligations will be due within one year and some will be due in more than a year close tracking of these debt payments is required to ensure that short term debt liabilities and long term debt liabilities on a single long term debt instrument are separated and accounted for properly to account for these debts companies simply notate the payment obligations within one year for a long term debt instrument as short term liabilities and the remaining payments as long term liabilities | in general on the balance sheet any cash inflows related to a long term debt instrument will be reported as a debit to cash assets and a credit to the debt instrument when a company receives the full principal for a long term debt instrument it is reported as a debit to cash and a credit to a long term debt instrument as a company pays back the debt its short term obligations will be notated each year with a debit to liabilities and a credit to assets after a company has repaid all of its long term debt instrument obligations the balance sheet will reflect a canceling of the principal and liability expenses for the total amount of interest required business debt efficiencyinterest payments on debt capital carry over to the income statement in the interest and tax section interest is a third expense component that affects a company s bottom line net income it is reported on the income statement after accounting for direct costs and indirect costs debt expenses differ from depreciation expenses which are usually scheduled with consideration for the matching principle the third section of the income statement including interest and tax deductions can be an important view for analyzing the debt capital efficiency of a business interest on debt is a business expense that lowers a company s net taxable income but also reduces the income achieved on the bottom line and can reduce a company s ability to pay its liabilities overall debt capital expense efficiency on the income statement is often analyzed by comparing gross profit margin operating profit margin and net profit margin in addition to income statement expense analysis debt expense efficiency is also analyzed by observing several solvency ratios these ratios can include the debt ratio debt to assets debt to equity and more companies typically strive to maintain average solvency ratio levels equal to or below industry standards high solvency ratios can mean a company is funding too much of its business with debt and therefore is at risk of cash flow or insolvency problems issuer solvency is an important factor in analyzing long term debt default risks investing in long term debtcompanies and investors have a variety of considerations when both issuing and investing in long term debt for investors long term debt is classified as simply debt that matures in more than one year there are a variety of long term investments an investor can choose from three of the most basic are u s treasuries municipal bonds and corporate bonds governments including the u s treasury issue several short term and long term debt securities the u s treasury issues long term treasury securities with maturities of two years three years five years seven years 10 years 20 years and 30 years municipal bonds are debt security instruments issued by government agencies to fund infrastructure projects municipal bonds are typically considered to be one of the debt market s lowest risk bond investments with just slightly higher risk than treasuries government agencies can issue short term or long term debt for public investment corporate bonds have higher default risks than treasuries and municipals like governments and municipalities corporations receive ratings from rating agencies that provide transparency about their risks rating agencies focus heavily on solvency ratios when analyzing and providing entity ratings corporate bonds are a common type of long term debt investment corporations can issue debt with varying maturities all corporate bonds with maturities greater than one year are considered long term debt investments | |
what is the long term debt to capitalization ratio | the long term debt to capitalization ratio a variation of the traditional debt to equity d e ratio shows the financial leverage of a firm it is calculated by dividing long term debt by total available capital long term debt preferred stock and common stock investors compare the financial leverage of firms to analyze the associated investment risk high ratios indicate riskier investments as debt is the primary source of financing and introduces a greater risk of insolvency understanding long term debt to capitalization ratioto achieve a balanced capital structure firms must analyze whether using debt equity stock or both is feasible and suitable for their business financial leverage is a metric that shows how much a company uses debt to finance its operations a company with a high level of leverage needs profits and revenue that are high enough to compensate for the additional debt they show on their balance sheet long term debt can be beneficial if a company anticipates strong growth and ample profits permitting on time debt repayments lenders collect only their due interest and do not participate in profit sharing among equity holders making debt financing sometimes a preferred funding source on the other hand long term debt can impose great financial strain on struggling companies and possibly lead to insolvency long term debt and cost of capitalcontrary to intuitive understanding using long term debt can help lower a company s total cost of capital lenders establish terms that are not predicated on the borrower s financial performance therefore they are only entitled to what is due according to the agreement e g principal and interest when a company finances with equity it must share profits proportionately with equity holders commonly referred to as shareholders financing with equity appears attractive and may be the best solution for many companies however it is quite an expensive endeavor financing risk | |
what is the long term debt to total assets ratio | the long term debt to total assets ratio is a measurement representing the percentage of a corporation s assets financed with long term debt which encompasses loans or other debt obligations lasting more than one year this ratio provides a general measure of the long term financial position of a company including its ability to meet its financial obligations for outstanding loans the formula for the long term debt to total assets ratio l t d t a long term debt total assets ltd ta dfrac textit long term debt textit total assets ltd ta total assetslong term debt investopedia jake shi | |
what does the long term debt to total assets ratio tell you | a year over year decrease in a company s long term debt to total assets ratio may suggest that it is becoming progressively less dependent on debt to grow its business although a ratio result that is considered indicative of a healthy company varies by industry generally speaking a ratio result of less than 0 5 is considered good example of long term debt to assets ratioif a company has 100 000 in total assets with 40 000 in long term debt its long term debt to total assets ratio is 40 000 100 000 0 4 or 40 this ratio indicates that the company has 40 cents of long term debt for each dollar it has in assets in order to compare the overall leverage position of the company investors look at the same ratio for comparable firms the industry as a whole and the company s own historical changes in this ratio if a business has a high long term debt to assets ratio it suggests the business has a relatively high degree of risk and eventually it may not be able to repay its debts this makes lenders more skeptical about loaning the business money and investors more leery about buying shares in contrast if a business has a low long term debt to assets ratio it can signify the relative strength of the business however the assertions an analyst can make based on this ratio vary based on the company s industry as well as other factors and for this reason analysts tend to compare these numbers between companies from the same industry the difference between long term debt to asset and total debt to asset ratioswhile the long term debt to assets ratio only takes into account long term debts the total debt to total assets ratio includes all debts this measure takes into account both long term debts such as mortgages and securities and current or short term debts such as rent utilities and loans maturing in less than 12 months both ratios however encompass all of a business s assets including tangible assets such as equipment and inventory and intangible assets such as accounts receivables because the total debt to assets ratio includes more of a company s liabilities this number is almost always higher than a company s long term debt to assets ratio | |
what are long term equity anticipation securities leaps | leaps or long term equity anticipation securities are publicly traded options contracts with expiration dates that are longer than one year typically leaps may expire up to three years from the date of issue they are functionally identical to most other listed options except with longer times until expiration a leaps contract grants a buyer the right but not the obligation to purchase or sell depending on if the option is a call or a put respectively the underlying asset at the predetermined price on or before its expiration date understanding long term equity anticipation securities leaps leaps are no different from short term options except for the later expiration dates lengthier times until maturity allow long term investors to gain exposure to prolonged price movements as with many short term options contracts investors pay a premium or upfront fee for the ability to buy or sell above or below the option s strike price the strike is the decided upon price for the underlying asset at which it converts at expiry for example a 25 strike price for a ge call option would mean an investor could buy 100 shares of ge at 25 at expiry the investor will exercise the 25 option if the market price is higher than the strike price should it be less the investor will allow the option to expire and will lose the price paid for the premium also remember each put or call options contract equates to 100 shares of the underlying asset investors must understand that they will be tying funds up in these long term contracts changes in the market interest rate and market or asset volatility may make these options more or less valuable depending on the holding and the direction of movement index leapsa market index is a theoretical portfolio made up of several underlying assets that represent a market segment industry or other groups of securities there are leaps available for equity indexes similar to the single stock leaps index leaps allow investors to hedge and invest in indices such as the standard poor s 500 index s p 500 index leaps give the holder the ability to track the entire stock market or specific industry sectors and take a bullish stance using call options or a bearish stance using put options investors could also hedge their portfolios against adverse market moves with index leaps puts leaps premiumspremiums are the non refundable cost associated with an options contract the premiums for leaps are higher than those for standard options in the same stock because the further out expiration date gives the underlying asset more time to make a substantial move and for the investor to make a healthy profit known as the time value option marketplaces use this lengthy timeframe and the intrinsic value of the contract to determine the value of the option intrinsic value is the calculated or estimated value of how likely the option is to make a profit based on the difference between the asset s market and strike price this value may include profit that already exists in the contract before purchase the contract writer will use fundamental analysis of the underlying asset or business to help place the intrinsic value as mentioned earlier the option contract has a basis of 100 shares of the asset so if the premium for meta meta formerly facebook is 6 25 the option buyer will pay 625 total premium 6 25 x 100 625 other factors that can affect the premium price include the volatility of the stock the market interest rate and if the asset returns dividends finally throughout the life of the contract the option will have a theoretical value derived from the use of various pricing models this fluctuating price indicates what the holder may receive if they sell their contract to another investor before expiration leaps were first introduced by the cboe in 1990 and are now ubiquitous long term equity anticipation securities vs shorter term contractsleaps also allow investors to gain access to the long term options market without needing to use a combination of shorter term option contracts short term options have a maximum expiration date of one year without leaps investors who wanted a two year option would have to buy a one year option let it expire and simultaneously purchase a new one year options contract this process which is called rolling contracts over would expose the investor to market changes in the prices of the underlying asset as well as additional option premiums leaps provides the longer term trader with exposure to a prolonged trend in a particular security with one trade types of leapsequity leaps call options allow investors to benefit from potential rises in a specific stock while using less capital than purchasing shares with cash upfront in other words the cost of the premium for an option is lower than the cash needed to buy 100 shares outright similar to short term call options leaps calls allow investors to exercise their options by purchasing the shares of the underlying stock at the strike price another advantage of leaps calls is that they let the holder sell the contract at any time before the expiration the difference in premiums between the purchase and sale prices can lead to a profit or loss investors must also include any fees or commissions charged by their broker to buy or sell the contract leaps puts provide investors with a long term hedge if they own the underlying stock put options gain in value as an underlying stock s price declines potentially offsetting the losses incurred for owning shares of the stock in essence the put can help cushion the blow of falling asset prices for example an investor who owns shares of company xyz and wishes to hold them for the long term might be fearful that the stock price could fall to allay these concerns the investor could purchase leaps puts on xyz to hedge against unfavorable moves in the long stock position leaps puts help investors benefit from price declines without the need to short sell shares of the underlying stock short selling involves borrowing shares from a broker and selling them with the expectation that the stock will continue to depreciate by expiry at expiry the shares are purchased hopefully at a lower price and the position is netted out for a gain or loss however short selling can be extremely risky if the stock price rises instead of falling leading to significant losses advantages and disadvantages of leapsthere are several key benefits and drawbacks of investing in long term equity anticipation securities we ve listed some of the main ones below long time frame allows selling of the optionused to hedge a long term holding or portfolioavailable for equity indicesprices less sensitive to the movement of the underlyingcostlier premiumslong time frame ties up the investment dollarsmarkets or company movements may be adverseprices more sensitive to changes in volatility and interest ratesexample of leapslet s say an investor holds a portfolio of securities which primarily includes the s p 500 constituents the investor believes there may be a market correction within the next two years and as a result purchases index leaps puts on the s p 500 index to hedge against adverse moves the investor buys a december 2021 leaps put option with a strike price of 3 000 for the s p 500 and pays 300 upfront for the right to sell the index shares at 3 000 on the option s expiration date if the index falls below 3 000 by expiry the stock holdings in the portfolio will likely fall but the leaps put will increase in value helping to offset the loss in the portfolio however if the s p 500 rises the leaps put option will expire worthless and the investor would be out the 300 premium | |
are leaps a good investment | leaps are simply long date call or put options listed on stocks or indexes as such they will have higher initial premiums than shorter dated options and lose value over time all else equal like any investment leaps will change in value in the case of a call it will rise and fall along with the underlying security and for a put inversely for some investors leaps may provide a more affordable way to take a long position than purchasing the actual stock | |
when should you buy leaps | if you have a medium term time horizon then a leaps call may be a good speculative bet on a stock that you think will rise you can also buy leaps puts as a medium term downside hedge against existing positions can you lose money with leaps yes leaps involve risk and you can lose up to your full investment when purchasing one if it ultimately expires worthless selling leaps is also risky as you are exposed to theoretically unlimited losses if the underlying security moves against you | |
do you pay taxes on leaps | yes when leaps are sold at a profit the gain is taxable if the leap contract was held for at least one year and one day the taxpayer will be taxed at the long term capital gain rate if the contract was held for shorter the taxpayer will be taxed at a short term capital gain rate | |
what is the downside of leaps | there are several specific downsides to leaps most often investors that buy leaps must put up more capital upfront at the beginning of the contract to pay for the initial premium in addition because they have more time until expiration leaps often cost more than traditional options the bottom linelaunched in 1990 by the chicago board options exchange cboe to meet investor demand leaps are now a mainstay of options trading leaps which stand for long term equity anticipation securities are simply listed equity call and put options that have initial expiration dates that are greater than one year and up to 39 months into the future as with all options leaps come with unique risks and investors should understand the potential risks and rewards of trading in them | |
what is long term growth ltg | long term growth ltg is an investment strategy that aims to increase the value of a portfolio over a multi year time frame understanding long term growth ltg although long term is relative to an investors time horizons and individual style generally ltg is meant to create above market returns over a period of ten years or more because of the longer time frame ltg portfolios can be more aggressive holding a larger percentage of stocks versus fixed income products such as bonds whereas an intermediate term balanced fund might have 60 stocks to 40 bonds a ltg fund might have 80 stocks and 20 bonds ltg is meant to do exactly what it says deliver portfolio growth over time the catch is that the growth can be uneven a ltg portfolio may underperform the market in the first years and then outperform later or vice versa this is a problem for investors in a ltg fund even if a fund delivers good average growth over a decade for example the performance year to year will vary therefore investors can have very different outcomes depending on when they buy into the fund and how long they hold timing investments is of course a problem facing every market participant and not just ltg fund investors long term growth ltg and value investingthe core advantage to ltg is that short term price fluctuations are not of major concern similarly many value investors focus on stocks with ltg potential searching for companies that are relatively inexpensive with strong fundamentals then they simply wait until they increase in value as the market catches on to their fundamental strength before selling individual investors often benefit from a ltg focus and that may lead them toward value investing as a strategy however ltg simply refers to the longer period over which returns are sought not a particular investment style such as value investing long term funds are just as likely to buy the market through various indexing products as they are to seek out undervalued stocks value investing in particular can be difficult for fund managers to stick to for the long term although investors in ltg funds are told to expect a decent average return over multiple years less patient investors are free to pull out unless the fund has a lock up period something that is usually found in hedge or private funds if a typical ltg fund has too many mediocre years then capital will start to leave as investors seek better market returns this can force a fund to prematurely trim holdings before the market value catches up with the intrinsic value of the stocks | |
what is a long term incentive plan | a long term incentive plan ltip is a company policy that rewards employees for reaching specific goals that lead to increased shareholder value in a typical ltip the employee usually an executive must fulfill various conditions or requirements in some forms of ltips recipients receive special capped options in addition to stock awards understanding long term incentive plansa long term incentive plan while geared toward employees is really a function of the business itself striving for long term growth when objectives in a company s growth plan match those of the company s ltip key employees know which performance factors to focus on for improving the business and earning more personal compensation the incentive plan helps retain top talent in a highly competitive work environment as the business continues to evolve types of ltipsone type of ltip is the 401 k retirement plan when a business matches a percentage of an employee s paycheck going into the plan employees are more likely to work for the company until retirement the business might have a vesting schedule that determines the value of retirement account contributions a worker may take when leaving the company with vesting a business typically retains part of its contributions over the first five years of a worker s employment once an employee is fully vested they own all of their retirement plan contributions moving forward there are two types of vesting cliff vesting and graded vesting for example with cliff vesting an employee might be 0 vested after being at the company for one two and three years and then be 100 vested after that with graded vesting an employee might be 0 vested after working at the company for a year then 20 vested after the second year then 40 vested after the third year then 60 vested after the fourth year then 80 vested after the fifth year and then 100 vested after the sixth year of service stock options are another type of ltip after a set length of employment workers may be able to purchase company stock at a discount while the employer pays the balance the worker s seniority in the organization increases with the percentage of shares owned in other cases the business may give restricted stock to employees for example the employee may have to surrender gifted stock if resigning within three years of receiving it for each year going forward the worker may have rights to another 25 of the gifted stock after five years of receiving restricted stock the employee is usually fully vested example of an ltipin june 2016 the board of directors of konecranes plc agreed to a new share based ltip for key employees the plan provided competitive rewards based on earning and accumulating shares of the company the ltip had a discretionary period of calendar year 2016 potential rewards were based on continual employment or service and on konecranes group s adjusted earnings before interest taxes depreciation and amortization ebitda rewards were to be paid partly in konecranes shares and partly in cash by the end of august 2017 the cash was intended to be used to cover taxes and related costs shares paid under the plan could not be transferred during the restriction period beginning when the reward was paid and ending on december 31 2018 | |
how does an ltip work | an ltip is a type of compensation that is earned right now and paid out over time this delay aims to motivate employees to stay with the company than they might otherwise as a dangling carrot as time passes the employee will reap the rewards of the plan | |
is ltip the same as a bonus | an ltip is not necessarily the same as a bonus a bonus might be awarded at a single moment in time whereas a ltip by definition is awarded over time | |
how long does an ltip last | in order to motivate employees a ltip typically distributes awards over a period of three to five years 1the bottom linea long term incentive plan attempts to align the interests of the employees and the business done well both benefit the incentive plan helps retain top talent in a highly competitive work environment as the business continues to evolve and the business thrives thanks to the work of the employees if you are offered an ltip consider your options and be sure to fully understand the details of the plan vesting for example might happen over time so try to weigh the tradeoffs | |
what are long term investments | a long term investment is an account on the asset side of a company s balance sheet that represents the company s investments including stocks bonds real estate and cash long term investments are assets that a company intends to hold for more than a year the long term investment account differs largely from the short term investment account in that short term investments will most likely be sold whereas the long term investments will not be sold for years and in some cases may never be sold being a long term investor means that you are willing to accept a certain amount of risk in pursuit of potentially higher rewards and that you can afford to be patient for a longer period of time it also suggests that you have enough capital available to afford to tie up a set amount for a long period of time investopedia sydney saporitolong term investments explaineda common form of long term investing occurs when company a invests largely in company b and gains significant influence over company b without having a majority of the voting shares in this case the purchase price would be shown as a long term investment | |
when a holding company or other firm purchases bonds or shares of common stock as investments the decision about whether to classify it as short term or long term has some fairly important implications for the way those assets are valued on the balance sheet short term investments are marked to market and any declines in value are recognized as a loss | however increases in value are not recognized until the item is sold therefore the balance sheet classification of investment whether it is long term or short term has a direct impact on the net income that is reported on the income statement held to maturity investmentsif an entity intends to keep an investment until it has matured and the company can demonstrate the ability to do so the investment is noted as being held to maturity the investment is recorded at cost although any premiums or discounts are amortized over the life of the investment for example a classic held to maturity investment was the purchase of paypal by ebay in 2002 1 once paypal had significantly grown its infrastructure and user base it was then spun out as its own company in 2015 with a five year agreement to continue processing payments for ebay this investment helped paypal grow and at the same time allowed ebay the benefit of owning a world class payment processing solution for nearly two decades 2the long term investment may be written down to properly reflect an impaired value however there may not be any adjustment for temporary market fluctuations since investments must have an end date equity securities may be not be classified as held to maturity available for sale and trading investmentsinvestments held with the intention of resale within a year for the purpose of garnering a short term profit are classified as current investments a trading investment may not be a long term investment however a company may hold an investment with the intention to sell in the future these investments are classified as available for sale as long as the anticipated sale date is not within the next 12 months available for sale long term investments are recorded at cost when purchased and subsequently adjusted to reflect their fair values at the end of the reporting period unrealized holding gains or losses are kept as other comprehensive income until the long term investment has been sold | |
what are long term liabilities | long term liabilities are a company s financial obligations that are due more than one year in the future the current portion of long term debt is listed separately on the balance sheet to provide a more accurate view of a company s current liquidity and the company s ability to pay current liabilities as they become due long term liabilities are also called long term debt or noncurrent liabilities | |
what is longitudinal data | longitudinal data sometimes called panel data is data that is collected through a series of repeated observations of the same subjects over some extended time frame and is useful for measuring change longitudinal data effectively follows the same sample over time which differs fundamentally from cross sectional data because it follows the same subjects over some time while cross sectional data samples different subjects whether individuals firms countries or regions at each point in time meanwhile a cross sectional data set will always draw a new random sample longitudinal data is used widely in the social sciences including among economists political scientists and sociologists understanding longitudinal dataoften analysts are interested in how things change over time in a typical cross sectional sample even if you measure some variable today and then again a year from now you will probably be sampling different people each time to get a better handle on how things change for the same people over time you need to be able to track them and follow up with them a year from now and in future waves this is longitudinal data longitudinal data is often used in economic and financial studies because it has several advantages over repeated cross sectional data for example because longitudinal data measures how long events last it can be used to see if the same group of individuals remain unemployed during a recession or whether different individuals are moving in and out of unemployment 1 this can help determine the factors that most affect unemployment applications of longitudinal datalongitudinal analysis can also be used to calculate a portfolio s value at risk var using the historic simulation method this simulates how the value of the current portfolio would have fluctuated over previous time periods using the observed historical fluctuations of the assets in the portfolio during those times it provides an estimate of the maximum likely loss over the next time period longitudinal data is also used in event studies to analyze what factors drive abnormal stock returns over time or how stock prices react to merger and earnings announcements it can also be used to measure poverty and income inequality by tracking individual households and because standardized test scores in schools are longitudinal they can be used to assess teacher effectiveness and other factors affecting student performance social scientists also use longitudinal data to try to understand causation of events that may have occurred in the past and how they lead to outcomes observed in later waves of the data for instance the effect of the passage a new law on crime statistics or a natural disaster on births and deaths years later | |
what are look alike contracts | look alike contracts are a cash settled financial product based on the settlement price of a similar exchange traded physically settled futures contract look alike contracts are traded over the counter and they carry no risk of actual physical delivery regardless of the terms of the underlying futures contract futures look alike contracts are regulated by the commodity futures trading commission cftc 1understanding look alike contractslook alike contracts are essentially options where the underlying is a futures contract with a specific settlement date for example the ice brent crude american style option product has an ice brent crude futures contract as its underlying the contract terms of a look alike contract closely correspond with the contract terms of the futures contract look alike contracts may be offered in both american and european styles 2look alike contracts and position limits | |
where look alike contracts get interesting is when they cover contracts traded on other exchanges allowing the exchange to capture some of the trading activity on a commodity they are not known for this allows some of the pure risk speculation to take place away from the actuals in the underlying futures contracts | moreover since none of the physical commodities are involved with the look alike contract trading the position limits meant to temper commodity speculation can be skirted criticisms of look alike contractslike many derivative products look alike contracts have their share of detractors the main purpose of the futures market is traditionally to aid in price discovery and allow supply and demand risks to be hedged or offloaded onto parties better prepared to handle them look alike contracts leave the physical commodity behind by being a derivative of a derivative instead of influencing the price of oil for example look alike contracts allow traders to bet against one another while arguably providing no new market price signals traders of look alike contracts do argue that last point as they are market participants so the volume and open interest of their speculation give market information on their opinions on the price performance of the underlying futures contract former cme group ceo craig donohue called look alike contracts parasitic second order derivatives in 2011 3 at the time of course ice was aggressively creating look alike contracts using cme traded futures as a benchmark the rivalry between the two exchanges no doubt colored his opinions all in all look alike contracts are no different than other over the counter products in that they allow high level market participants to make bets with money they are prepared to risk in a very specific way | |
what are futures contracts | futures or futures contracts are agreements to purchase a certain commodity at a certain price at a predetermined date they are used to lock in future income and reduce exposure to volatility | |
what are index futures | index futures are futures contracts that allow traders to buy a sell a contract that is based on the value of a stock market index at a predetermined date traders use these futures to speculate on the future movements of market indexes | |
what is an inverted futures market | an inverted futures market refers to a market where contracts that are nearing maturity have a higher market price than far maturity contracts in a normal market futures prices are higher for contracts that are further from maturity an inverted market may be caused by disruptions in the supply of an underlying commodity the bottom linelook alike contracts are derivatives of an exchange traded futures contract unlike the underlying futures look alikes are traded over the counter and have no risk of actual delivery however these derivatives have been criticized as being speculative vehicles that do not contribute to price discovery | |
what is a lookback option | a lookback option allows the holder to exercise an option at the most beneficial price of the underlying asset over the life of the option understanding lookback optionsalso known as a hindsight option a lookback option allows the holder the advantage of knowing history when determining when to exercise their option this type of option reduces uncertainties associated with the timing of market entry and reduces the chances the option will expire worthless lookback options are expensive to execute so these advantages come at a cost as a type of exotic option the lookback allows the user to look back or review the prices of an underlying asset over the lifespan of the option after it has been purchased the holder may then exercise the option based on the most beneficial price of the underlying asset the holder can take advantage of the widest differential between the strike price and the price of the underlying asset lookback options do not trade on major exchanges instead they are unlisted and trade over the counter otc lookback options are cash settled options which means the holder receives a cash settlement at execution based on the most advantageous differential between high and low prices during the purchase period sellers of lookback options would price the option at or near the widest expected distance of price differential based on past volatility and demand for the options the cost to purchase this option would be taken up front the settlement will equate to the profits they could have made from buying or selling the underlying asset if the settlement was greater than the initial cost of the option then the option buyer would have a profit at settlement otherwise a loss fixed vs floating lookback options | |
when using a fixed strike lookback option the strike price is set or fixed at purchase similar to most other types of option trades unlike other options however at the time of exercise the most beneficial price of the underlying asset over the life of the contract is used instead of the current market price in the case of a call the option holder can review the price history and choose to exercise at the point of highest return potential | for a put option the holder may execute at the asset s lowest price point to realize the greatest gain the option contract settles at the selected past market price and against the fixed strike | |
when using a floating strike lookback option the strike price is set automatically at maturity to the most favorable underlying price reached during the contract s life call options fix the strike at the lowest underlying asset price adversely put options fix the strike at the highest price point the option will then settle against the market price calculating the profit or loss against the floating strike | the fixed strike option solves the market exit problem the best time to get out the floating strike solves the market entry problem the best time to get in examples of lookback optionsin example number one if you assume a stock trades at 50 at both the start and end of the three month option contract so there is no net change gain or loss the path of the stock will be the same for both the fixed and floating strike versions at one point during the life of the option the highest price is 60 and the lowest price is 40 the profit is the same because the stock moved the same amount higher and lower during the life of the option in example number two let s assume the stock had the same high of 60 and low of 40 but closed at the end of the contract at 55 for a net gain of 5 finally in example number three let s assume the stock closed at 45 for a net loss of 5 | |
what is a loophole | a loophole is a technicality that allows a person or business to avoid the scope of a law or restriction without directly violating the law used often in discussions of taxes and their avoidance loopholes provide ways for individuals and companies to remove income or assets from taxable situations into ones with lower taxes or none at all loopholes are most prevalent in complex business deals involving tax issues political issues and legal statutes they can be found within contract details building codes and tax codes among others | |
how a loophole works | a person or company utilizing a loophole isn t considered to be breaking the law but circumventing it in a way that was not intended by the regulators or legislators that put the law or restriction into place the ability to circumvent the law is due to a flaw or defect in the legislation often one that wasn t obvious to those who originally drafted said law most loopholes will close in time as those who have the power to do so rewrite the rules to cut off the opportunity for loophole advantage some tax loopholes exist perennially especially in nations like the united states where the intricate tax code amounts to tens of thousands of pages which can lead to many opportunities for those seeking to exploit it examples of loopholesfor example in the united states federal law requires that commercial gun sales be subject to a background check when a consumer wishes to buy a firearm from a commercial retailer they must submit their information to the national instant criminal background check system which compares the buyer s name and birthdate against a database of individuals not allowed to buy a firearm 1 however an exception is made for private sales under federal law any private individual can sell any other private individual a gun without the need for a background check 2 this private sale exception has created what is known as the gun show loophole which allows individuals in many states to purchase guns from gun shows or through other private sales without the need for a background check as long as state law doesn t require a background check for private gun sales which it does in some states neither buyer nor purchaser has broken the law if there s a loophole that involves large sums of money in the world of banking and finance count on wall street with all those sharp lawyers and accountants to exploit it to the max and keep it going year after year a prime example is the carried interest provision that allows private equity managers venture capital investors hedge fund managers and real estate investors to pay a capital gains tax rate presently 20 instead of the higher ordinary income tax rate on the income earned from their day to day work activity 2 this loophole has saved hundreds of millions in taxes for financiers such as stephen schwarzman a public face of the private equity sector and others like him who generously support their patrons in washington particularly if key leaders there happen to come from the real estate industry for wall street a lucrative loophole can be thought of as a you scratch my back and i ll scratch yours kind of agreement | |
what is a lorenz curve | a lorenz curve developed by american economist max lorenz in 1905 is a graphical representation of income inequality or wealth inequality the graph plots percentiles of the population on the horizontal axis according to income or wealth and plots cumulative income or wealth on the vertical axis understanding the lorenz curvein practice a lorenz curve is usually a mathematical function estimated from an incomplete set of observations of income or wealth the lorenz curve is often accompanied by a straight diagonal line with a slope of 1 which represents perfect equality in income or wealth distribution the lorenz curve lies beneath it showing the observed or estimated distribution while the lorenz curve is most often used to represent economic inequality it can also demonstrate unequal distribution in any system the farther the curve is from the baseline represented by the straight diagonal line the higher the level of inequality 1 in economics the lorenz curve denotes inequality in the distribution of either wealth or income these are not synonymous since it is possible to have either high earnings but zero or negative net worth or low earnings but a large net worth a lorenz curve usually starts with an empirical measurement of wealth or income distribution across a population based on data such as tax returns which report income for a large portion of the population a graph of the data may be used directly as a lorenz curve or economists and statisticians may fit a curve that represents a continuous function to fill in any gaps in the observed data the closer the lorenz curve is to the line of equality the less inequality exists the further the lorenz curve is to the line of equality the more inequality exists components of the lorenz curvethe united states federal reserve collected net worth statistics from u s households it then graphically depicted the inequality distribution of wealth the latest data collected by the survey of consumer finances is from 2019 per the federal reserve the underlying data demonstrates that the bottom 50 of households hold just 1 5 of overall household wealth 2there are several important components to understand when analyzing a lorenz curve the lorenz curve and the gini coefficientthe gini coefficient is used to express the extent of inequality in a single figure it most often ranges from 0 or 0 to 1 or 100 complete equality in which every individual has the exact same income or wealth corresponds to a coefficient of 0 plotted as a lorenz curve complete equality would be a straight diagonal line with a slope of 1 the area between this curve and itself is 0 so the gini coefficient is 0 a coefficient of 1 means that one person earns all of the income or holds all of the wealth 3 in theory the gini coefficient can exceed 100 in extreme situations for example when handling negative wealth or income the figure can theoretically be higher than 1 in that case the lorenz curve would dip below the horizontal axis the gini coefficient is equal to the area below the line of perfect equality minus the area below the lorenz curve divided by the area below the line of perfect equality in the graph above the gini coefficient is the area below the dashed line but above the solid line the gini coefficient is used to measure the extent of inequality it can also be used to compare two different nations or countries to see which has more inequality for data sets demonstrating inequality it may be difficult to property analyze certain sections of data for example the graph above has a very long left skewed tail this makes it difficult to exam changes in equality for this section of data advantages and disadvantages of the lorenz curvea lorenz curve gives more detailed information about the exact distribution of wealth or income across a population than summary statistics such as the gini coefficient or the lorenz asymmetry coefficient because a lorenz curve visually displays the distribution across each percentile or other unit breakdowns it can show precisely at which income or wealth percentiles the observed distribution varies from the line of equality and by how much the underlying data for a lorenz curve is necessary to calculate the gini coefficient a primary means of mathematically measuring inequality assuming sufficient data can be collected a lorenz curve can be prepared for any geographical region i e by country by state by city etc this may be especially important for governments relying on a lorenz curve to better understand how to most appropriately assess tax brackets though the lorenz curve often displays sensitive financial information it also maintains the anonymity of the underlying surveyed individuals in addition the lorenz curve can be layered on top of itself over time demonstrating how public policy has changed the level of inequality at various points along the lorenz curve because constructing a lorenz curve involves fitting a continuous function to some incomplete set of data there is no guarantee that the values along a lorenz curve other than those actually observed in the data actually correspond to the true distributions of income this is also true because it may be too expensive or demand too many resources to collect enough data points to fill all gaps most of the points along the curve are just guesses based on the shape of the curve that best fits the observed data points therefore the shape of the lorenz curve can be sensitive to the quality and sample size of the data and to the mathematical assumptions and judgments as to what constitutes a best fit curve and these may represent sources of substantial error between the lorenz curve and the actual distribution the lorenz curve or gini coefficient may also be insufficient to clearly demonstrate the extent of change of inequality over time consider a situation where two gini coefficients are calculated to be the exact same it is possible for the slope of the lorenz curve to be radically different yet the underlying aggregated inequality level is calculated to be the same visually depicts inequality across a population in a manner easy to understand and analyze | |
is used to help calculate the gini coefficient a primary mathematical mean of calculating inequality | may assist governments in making public policy changes or impacting tax bracket ranges based on incomemaintains anonymity of surveyed individualsmay be compiled to show how the curve has changed over timesample data may not appropriately reflect the overall population therefore displaying an incorrect lorenz curvemay require extensive data collection to adequately fill in the entire curvemay require estimation or preparer inference as to the curve to drawmay mislead analysts due to the varying shapes and sizes of the gini coefficient area different areas may be equal in size yet vary in appearancelorenz curve examplethe curve above shows a continuous lorenz curve that has been fitted to data that describes income distribution in brazil as of 2020 the data set is also compared to a straight diagonal line representing perfect equality at the 55th income percentile the value of the lorenz curve is 22 39 this means that the lorenz curve estimates that the bottom 55 of the population takes in 22 39 of the nation s total income if brazil were a perfectly equal society the bottom 55 would earn 55 of the total elsewhere we can see that the 99th percentile corresponds to 89 32 in cumulative income this means that the top 1 takes in 11 68 of brazil s income to find the approximate gini coefficient subtract the area beneath the lorenz curve around 0 25 from the area beneath the line of perfect equality 0 5 by definition divide the result by the area beneath the line of perfect equality which yields a coefficient of around 0 5 or 50 according to the world bank brazil s gini coefficient was 48 9 in 2020 4 | |
why is the lorenz curve important | the lorenz curve is important because it represents one of the best and simplest ways to illustrate the level of economic inequality in society as the lorenz curve moves away from the baseline the underlying data suggests that the unequal distribution keeps increasing | |
how does the lorenz curve measure inequality | the lorenz curve is a graphical representation of the distribution of income or wealth in a society basically the farther the curve moves from the baseline represented by the straight diagonal line the higher the level of inequality who uses lorenz curves government agencies are especially interested in lorenz curves especially for net worth and income distributions within their country lorenz curves inform governments of how public policy is working or not working it may also be an indicator of how a government should establish its tax brackets based on gaps or ranges of income | |
how is a lorenz curve calculated | after collecting data from a relatively large sample size a lorenz curve is then fitted to best demonstrate the distribution of that data set because each set of information is different there is no single universal curve formula and the nonlinear regression will often look very different for different data sets the bottom linea common method of visually analyzing inequality distributions is to use a lorenz curve the curve graphically depicts what a standard distribution of equality would look like then the graph layers on the actual distribution of a given data set the lorenz curve is used to calculate the gini coefficient to mathematically analyze how unequal a dataset is and it is used to visually exam inequality levels as well | |
what is loss adjustment expense | a loss adjustment expense lae is a cost that insurance companies incur when investigating and settling an insurance claim | |
when an insurer receives a claim it doesn t open its checkbook immediately it first does its due diligence to ensure that the damages claimed by a policyholder are accurate this involves an investigation of an incident and claim the absence of an investigation could lead to losses from fraudulent claims | loss adjustment expenses can include the costs of adjusters investigators attorneys mediators and more 1laes will vary widely depending upon how difficult a claim is to investigate even in cases where the lae is high insurance companies deem the expense worth it to avoid being bilked by fraudulent claims the investigation of claims can be a deterrent to those who might file fraudulent claims for an easy payday fraudulent insurance claims are believed to cost insurers billions of dollars these claims drive up insurance premiums for the rest of the customers as insurance companies must count fraudulent claims in their cost of doing business 2special considerationssome commercial liability policies contain endorsements that require policyholders to reimburse their insurance company for loss adjustment expenses it is important to carefully read the endorsement language which may indicate that a loss adjustment expense doesn t include the policyholder s attorney fees and costs if an insurer denies coverage and a policyholder successfully sues the insurer thus when there s no actual adjusting of the claim the insurance company shouldn t be allowed to use its deductible to cover policyholder expenses incurred when the policyholder defends the claim dismissed by the insurance company 3using lae to calculate the combined ratiothe combined ratio also known as the combined ratio after policyholder dividends ratio is one of the key profitability measures in the insurance industry it measures profits earned through daily underwriting activities and excludes investment related income the calculation includes the lae as shown below combined ratio incurred losses loss adjustment expense lae other underwriting expenses earned premiumsthe combined ratio essentially compares expenses to revenue a ratio below 100 means that the company is making an underwriting profit a ratio above 100 indicates an underwriting loss so when it comes to the combined ratio the lower the result the better as you can see from the above formula loss adjustment expense is one of the components used in the combined ratio formula all things being equal the higher the loss adjustment expense the higher the company s combined ratio and vice versa let s say for example insurance company abc incurred underwriting losses of 5 million loss adjustment expenses of 3 million and 2 million in underwriting expenses in q1 for a total of 10 million dollars in the same period the company earned 11 million in premiums thus abc s combined ratio for the quarter is 91 or 91 10 million 11 million it s making a profit as the 11 million in earned premiums outpaced the underwriting costs generally speaking a combined ratio in the range of 75 90 over the long run is considered healthy types of loss adjustment expenseloss adjusted expenses that are allocated to a specific claim are called allocated loss adjustment expenses alae while expenses not allocated to a specific claim are called unallocated loss adjustment expenses ulae allocated loss adjustment expenses occur when the insurance company pays for an investigator to survey claims made on a specific policy or a driver with an automobile insurance policy may be required to take a damaged vehicle to an authorized third party shop so that a mechanic can assess the damage in the case of a third party review the cost associated with hiring that professional is an allocated loss adjustment expense other allocated expenses include the cost of obtaining police reports and the cost required to evaluate whether an injured driver is really injured insurance companies can also incur unallocated loss adjustment expenses unallocated expenses could be related to the salaries of the home office personnel maintenance costs of the fleet of vehicles used by in house investigators and other expenses incurred in the regular course of operations an insurance company that maintains a staff to evaluate claims but is fortunate enough to never have a claim filed will have salary and overhead as unallocated loss adjustment expenses but will not have any allocated loss adjustment expenses | |
how is a loss ratio different from the combined ratio | the loss ratio is calculated by dividing the total incurred losses by the total collected insurance premiums it does not include underwriting and loss adjustment expenses as is the case with the combined ratio | |
what does it mean if a company s lae increases each year | if a company s lae increases each year it could mean that management is overly aggressive in its financial reporting specifically it might be habitually under reserving for losses and overstating income | |
what is the difference between an incurred loss and an lae | incurred loss is simply the amount of money an insurance company paid out in claims loss adjusted expense meanwhile is the expense associated with investigating and settling those claims the bottom lineloss adjustment expenses are the expenses that insurance companies incur during the investigation and handling of claims examples of loss adjustment expenses include costs for investigators adjusters attorneys and mediators the combined ratio the formula for which includes loss adjustment expenses compares expenses to earned premiums and is used as a metric for profitability by the insurance industry | |
what is a loss carryback | a loss carryback describes a situation in which a business experiences a net operating loss nol and chooses to apply that loss to a prior year s tax return this results in an immediate refund of taxes previously paid by reducing the tax liability for that previous year understanding a loss carrybackloss carrybacks are similar to loss carryforwards except that companies apply their net operating losses to preceding rather than subsequent years incomes the loss carryback will generate a tax refund of prior taxes paid by the business for that previous year due to its newly reduced tax liability after the carried back loss is applied it will be as though the business had overpaid its taxes for that year a business can choose how to apply a net operating loss nol when such a loss occurs for example it can choose to waive the carryback period and only carry the loss forward however once the decision has been made to carry the loss forward the action cannot be reversed 1it is important to note that an nol carryback is typically more beneficial than a carryforward because the time value of money shows that tax savings in the present are more valuable than in the future there may be very specific instances when a carryforward makes more sense for a certain business such as when business tax rates increase considerably however it s not the norm tax provisions allowing nols to be carried back have ranged from zero to five years historically because it is such a highly beneficial tax planning option to the taxpayer tax bills have often touched on carrybacks in times of recession the length of time taxpayers are allowed to carry back losses has been extended carrybacks have also been omitted from the tax code entirely as an option allowing only carryforwards it is important to know where the legislation sits at the point in time a carryback is being considered history of loss carrybacksthe nol carryback provision relating to federal income taxes was originally introduced as part of the revenue act of 1918 originally this federal income tax provision was intended to be a short lived benefit to companies incurring losses related to the sale of war related items in the post wwi era the initial carryback and carryforward collectively carryover provisions were only for one year the purpose of keeping the provision was to smooth the tax burden for companies whose primary business is cyclical in nature but not in line with a standard tax year this is common with agricultural businesses as they are highly dependent on weather conditions and may have one successful year followed by a year with a major net operating loss 2over the following years the allowable duration for carryovers has been extended decreased omitted entirely and reinstated we will look only at the major changes to the carryback provision over the last few decades some states have stricter income percentages or time limits on carrybacks or carryforwards for state income tax purposes real world exampletax loss carrybacks got new attention in september 2020 when the new york times released details surrounding president trump s 2009 tax return according to the times article confidential records show that starting in 2010 he claimed and received an income tax refund totaling 72 9 million all the federal income tax he had paid for 2005 through 2008 plus interest 4 this was made possible through an nol carryback provision that changed as a result of the worker homeownership and business assistance act of 2009 signed into law by president obama 5the 2009 tax law allowed a five year nol carryback provision for tax years 2008 and 2009 rather than the two year carryback provision that was in place at the time 5 this meant that nols incurred during 2008 and 2009 could be applied toward a refund of taxes previously paid in the five years preceding the loss if the taxpayer elected to carry back an nol to the fifth preceding year the nol carryback was limited to 50 of the taxable income in the fifth preceding year however the remaining nol balance could be carried forward to the fourth preceding year and so on until the loss was fully exhausted 6 | |
what is a loss carryforward | a loss carryforward refers to an accounting technique that applies the current year s net operating loss nol to future years net income to reduce tax liability for example if a company experiences negative net operating income noi in year one but positive noi in subsequent years it can reduce future profits using the nol carryforward to record some or all of the loss from the first year in the subsequent years this results in lower taxable income in positive noi years reducing the amount the company owes the government in taxes loss carryforward can also refer to a capital loss carryforward investopedia ryan oakley | |
what are the rules for loss carryforwards | prior to the implementation of the tax cuts and jobs act tcja in 2018 the internal revenue service irs allowed businesses to carry net operating losses nol forward 20 years to net against future profits or backward two years for an immediate refund of previous taxes paid after 20 years any remaining losses expire and could no longer be used to reduce taxable income 1for tax years beginning jan 1 2018 or later the tcja has removed the two year carryback provision except for certain farming losses but allows for an indefinite carryforward period however the carryforwards are now limited to 80 of each subsequent year s net income losses originating in tax years beginning prior to jan 1 2018 are still subject to the former tax rules and any remaining losses will still expire after 20 years 1nol carryforwards are recorded as assets on the company s balance sheet they offer a benefit to the company in the form of future tax liability savings a deferred tax asset is created for the nol carryforward which is offset against net income in future years the deferred tax asset account is drawn down each year not to exceed 80 of net income in any one of the subsequent years until the balance is exhausted 1the nol carryforward provision relating to federal income taxes was originally introduced as part of the revenue act of 1918 some states have stricter limits for state income tax on carryforwards or carrybacks 2originally this federal income tax provision was intended to be a short lived benefit to companies incurring losses related to the sale of war related items in the post wwi era over the following years the provision s duration for carryovers has been extended decreased omitted and reinstated the purpose of keeping the provision was to smooth the tax burden for companies whose primary business is cyclical in nature but not in line with a standard tax year 2 | |
how can businesses use loss carryforwards | to use nol carryforwards effectively businesses should claim them as soon as possible the losses are not indexed with inflation and as a result each year the claim effectively becomes smaller for example if a business loses 100 000 in the current tax year although it may carry the loss forward for the next 20 years it is likely to have a larger impact the sooner it is claimed as a result of inflation it is most likely that 100 000 will have less buying power and less real value 20 years from now example of a loss carryforwardimagine a company lost 5 million one year and earned 6 million the next the carryover limit of 80 of 6 million is 4 8 million the full loss from the first year can be carried forward on the balance sheet to the second year as a deferred tax asset the loss limited to 80 of income in the second year can then be used in the second year as an expense on the income statement it lowers net income and therefore the taxable income for that year to 1 2 million a 200 000 deferred tax asset 5 million 4 8 million will remain on the balance sheet | |
how many years can a loss be carried forward | a business can carry a loss forward over 20 years with a carryover limit of 80 of each subsequent year s net income | |
how much loss can you write off in a loss carryforward | a company can write off 80 of each subsequent year s net income in a loss carryforward in this way if a company lost 10 million in one year and earned 12 million the following year it can carryover 9 6 million on the balance sheet in the second year this is then indicated as a deferred tax asset and is represented as an expense on the income statement the benefit is that it lowers the taxable income in the second year to 2 4 million | |
what is the difference between a loss carryforward and carryback | a loss carryforward allows a business to carryover a loss to the net operating income to reduce its tax liability this loss can be carried forward over the next 20 subsequent years by contrast a loss carryback allows a firm to apply a loss to a previous year s tax return this results in an immediate refund of the taxes paid in that year the bottom lineif a business reports a loss in a given year the carryforward tax provision allows this company to apply this loss to its future net operating income over the next 20 years this is one way that companies have the potential to significantly reduce their tax burden if they report positive net income over this time horizon importantly it is most effective to apply this loss sooner than later due to inflation impacting the purchasing power of money instead of waiting to carryforward a loss | |
what is loss development | loss development is the difference between the final losses recorded by an insurer and what the insurer originally recorded loss development seeks to account for the fact that some insurance claims take a long time to settle and that estimates of the total loss an insurer will experience will adjust as claims are finalized investopedia eliana rodgers | |
how loss development works | insurance companies use loss development factors in insurance pricing and reserving to adjust claims from their initial projected estimate to the final amount actually paid out after a successful claim insurers have to take a number of factors into account when determining what if any losses they may face from the insurance policies that they underwrite one of the most important factors is the amount of time that it takes to process a claim while claims may be reported processed and closed during a particular policy period they may also be reported in later policy periods and may not be settled for a long period of time this can make reporting complicated and at best based off an approximation of the loss that the insurer will ultimately experience reported but not settled rbns losses are those that have been reported to an insurance company that have not been settled by the end of the policy period rbns losses are initially calculated using an estimation of the severity of the loss based on the available information from the claims settlement process incurred but not reported ibnr is another type of reserve used in the insurance industry as the provision for claims and or events that have transpired but have not yet been reported to an insurance company in ibnr situations an actuary will estimate potential damages and the insurance company may decide to set up reserves to allocate funds for the expected losses insurance claims in long tailed lines such as liability insurance are often not paid immediately claims adjusters set initial case reserves for claims however it is often impossible to accurately predict what the final amount of an insurance claim will be for a variety of reasons loss development factors are used by actuaries underwriters and other insurance professionals to develop claim amounts to their estimated final value ultimate loss amounts are necessary for determining an insurance company s carried reserves they are also useful for determining adequate insurance premiums when loss experience is used as a rating factor a loss development factor ldf is used to adjust losses to account for claim increases the ldf is a number that is meant to adjust claims to their ultimate projected level for example an ldf of 2 0 means that for every 1 in claims the ultimate payout will be 2 if an insurer had 100 000 in current claims the ultimate payout would be 200 000 with an ldf of 2 0 loss amounts are key for pricing insurance premiums and determining carried reserves requirements for loss developmentinsurers use a loss development triangle when evaluating loss development the triangle compares loss development for a specific policy period over an extended period of time for example an insurer may look at loss development for the 2018 policy period at twelve month intervals over the course of five years this means that it will examine the 2018 loss development in 2018 2019 2020 2021 and 2022 insurers are required to report their financial position to state regulators who use these reports to determine whether an insurer is in good financial health or if there is a risk of insolvency regulators may use a loss development triangle to compare the percentage change across time periods and use this percentage when making estimates of its loss development for a particular insurer in upcoming periods if the rate of change fluctuates substantially over time the regulator may contact the insurer to find out why its loss estimates are off the mark | |
what is loss given default lgd | loss given default lgd is the estimated amount of money a bank or other financial institution loses when a borrower defaults on a loan lgd is depicted as a percentage of total exposure at the time of default or a single dollar value of potential loss a financial institution s total lgd is calculated after a review of all outstanding loans using cumulative losses and exposure understanding loss given default lgd banks and other financial institutions determine credit losses by analyzing actual loan defaults quantifying losses can be complex and require an analysis of several variables how credit losses are accounted for on a company s financial statements include determining both an allowance for credit losses and an allowance for doubtful accounts consider if bank a lends 2 million to company xyz and the company defaults bank a s loss is not necessarily 2 million other factors must be considered such as the amount of collateral whether installment payments have been made and whether the bank makes use of the court system for reparations from company xyz with these and other factors considered bank a may in reality have sustained a far smaller loss than the initial 2 million loan determining the amount of loss is an important and fairly common parameter in most risk models lgd is an essential component of the basel model basel ii a set of international banking regulations as it is used in the calculation of economic capital expected loss and regulatory capital the expected loss is calculated as a loan s lgd multiplied by both its probability of default pd and the financial institution s exposure at default ead loans with collateral known as secured debt greatly benefit the lender and can benefit the borrower through lower interest rates | |
how to calculate lgd | there are a number of different ways to calculate lgd a common variation considers the exposure at risk and recovery rate exposure at default is an estimated value that predicts the amount of loss a bank may experience when a debtor defaults on a loan the recovery rate is a risk adjusted measure to right size the default based on the likelihood of the outcome lgd in dollars exposure at risk ead 1 recovery rate another basic variation compares the potential net collectible proceeds to the outstanding debt this formula provides a general ratio of what portion of debt is expected to be lost lgd as percentage 1 potential sale proceeds outstanding debt of these two methods it is more common to see the first formula be used as it is more conservative approach to reflect the maximum potential loss it can often be difficult to assess what the potential sale proceeds are especially considering multiple collateral assets disposition costs timing of payments and liquidity of each asset loss given default lgd vs exposure at default ead exposure at default is the total value of a loan that a bank is exposed to when a borrower defaults for example if a borrower takes out a loan for 100 000 and two years later the amount left on the loan is 75 000 and the borrower defaults the exposure at default is 75 000 | |
when analyzing default risk banks will often calculate the ead on a loan as it aims to predict the amount the bank will be exposed to when a borrower defaults exposure at default constantly changes as a borrower pays down their loan | depending on the loan such as a mortgage or student loan there are a different number of days passed without payment that counts as a default make sure you are aware of the figure for your specific loan the main difference between lgd and ead is that lgd takes into consideration any recovery on the default for this reason ead is the more conservative measurement as it is the higher figure lgd is more often the best case scenario that relies on multiple assumptions for example if a borrower defaults on their remaining car loan the ead is the amount of the loan left they defaulted on now if a bank can then sell that car and recover a certain amount of the ead that will be taken into consideration to calculate lgd example of loss given default lgd imagine a borrower takes out a 400 000 loan for a condo after making installment payments on the loan for a few years the borrower begins to face financial difficulties it is estimated that the borrower has an 80 chance of default which means the recovery rate is 20 the outstanding loan balance is 300 000 and the bank will be able to sell the condo for 200 000 upon foreclosure to calculate the lgd in dollars compare the amount at risk to the likelihood of default in this situation the lender interprets 240 000 at risk of default lgd in dollars omitting collateral 300 000 1 0 20 240 000alternatively lgd can be calculated as a percentage that typically incorporates the value of the collateral although the formula above is easier to calculate it did not factor in the disposition proceeds of the condo in the event of default using the second variation the lender should anticipate losing 33 of their capital should the condo owner default when considering the collateral value lgd as percentage including collateral 1 200 000 300 000 33 33 | |
what does loss given default mean | loss given default lgd is the amount of money a financial institution loses when a borrower defaults on a loan after taking into consideration any recovery represented as a percentage of total exposure at the time of loss | |
what are pd and lgd | lgd is loss given default and refers to the amount of money a bank loses when a borrower defaults on a loan pd is the probability of default which measures the probability or likelihood that a borrower will default on their loan | |
what is the difference between ead and lgd | ead is exposure at default and represents the value of a loan that a bank is at risk of losing at the time a borrower defaults on their loan loss given default is the value of a loan that a bank is at the risk of losing after taking into proceeds from the sale of the asset represented as a percentage of total exposure can loss given default be zero loss given default can theoretically be zero when a financial institution is modeling lgd if the model believes that a full recovery on the loan is possible then the lgd can be zero this is usually not the case however | |
what is usage given default | usage given default is another term for exposure at default which is the total value left on a loan when the borrower defaults the bottom line | |
when making loans banks tend to reduce their risk as much as they can they evaluate a borrower and determine the risk factors of lending to that borrower including the probability of them defaulting on the loan and how much the bank stands to lose if they do default loss given default lgd probability of default pd and exposure at default ead are calculations that help banks quantify their potential losses | correction nov 3 2023 this article has been edited from a previous version that included an incorrect example of loss given default | |
what is a loss leader strategy | a loss leader strategy involves selling a product or service at a price that is not profitable but is sold to attract new customers or to sell additional products and services to those customers loss leading is a common practice when a business first enters a market a loss leader introduces new customers to a service or product in the hopes of building a customer base and securing future recurring revenue investopedia nono floresunderstanding a loss leader strategyloss leading can be a successful strategy if executed properly a classic example is razor blades gillette for example often gives their razor units away for free or at a low price knowing that customers must buy replacement blades which is where the company makes its profit 1 another example is microsoft s xbox one video game console the product was sold at a low margin per unit but microsoft knew that there was potential to profit from the sale of video games with higher margins and subscriptions to the company s xbox live service the loss leader strategy is common throughout the video game industry and in most cases consoles are sold for less than they cost to build 2 the loss leader strategy is also known as penetration pricing as the manufacturer attempts to penetrate the market by pricing its products low opponents of loss leader pricing practices argue that the strategy is predatory in nature and designed to force competitors out of business loss leaders and retail shopsboth brick and mortar stores and online shops use loss leader pricing strategies these businesses frequently price a few items so low that there is no profit margin the hope is that once the shopper buys the product from the store or the website the shopper will buy other products and become loyal to the brand unfortunately for business owners consumers sometimes leave without buying other products or subscribing to the brand this consumer practice of jumping from shop to shop and picking up loss leader items is called cherry picking some retailers place loss leaders at the back of their stores so consumers will have to walk by other more expensive products to get to them one of the most practiced examples of this is the sale of milk milk a common household item is often placed at the back of every grocery store requiring an individual to pass by almost every other item in a grocery store even if the shopper just came in the store to buy milk it is very likely they will purchase additional items as they walk by them on their way to the milk section and then back to the register resulting in increased sales for the shop loss leaders and introductory pricingintroductory pricing can also be a loss leader for example a credit card company may offer a low introductory rate to entice clients to use a card or transfer their existing balances then after snagging the client the company raises its interest rates similarly cable companies often offer low rates sometimes at a loss for an initial period to attract new customers or to lure customers away from competitors disadvantages of a loss leader strategyfor businesses that use a loss leader strategy the greatest risk is that clients may only take advantage of the loss leader pricing and not use any of the business s other products and services additionally some small business owners complain that they cannot compete with large corporations who can absorb the losses implicit in this strategy finally suppliers to companies who follow a loss leader strategy may experience pressure to keep their own prices low so that the company using a loss leader strategy can continue to do so | |
what is a loss payee | the loss payee is the party to whom the claim from a loss is to be paid a loss payee can mean several different things in the insurance industry the insured or the party entitled to payment is the loss payee the insured can expect reimbursement from the insurance carrier in the event of a loss a loss payee clause in an insurance policy would specify that any loss covered by the insurer would be paid to a third party payee and not the primary beneficiary the loss payee could be a lender in the case of a lien on a car or home lessor property owner or any other party with an interest in the insured s property 1 | |
how loss payees work | a loss payee also known as a loss payable can be different from first loss payee which is the party that must be paid first when a debtor defaults on a loan loss payee is simply a generic phrase signifying the rightful recipient of any kind of reimbursement and is most often used in the property casualty insurance industry 2 | |
when financing a vehicle purchase a buyer must agree to carry insurance on the secured property otherwise forced placed insurance becomes a possibility the financial institution making the loan typically insists that they are indicated as the loss payee on the insurance policy to protect themselves against loss | for example the loss payee section is a section on an auto insurance policy that lists your lender s name and address on the given collateral it is important to give the correct address for your lender as some insurance companies have multiple addresses the term loss payee is most often used in the auto insurance industry but is also used by other insurance sectors 1the lender will usually require verification of insurance coverage and the loss payee should be added as soon as you buy insurance for the covered vehicle this verification of insurance cannot be satisfied simply by an insurance id card it needs to be a declarations page the declarations page will have multiple pieces of crucial information listed for your lender explaining loss payee status | |
when listed as a loss payee the lender will receive notification of your insurance policy s status on a regular basis the notifications will inform the lender of all activities on your insurance policy for example the loss payee section of an auto insurance policy creates more than a direct link between your insurance company and your lender | since you are not the sole owner of the collateral claim checks will be payable to both you and the lender or directly to a repair shop in a total loss the lender will be paid first 3for the lender being listed as a loss payee ensures the lender will be compensated for their collateral regardless of potential losses the loss payee is essentially a safety net for the lender to reduce unpaid loans if you do not list your lender as the loss payee it is probable the lender will put forced placed insurance on your collateral 4 | |
what is a loss ratio | loss ratio is used in the insurance industry representing the ratio of losses to premiums earned losses in loss ratios include paid insurance claims and adjustment expenses the loss ratio formula is insurance claims paid plus adjustment expenses divided by total earned premiums for example if a company pays 80 in claims for every 160 in collected premiums the loss ratio would be 50 | |
how a loss ratio works | loss ratios vary depending on the type of insurance for example the loss ratio for health insurance tends to be higher than the loss ratio for property and casualty insurance loss ratios help assess the health and profitability of an insurance company a business collects premiums higher than amounts paid in claims and so high loss ratios may indicate that a business is in financial distress unlike auto and homeowners insurance under the aca health insurers do not retain the ability to adjust your insurance premiums based on submitted claims or your medical history types of loss ratiosa health insurance carrier that pays 8 in claims for every 10 in premiums collected has a medical cost ratio mcr of 80 under the affordable care act aca health insurance carriers were mandated to allocate a significant share of the premium to clinical services and the improvement of healthcare quality health insurance providers are required to divert 80 of premiums to claims and activities that improve the quality of care and offer more value to the plan s participants if an insurer fails to spend the required 80 on health care costs it will have to rebate excess funds back to the consumer businesses with commercial property and liability policies are expected to maintain adequate loss ratios otherwise they may face premium increases and cancellations consider a small used car dealer who pays 20 000 in annual premiums to insure their inventory a hailstorm causes 25 000 in damages for which the business owner submits a claim the insured s one year loss ratio becomes 25 000 20 000 or 125 to determine if and for what amount a premium increase is warranted carriers may review claims history and loss ratios for the past five years if the insured has a very brief tenure with the insurer the company may decide that the auto dealer presents an unacceptable future risk at that juncture the carrier may choose not to renew the policy loss ratio vs benefits expense ratiorelated to loss ratios are benefit expense ratios which compares an insurer s expenses for acquiring underwriting and servicing a policy by the net premium charged expenses can include employee wages agent and broker commissions dividends advertising legal fees and other general and administrative expenses g a an insurer will combine the benefit expense ratio with their loss ratio to arrive at a combined ratio while the benefit ratio looks at company expenses the loss to gain ratio looks at paid claims including adjustments compared to the net premium also due to the higher number of probable claims per period losses for healthcare providers will be higher than those for property or casualty insurance the combined ratio measures the flow of money out of a company through the payment of expenses and the total losses as they relate to the income from premiums | |
what is a loss reserve | a loss reserve is an estimate of an insurer s liability from future claims it will have to pay out on typically composed of liquid assets loss reserves allow an insurer to cover claims made against insurance policies that it underwrites estimating liabilities can be a complex undertaking insurers must take into account the duration of the insurance contract the type of insurance offered the odds of a claim being made and the time of it being resolved quickly insurers have to adjust their loss reserve calculations as circumstances change understanding a loss reserve | |
when an insurer underwrites a new policy it records a premium receivable which is an asset and a claim obligation which is a liability the liability is considered part of the unpaid losses account which represents the loss reserve | accounting for loss reserves involves complex calculations because losses can come at any time including years down the road for example a final settlement of litigation with a claimant may require a multi year court battle which would drain an insurance company s funds over a long period maintaining an adequate level of loss reserves puts an insurance company in a better financial position to pay out claims and any long legal battles calculating a loss reserveestimating the correct loss reserve is crucial for a company in maintaining its profitability and solvency if an insurance company is too conservative in their loss reserve calculation they will have allocated too much to the reserve reducing their income and the investment ability of assets 1 on the other hand if they are too liberal with their calculation then they will not have allocated enough to their reserves which would result in booking losses and possible insolvency for the company insurers prefer to use present value when calculating claims since it allows them to discount the future value of claim payments and realize how much they have to reserve today it also takes into consideration the years of interest earned on the reserves before having to pay out a claim this would technically reduce the liability amount however regulators require claims to be recorded at the actual value of the loss its nominal value the undiscounted loss reserve will be greater than the discounted loss reserve this regulatory requirement results in higher reported liabilities other impacts of loss reservesloss reserves also impact an insurance company s tax liabilities regulators determine an insurer s taxable income by taking the sum of annual premiums and subtracting any increases in loss reserves this calculation is called a loss reserve deduction income which is the insurer s underwriting income includes the loss reserve deduction plus investment income 2the incorporation of loss reserves into financial statements can often lead to the use of loss reserves for income smoothing the claims process can be complex so determining whether an insurer is using loss reserves to smooth income requires examining changes to the insurer s loss reserve errors relative to past investment income loss reserves and loanslending institutions also use loss reserves to manage their books and when applied to the banking industry are known as loan loss provisions which operate in the same fashion that loss reserves do for an insurance company for example consider bank abc that has made loans in the amount of 10 000 000 to various companies and individuals though bank abc works very hard to qualify the people to whom it grants loans some will inevitably default or fall behind and some loans will have to be renegotiated bank abc understands these realities and thus estimates that 2 of its loans or 200 000 will probably never be paid back this 200 000 estimate is bank abc s loan loss reserve and it records this reserve as a negative number on the asset portion of its balance sheet if bank abc decides to write all or a portion of a loan off it will remove the loan from its asset balance and also remove the amount of the write off from the loan loss reserve the amount deducted from the loan loss reserve may be tax deductible for bank abc | |
what is the lost decade | the lost decade is commonly used to describe a period in japan beginning in the 1990s during which economic stagnation became one of the longest running economic crises in recorded history later decades are also included in some definitions with the period from 1991 through 2011 or even through 2021 sometimes being referred to as japan s lost decades 1understanding the lost decadethe lost decade is a term initially coined to refer to the decade long economic crisis in japan during the 1990s japan s economy rose meteorically in the decades following world war ii peaking in the 1980s with the largest per capita gross national product gnp in the world japan s export led growth during this period attracted capital and helped drive a trade surplus with the u s to help offset global trade imbalances japan joined other major world economies in the plaza agreement in 1985 in accord with this agreement japan embarked on a period of loose monetary policy in the late 1980s this loose monetary policy led to increased speculation and a soaring stock market and real estate valuations in the early 1990s as it became apparent that the bubble was about to burst the japanese financial ministry raised interest rates and ultimately the stock market crashed and a debt crisis began halting economic growth and leading to what is now known as the lost decade 1 during the 1990s japan s gross domestic product gdp averaged 1 3 significantly lower as compared to other g 7 countries 2 household savings increased but that increase did not translate into demand resulting in deflation for the economy in the following decade japan s gdp growth averaged only 0 5 per year as sustained slow growth carried over right up until the global financial crisis and great recession 2 as a result many refer to the period between 1991 and 2010 as the lost score or the lost 20 years from 2011 to 2019 japan s gdp grew an average of just under 1 0 per year 2 and 2020 marked the onset of a new global recession as governments locked down economic activity in reaction to the covid 19 pandemic together the years from 1990 to the present are sometimes referred to as japan s lost decades the pain is expected to continue for japan according to research from the federal reserve bank of st louis recent growth rates imply that japan s gdp will double in 80 years when previously it doubled every 14 years 3 | |
what caused the lost decade | while there is some agreement on the events that led up to and precipitated the lost decade the causes for japan s sustained economic woes are still being debated once the bubble burst and the recession took place why did persist through successive years and decades demographic factors such as japan s aging population and the geopolitical rise of china and other east asian competitors may be underlying non economic factors researchers have produced papers delineating possible reasons why the japanese economy sank into prolonged stagnation keynesian economists have offered several demand side explanations paul krugman opined that japan was caught in a liquidity trap consumers were holding onto their savings because they feared that the economy was about to get worse 4 other research on the subject analyzed the role played by decreasing household wealth in causing the economic crisis 5 japan s lost decade a 2017 book blames a vertical investment saving curve for japan s problems 6monetarist economists have instead pointed to japan s monetary policy before and during the lost decade as too restrictive and not accommodative enough to restart growth milton friedman wrote in reference to japan that the surest road to a healthy economic recovery is to increase the rate of monetary growth to shift from tight money to easier money to a rate of monetary growth closer to that which prevailed in the golden 1980s but without again overdoing it that would make much needed financial and economic reforms far easier to achieve 7despite these various attempts keynesian and monetarist views on japan s extended economic malaise generally fall short japan s government has engaged in repeated rounds of massive fiscal deficit spending the keynesian s solution to economic depression and expansionary monetary policy the monetarist prescription without notable success this suggests that either the keynesian and monetarist explanations or solutions or both are likely mistaken austrian economists have on the contrary argued that a period of extended economic stagnation is not inconsistent with japan s economic policies that throughout the period acted to prop up existing firms and financial institutions rather than letting them fail and allowing entrepreneurs to reorganize them into new firms and industries they point to the repeated economic and financial bailouts as a cause of rather than a solution to japan s lost decades 8 | |
what is japan s gdp growth rate | as of the first quarter of 2024 japan s annual gdp growth rate stood at a negative 0 2 percent compared to the same period one year prior this indicates that the country s gdp contracted slightly rather than growing 9 | |
how big is japan s economy | as of 2024 japan boasts the world fourth largest economy behind the united states china and germany 10 the country s economy is characterized by a strong manufacturing sector and exports | |
what is japan s lost generation | the lost generation is a concept closely related to japan s lost decades the term refers to those japanese university graduates who entered the economy during the employment freezes characteristic of the lost decades this primarily includes people who graduated in the 1990s and 2000s as a consequence of these circumstances members of the lost generation may have had to take on low wage temporary work over stable employment with robust retirement benefits teeing up a potential pension crisis for the nation 11the bottom linethe lost decade also known as the lost decades refers to an extended stretch of economic stagnation in japan beginning in the early 1990s this era of poor economic performance has been characterized by low gdp growth recessions and deflation economists have posited multiple hypotheses to attempt to understand and explain the root causes and potential solutions of japan s economic downturn | |
what is a lost policy release lpr | a lost policy release lpr is a statement releasing an insurance company from its liabilities an lpr is signed by the insured party and signifies that the policy in question has been lost or destroyed or is being retained historically an insured party that wanted to cancel an insurance policy would have to produce the original insurance documents that the insurance company created when the policy was underwritten if the policy was lost or misplaced the insured would then have to demonstrate that the policy is still being canceled and this was done with a lost policy release the lost policy release is used to signify that the policyholder is canceling the policy intentionally understanding lost policy releases lpr lost policy releases generally have standard language that is a holdover from the past generally such releases carry the option of either releasing or cancelling a policy while they sound different both options are in effect the same lost policy releases are not necessary in most modern insurance cases and do not require mailing back the original policy documents the exception might be an auto insurer for instance that might get a policyholder to sign a lost policy release if they are switching over to a different auto insurance provider once this form is signed the insurer is no longer liable for reimbursing losses to the policyholder though this form would more than likely be filled out online different types of cancellation lost policy releases | |
when filling out the lost policy release also called a cancellation lost policy release the insured typically chooses between three types of cancellations flat pro rata and short rate | flat cancellations are used when the insurer was never exposed to risk because the coverage never went into effect in this case the premium is often refunded in full if an insurance policy is canceled before it is expired the insured may be eligible to receive a portion or all of the remaining unearned premium held by the insurer this is called a pro rata cancellation the unearned premium represents the money that an insurer has collected from the sale of the policy but which is set aside to cover the liability created when the policy was underwritten short rate cancellations are used when the insured fails to pay premiums and the insurance company requests that the policy be canceled lost policy releases may also be used if an insurer issues a replacement policy once a lost policy release is signed the insurer is no longer responsible for any claims made after the cancellation date on the policy being replaced however in such instances it may be smart to retain old policy documents just in case there is an issue that arises regarding the replacement insurance policy | |
what is a lot in securities trading | lots in securities and trading represent the number of units of a financial instrument that have been bought on an exchange the number of units is typically conveyed by the lot name a round lot is 100 shares in the stock market but investors don t have to buy round lots a lot can be any number of shares an odd lot is the term used when fewer than 100 shares are bought | |
how a lot works | investors and traders purchase and sell financial instruments in the capital markets with lots a lot is a fixed quantity of units that depends on the financial security being traded the typical lot size for stocks was round lots of 100 shares until the advent of online trading a round lot can also refer to a number of shares that can be evenly divided by 100 such as 300 1 200 or 15 500 shares 1odd lots and mixed lots are more common an odd lot is an order for less than 100 shares mixed lots are a number of shares above 100 but not divisible by 100 the round lot for exchange traded securities such as an exchange traded fund etf is 100 shares similar to stocks types of lotsthe exact nature of lots depends on what is being traded the bond market is dominated by institutional investors who buy debt from bond issuers in large sums a round lot for u s government and corporate bonds is considered to be 1 million in some circles but it can also be 100 000 this is the case with municipal bonds a trader or investor doesn t have to buy bonds in that quantity bonds typically have a face value of 1 000 to 10 000 and some are even lower an investor can buy as many bonds as they like but it may still be an odd lot a lot in terms of options represents the number of contracts contained in one derivative security one equity option contract represents 100 underlying shares of a company s stock the lot for one options contract is 100 shares let s say that an options trader purchased one bank of america bac call option last month the option has a strike price of 24 50 and it expires this month the options holder can purchase 100 shares of bac at the strike price of 24 50 if they exercise their call option today when the underlying stock is trading at 26 15 one option contract gives an investor the right to purchase the lot of 100 shares at the agreed strike price investors always know exactly how many units they re buying with each contract with this kind of standardization they can easily assess what price per unit they re paying valuing and trading options would be needlessly cumbersome and time consuming without such standardization the smallest options trade an investor can typically make is for one contract this represents 100 shares but it s possible to trade options for a smaller amount with mini stock options that have an underlying share amount of 10 2lots are known as contract sizes in the futures market the underlying asset of one futures contract could be an equity a bond interest rates a commodity an index or a currency the contract size varies depending on the type of contract that s being traded one futures contract for corn soybeans wheat or oats has a lot size of 5 000 bushels of the commodity 3 the lot unit for one canadian dollar futures contract is 100 000 cad it s 62 500 gbp for one british pound contract 12 500 000 jpy for one japanese yen contract and 125 000 eur for one euro futures contract 4the standard contract sizes for options and futures are fixed and non negotiable unlike stocks bonds and etfs in which odd lots can be purchased derivative traders who are purchasing and selling forward contracts can nonetheless customize the contract or lot size of these contracts because forwards are non standardized contracts that are created by the parties involved standardized lots are set by the exchange and they allow for greater liquidity in the financial markets increased liquidity comes with reduced spreads creating an efficient process for all participants involved there are micro mini and standard lots when trading currencies a micro lot is 1 000 of the base currency a mini lot is 10 000 and a standard lot is 100 000 it s possible to exchange currencies at a bank or currency exchange in amounts less than 1 000 but the smallest trade size is typically 1 000 unless expressed stated otherwise if you re trading through a foreign exchange broker 5 | |
is it better to invest in bonds or stocks | it can depend a great deal on your goals stocks might be more appropriate if you re planning to leave your money invested over a long period of time bonds tend to be safer in the short term but they ll most likely be worth less than stocks in the long term 6 | |
what is a lot in forex trading | a lot in terms of options represents 100 shares of the underlying stock but forex is traded in micro 1 000 of base currency mini 10 000 of base currency and standard lots of 100 000 | |
what are futures | a future is a contract to sell or buy a security at a future point in time at a price that s established at the time the contract is entered into the future date is often the time when the commodity will be delivered 7the bottom linetrading in lots isn t as much of a concern in the options and futures markets because you can trade any number of these contracts as you like each stock option will represent 100 shares and each futures contract controls the contract size of the underlying asset an investor can trade a minimum of 1 000 of the base currency in forex in any increment of 1 000 they could trade 1 451 000 14 standard lots five mini lots and one micro lot they can trade in odd lots of less than 100 shares in a stock trade the importance of lots depends a great deal on what you re trading | |
what is love money | love money refers to seed capital that has been extended by family or friends to an entrepreneur to start a business venture the decision to lend money and the terms of the agreement are usually based on the relationship between the two parties instead of a formulaic risk analysis understanding love moneylove money is usually given to entrepreneurs by family or friends when there are no other financial options available love money may be the only financing option for an entrepreneur who does not meet the criteria necessary to get credit or capital from traditional avenues like banks or other lenders love money may be used to start a new business or to provide an injection of capital to an existing business when required love money typically has no fixed repayment terms and can sometimes be given for equity in the venture love money may also be advanced as a loan or a convertible note with a more formal and structured agreement regardless of the structure it is recommended that investors only use risk capital money they are prepared to lose when providing love money investments to family and friends angel investors and love moneythe people who advance love money may also be considered angel investors but that is not always the case the term angel investors may refer to any high net worth individual who can afford to put money in a risky venture but it usually refers to accredited investors these investors will often inject cash into a new venture or when a business needs capital to continue its operations especially during the difficult early stages but they tend to have an expectation of returns and a set exit strategy to qualify as love money the angel investor would have to be in the entrepreneur s social network prior to investing | |
why is love money important | love money is crucial to many types of business ventures but is especially helpful for startups many of these businesses would never obtain financing through traditional means for many budding entrepreneurs love money is the best way to get off the ground that said love money is not always for first time entrepreneurs it can also be a great source of capital for people who are already established but cannot secure enough financing the more advanced a business is the more formal a love money investment is likely to be | |
does love money mean more or less stress | while it may seem easier to approach people you know for capital that does not necessarily mean it comes without stress and pressure in fact there may be an additional sense of responsibility toward your funders when you know them personally it is not always easy to mix business with pleasure so discussing the direction of the business and when and how you will repay the debt can be difficult both parties in a love money transaction should set out clear guidelines and expectations from the beginning in order to help alleviate the pressure and any future problems make sure both sides are aware of any legal consequences and considerations before any capital changes hands more importantly just like any other investor the funder should be aware of market conditions and the risks associated with investing in the business | |
what is a low exercise price option lepo | a low exercise price option lepo is a european style call option with an exercise price of one cent both buyer and seller operate on margin and because it is almost a certainty that the holder will exercise the option at maturity it is somewhat similar to a futures contract understanding a low exercise price option lepo lepos originated in switzerland and quickly spread to finland for the avoidance of paying the required stamp duties that were charged on stock trading since the strike price is so close to zero the investor purchasing the lepo gains most of the features of owning the share directly with the major exceptions of dividends and voting rights the australian stock exchange asx began listing lepo options in 1995 and as of july 2021 offers them on nearly 100 asx listed companies 12lepos differ from regular or standard options in several key ways conceptually lepos also act as forward contracts or futures standard options give the holder the right but not the obligation to purchase the underlying security at or before expiration however since the strike price is so low the odds that the option will expire itm and therefore automatically exercise at the expiration date are a near certainty essentially a lepo is a futures contract with the obligation to take delivery of course all options and futures may be sold to close out the position and avoid taking delivery of the underlying advantages and disadvantages of low exercise price options lepos since lepos are essentially a deep itm call option they have a very high delta value and trade similarly to the underlying stock because these options are of the european style meaning they are only able to be exercised at expiration their near zero strike price almost guarantees that the holder will take delivery of shares at that time the advantage over owning the stock outright is the participation in the performance of the underlying without any financial or legal issues caused by the direct holding of the stock deep itm options have very high premiums or initial costs however the investor holds lepos on margin resulting in a lower upfront cost again the benefits must be weighed against the disadvantages of having no claim on dividends or the ability to vote the shares | |
what is the low income housing tax credit | the low income housing tax credit lihtc is a tax incentive for housing developers to construct purchase or renovate rental housing for low income individuals and families the lihtc was written into the tax reform act of 1986 1the lihtc provides state and local agencies with the authority to distribute around 9 billion annually in federal tax credits for every dollar of tax credit received developers can reduce a dollar s worth of their federal income tax owed however the amount of tax credit available to each developer is determined by the number of low income housing units the developer plans to build 2to be eligible for low income rental housing properties applicants must find an eligible tax credit property and typically earn less than 60 of the area median income ami 3 | |
how the low income housing tax credit works | the lihtc is intended to stimulate the creation of more affordable housing for low and middle income families the lihtc program provides the cost reducing tax credit in return for developers agreeing to reserve a certain percentage of rent restricted units for lower income families 4there are two main types of federal tax credits available to developers these credits are applied over a ten year period after a building is placed into service and can cover almost the entirety of the taxable expense for the building according to federal law the tax credits are allocated to each state by the federal government from there each state may choose the developers that can take advantage of these credits for their housing projects 7not every developer or investor will be able to take advantage of this program as there are more applications than available permits issued for construction the number of affordable housing units that the lihtc led to the creation of between 1987 and 2022 according to the latest data from the u s department of housing and urban development hud 8 | |
how to qualify for the low income housing tax credit | a wide variety of properties can be eligible for the lihtc including single family homes duplexes apartment complexes and townhouses to qualify property owners investors or developers must meet specific requirements regarding the income levels of their tenants and the number of lower income units offered a project must meet one of the three income tests 9all projects receiving the lihtc must continue to meet one of these income conditions for a period of 15 years if the project doesn t comply the value of the tax credit can be reclaimed a frequent criticism of this program is that many properties in sought after areas often become unaffordable for low income families after the initial 15 year period support for people seeking low income housinglow income housing refers to any housing project or residential building that rents units out to tenants who qualify for reduced rent based on income and family size or who receive housing vouchers to help make their monthly rental payment low income housing units can either be operated by a housing authority or by private landlords who accept government payments along with the tenant s rental payment there are other types of support available for low income individuals and households such as housing subsidies provided by the department of housing and urban development hud the income qualifications can be found on hud s website and are subject to change as wages grow or decline in a given area to qualify a potential renter s income must be below 50 of the median income in their region while hud housing subsidies are available to single renters as well as families there are qualifications for room counts in prospective homes and single renters may be excluded from a housing project due to lack of availability of properly sized units low income housing should not be confused with affordable housing which is for families who are spending more than 30 of their income on housing | |
what is a low interest rate environment | a low interest rate environment occurs when the risk free rate of interest typically set by a central bank is lower than the historic average for a prolonged period of time in the united states the risk free rate is generally defined by the interest rate on treasury securities zero interest rates and negative interest rates are two extreme examples of low interest rate environments low interest rate environment explainedmuch of the developed world has experienced a low interest rate environment since 2009 as monetary authorities from around the globe cut interest rates to effectively 0 in order to stimulate economic growth and prevent deflation 1low interest rate environments are meant to stimulate economic growth by making it cheaper to borrow money to finance investment in both physical and financial assets one special form of low interest rates is negative interest rates this type of monetary policy is unconventional in that depositors must pay the central bank and in some cases private banks to hold their money rather than receiving interest on their deposits 2like anything else there are always two sides to every coin low interest rates can be both a boon and curse to those affected in general savers and lenders will tend to lose out while borrowers and investors benefit from low interest rates real world example of a low interest rate environmentas an example let us consider the interest rate environment in the united states from 1999 to 2021 the red line represents the risk free rate one year treasuries and the blue line is the fed funds rate both rates are often used to describe the risk free rate as the graph shows the period following the 2008 financial crisis until around 2017 represents a low interest rate environment with rates not only below historical norms but also very close to 0 meanwhile rates begin to rise in 2017 but in 2019 started to fall again and then in 2020 fell back close to 0 due to the covid 19 pandemic 34who benefits from a low interest rate environment the federal reserve lowers interest rates in order to stimulate growth during a period of economic decline that means that borrowing costs become cheaper a low interest rate environment is great for homeowners because it will reduce their monthly mortgage payment similarly prospective homeowners might be enticed into the market because of the cheaper costs low interest rates mean more spending money in consumers pockets that also means they may be willing to make larger purchases and will borrow more which spurs demand for household goods this is an added benefit to financial institutions because banks are able to lend more the environment also helps businesses make large purchases and boost their capital drawbacks of a low interest rate environmentjust as there are advantages to a low interest rate environment there are also drawbacks especially if the rates are kept extremely low for a long period of time lower borrowing rates mean investments are also affected so anyone putting money into a savings account or a similar vehicle won t see much of a return during this type of environment bank deposits will also drop but so will bank profitability because cheaper borrowing costs will result in a decrease in interest income these periods will increase the amount of debt people are willing to take on which could be a problem for both banks and consumers when interest rates begin to rise | |
what is a low no documentation loan | a low no documentation loan allows a potential borrower to apply for a mortgage while providing little or no information regarding their employment income or assets regulation of these loans has evolved significantly since 2008 but they remain an option for some borrowers in nontraditional financial situations 1 | |
how a low no documentation loan works | borrowers who seek out these products tend to have nontraditional income streams that may be more difficult to document in a traditional mortgage application examples might include alternative investments or self employment arrangements where the borrower minimizes income reporting for tax purposes lenders considering these loans tend to focus on the applicant s credit score ability to make a larger than normal down payment and nontraditional documentation such as bank statements interest rates on these loans tend to be higher than traditionally documented mortgages origins of the low no documentation loana low no documentation loan may sound like a throwback to the pre 2008 days of liar loans and subprime lending but it remains an option for some segments of the mortgage industry the term s origins do lie in the build up to the real estate crash of 2008 in the early and mid 2000s lenders who were feeling pressure to issue loans with more favorable terms loosened documentation requirements to the point that low documentation products became commonplace ninja loans were one class of these products ninja is an acronym for no income job or asset verification lenders often extended these loans to borrowers based purely on their credit scores without any further documentation of the individual s ability to make payments 2ninja and other low documentation loans along with subprime lending practices led directly to the crash of 2008 the housing market slowed in the mid 2000s and borrowers were increasingly unable to keep up with required payments regulatory responses to this meltdown included a 2008 rule enacted by the federal reserve through the truth in lending act tila that required lenders to verify a borrower s ability to make payments on any loan where a higher interest rate was imposed due to a weaker applicant profile the 2010 dodd frank wall street reform and consumer protection act followed and a modification to dodd frank known as the ability to repay rule was finalized by the consumer financial protection bureau cfpb in january 2013 this rule required lenders to adequately determine any borrower s ability to make required monthly mortgage payments lenders who failed to do so would be subject to penalties established by the u s congress 34many of the riskiest low no documentation loan categories such as ninja loans disappeared after the crash of 2008 and the passage of dodd frank the ability to repay rule however allowed some room for low documentation loans including a class known as alternative documentation loans 3a 2018 law repealing portions of the dodd frank act loosened standards for potential loans to be considered qualifying mortgages the ability to repay rule was not affected by this law but the law made it easier for borrowers to avoid the low documentation classification many smaller banks pushed for this adjustment arguing that the dodd frank restrictions were unnecessarily onerous on these banks they argued that national lenders had abandoned riskier loans that could prove beneficial to local communities and that smaller banks could support the recovery of real estate markets with more lenient lending practices 5 | |
what is a low volume pullback | a low volume pullback is a technical correction toward an area of support that occurs on lower than average volume since the move occurs on low volume traders often attribute the pullback to weak longs locking in profits rather than a reversal understanding low volume pullbacksfrequent moves that occur in the opposite direction of a trend which are accompanied by low volume are normal fluctuations and generally deemed to be insignificant on the other hand a large spike in volume in the opposite direction of the trend could be used to signal that the smart money is starting to look for the exits and the trend is getting ready to reverse these significant moves lower are known as high volume pullbacks trading low volume pullbacksmany technical traders will try to enter a position on the short term weakness seen in a low volume pullback because it increases the risk reward ratio as stop losses are closer to major support levels long term investors may also take these opportunities to add to their positions at a lower price and decrease the cost basis of their overall long positions which creates an opportunity for more upside traders will use indicators such as the on balance volume obv to find situations where the trend and the volume are diverging if the trend is moving higher and volume is decreasing trades may look for a potentially longer term reversal to occur since there are fewer longs responsible for pushing the stock higher high volume pullbacks are also a sign that the market may be ready to reverse in these instances long traders may exit their positions and long term investors may lock in some profits traders often look at many different factors when determining if a pullback is temporary or long term while volume is a reliable indicator it s also important to look at chart patterns such as key support and resistance levels and technical indicators like the relative strength index rsi or moving average convergence divergence macd to confirm these sentiments real world example of low volume pullbackshere s an example of a series of low volume pullbacks in the spdr s p 500 etf spy the chart shows three low volume pullbacks occurring within a significant uptrend before a high volume pullback that signaled a more prolonged reversal in price each low volume pullback was followed by a subsequent resumption of the overall trend as weak traders took profits off the table before more bullish investors entered the market by comparison the high volume pullback lasted for several days and the etf was considerably more volatile in the aftermath as investors questioned whether the long term trend was still in place investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is the lower of cost or market lcm method | the lower of cost or market lcm method states that when valuing a company s inventory it is recorded on the balance sheet at either the historical cost or the market value historical cost refers to the cost at which the inventory was purchased the value of a good can shift over time this holds significance because if the price at which the inventory can be sold falls below the net realizable value nrv of the item thus triggering a loss for the company then the lower of cost or market method can be employed to record the loss | |
why is the lower of cost or market lcm method used | the lower of cost or market lcm method lets companies record losses by writing down the value of the affected inventory items this value may be reduced to market value which is defined as the middle value when comparing the cost to replace the inventory the difference between the net realizable value and the typical profit on the item and the net realizable value of the item the amount by which the inventory item was written down is recorded under cost of goods sold on the balance sheet the lcm method is part of generally accepted accounting principles gaap used in the united states and in international commerce almost all assets enter the accounting system with a value equal to acquisition cost gaap prescribes many different methods for adjusting asset values in subsequent reporting periods in 2017 the financial accounting standards board fasb issued an update to its code and standards that affect companies that use the average cost and last in first out lifo methods of inventory accounting companies that use these two methods of inventory accounting must now use the lower of cost or net realizable value method which is more consistent with international financial reporting standards ifrs application of the lower of cost or market lcm rulethe lower of cost or market lcm rule traditionally applies to companies with products that become obsolete the rule also applies to products that lose value due to a dwindled current market price which is defined as the current cost of replacing outdated inventory provided that the market price isn t larger or smaller than the net realizable value which is essentially the projected selling price minus disposal fees the lcm rule was recently changed making things easier for businesses that do not use the retail method or the last in first out lifo method under the new guidelines the measurement can be solely restricted to the lower of cost or net realizable value | |
is the lower of cost or market lcm method required by generally accepted accounting principles gaap | yes the lcm method is required under gaap this method became required as of 2017 | |
what is the meaning of the lower of cost or market lcm method | the lower of cost or market lcm method is used to value inventory by comparing the original cost and the current market price and recording the cost of inventory by whichever is lower this method is typically applicable to companies that hold inventories for extended periods when inventory has declined in cost or if inventory has gone obsolete | |
what inventory costing methods are allowed by gaap | along with the lower of cost or market lcm method being required by gaap reporting other inventory costing methods allowed by gaap are the bottom linethe lower of cost or market lcm method is a conservative accounting principle used to value a company s inventory while the lcm method may result in lower profits and lower taxes it provides a more accurate picture of a company s financial health companies should carefully consider the lcm method when valuing their inventory to ensure that their financial statements are transparent and accurate | |
what is a loyalty program | loyalty programs sponsored by retailers and other businesses offer rewards discounts and other special incentives as a way to attract and retain customers they are designed to encourage repeat business offering people a reward for store brand loyalty hence the name typically the more often a customer patronizes the merchant and the more they spend the greater their rewards | |
how a loyalty program works | loyalty program incentives vary typical incentives include to join a loyalty program also known as a rewards program or points program customers typically register their personal information with the company and are given a unique identifier such as a numerical id or membership card they use that identifier when making a purchase purpose of a loyalty programloyalty programs provide two key functions they reward customers for their repeated patronage and they provide the issuing company with a wealth of consumer information and data while companies can evaluate anonymous purchases the use of a loyalty program offers additional details on the type of products that may be purchased together and whether certain incentives are more effective than others loyalty programs particularly apply to high volume businesses that thrive on return customers and since it s more expensive to acquire a new customer than to sell to an existing one the prospect of creating a loyal following is fundamental to adding value | |
when these programs are integrated into the customer s everyday routine they can cultivate true brand loyalty often customers get invested in the program and they will stick to a hotel store restaurant credit card or airline because of points or rewards they ve accrued in its loyalty program more than anything else | retail loyalty programs can trace their roots to the stamp or boxtop collection and redemption programs that date back to the 1890s however the modern model was born with airlines frequent flyer programs american airlines s aadvantage launched in 1981 was the first united airlines s mileage plus debuted shortly afterward 12example of a loyalty programloyalty programs like everything else have joined the digital age interestingly they are incorporating tech not just as a means of purchasing things to get rewards but as a source of rewards themselves urging patrons to text or instagram photos for points or offering a discount if they shop via the merchant s new app the starbucks sbux rewards program remains the default case study of how a brand can retain customers through interactive offers the app operates much like any other rewards program in that customers earn points called stars to use for future coffee purchases 3it differentiates itself from other loyalty systems by providing customers with a convenient way to order ahead pay in store and even access exclusive music playlists for the most part the app solidifies starbucks as a basic necessity for every coffee drinker if you add funds via the app onto your digital rewards card you ll earn stars twice as fast starbucks says 3loyalty program alternativesloyalty programs aren t the only way to win customers allegiance retailers like costco cost and amazon amzn have achieved great customer loyalty through membership programs 45even though they carry an out of pocket cost many shoppers happily pay the annual fees to access the variety of products free shipping in amazon s case and other perks and privileges offered by the two retailers and for those who take advantage of all the available services included in a membership the benefits can often outweigh the costs 54 | |
what are examples of loyalty programs | many companies have loyalty programs some of the most common include starbucks rewards the north face xplr pass sephora beauty insider uber rewards expedia rewards and chick fil a one | |
what are the different types of loyalty programs | loyalty programs can function with different methods the most implemented ones are points programs tier programs paid programs and value programs points programs allow customers to earn points when they spend and the points can then be redeemed at a later date tier programs allow customers different benefits depending on their rank which they can earn after reaching spending limits paid programs allow customers to receive immediate benefits after paying a fee value programs donate to charity or other causes rather than providing benefits directly to the customer |
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