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what is positive economics in simple terms | positive economics is the objective analysis of the economic study this involves investigating what has happened and what is happening allowing economists to predict what will happen in the future positive economics is tangible so anything that can be substantiated with a fact such as the inflation rate the unemployment rate housing market statistics and consumer spending are examples of positive economics | |
what are the differences between positive and normative economics | while positive economics is a branch of economics that relies on objective data normative economics is based on subjective information the latter is based on value judgments that stem from opinions and personal feelings rather than analysis positive economics deals in what is compared to normative economics which relies on what economic behavior should be | |
what is a positive versus normative statement | there are big distinctions between positive and normative statements positive statements are objective theories that can be tested normative statements on the other hand are subjective they involve the use of opinions and value judgments and are often based on personal opinions | |
what are examples of normative economics | normative economics is represented by anything that is subjective and value based this means we can use the information we have at our disposal to say what should be in the future for instance we can use data from earnings to say that corporations should pay more in taxes and we can use the cost of living with current wages to make opinions on the minimum wage the branch of economic theory called welfare economics is an example of normative economics the leading thinkers in this area early on were abram bergson and nobel prize winning economist kenneth arrow the bottom lineeconomics is considered an art and a science because it combines the use of objective fact with subjective judgments positive economics is an objective branch of study that allows conclusions to be made using verifiable facts normative economics on the other hand deals with opinions based on those facts although it may seem like the best option no society truly functions on a positive economic stances in fact combining both positive and normative economics may be the best approach when policymakers develop new solutions | |
what is positive pay | the term positive pay refers to an automated cash management service used by financial institutions to deter check fraud banks use positive pay to match checks issued by companies with those it presents for payment checks that are considered suspicious are sent back to the issuer for examination the system acts as a form of insurance against fraud losses and other liabilities to the bank there is generally a charge incurred for using the positive pay system although some banks now offer the service for a reduced fee or free | |
how does positive pay work | positive pay is a service provided by financial institutions to their customers clients enrolled in the program have special fraud detection services to protect their accounts the system matches the date check number dollar amount and account number of each check presented against a list provided by the company to protect against forged altered and counterfeit checks the payee may also be included on the list of checks if these do not match the bank won t clear the check when security checks are not put in place identity thieves and fraudsters can create counterfeit checks that may end up being honored | |
when the information doesn t match the check the bank notifies the customer through an exception report withholding payment until the company advises the bank to either accept or reject the check the bank can also flag the check notify a representative at the company and seek permission to clear the check | companies should thoroughly review the terms and conditions of their financial institution as banks may not be responsible for fraudulent checks if the company finds only a slight error or other minor problem it can also choose to advise the bank to clear the check if the company forgets to send a list to the bank all checks presented that should have been included may be rejected which could cause some financial problems here s a step by step breakdown of the process positive pay vs reverse positive paya variation on the concept of positive pay is the reverse positive pay system this system requires the issuer to monitor the checks it writes on its own in the reverse positive pay system it s the company s responsibility to alert the bank to decline a certain check as such the bank provides the company with daily notifications about all presented checks and clears only those that are approved by the company if the company does not respond within a fairly short time the bank will typically go ahead and cash the check s in question this method is not as reliable and effective as positive pay but it is cheaper preventing frauddigital wallets and other new forms of financial technology are changing the way people bank which means fewer checks are being written but check fraud still exists in fact the threat from check fraud hovered around 66 in 2020 banks reported losses of about 1 500 per item 1 so it should come as no surprise that financial fraudsters are still finding ways to scam others out of their money using checks services like the positive pay system can help prevent fraud companies can ensure that every check that goes through their account is properly vetted because they are matched against a list provided to the bank not only is this a step against fraud prevention but it also ensures efficiency the bank can cash or reject checks without any delays any items that are deemed suspicious are held aside for further review as exception items this means that the proper control is in place even when there are questionable documents that are presented to be cashed nothing goes through without the proper verification the total percent of business to business transactions that were initiated through checks 1positive pay fees and costthe fees associated with positive pay depend on where you bank your relationship with the financial institution the type of customer you are high net worth retail small business or large corporation and in some cases the value of your company s net worth some banks offer the service for free while others may charge their clients on a per use basis in these cases banks charge a flat fee for every item they may have to verify still there are other banks that offer it for a monthly service charge these banks may offer a limit to the number of transactions they ll verify or they may provide unlimited positive pay services there may be other fees that come with the service on top of the costs of adding the service to your account these can include if you re interested in the service ask your bank or financial professional about how much it costs to enroll and whether there are any additional fees advantages and disadvantages of positive payjust like any additional financial service positive pay comes with both benefits and drawbacks it s always a good idea to do your research weigh the pros and cons and ensure it makes the most sense for you fraud control and preventionmay also cover ach transactionsavoid hassle of closing opening accountsincreased control and decreased losstime consumingrisk of missed deadlinescostenrolling in and adding positive pay can provide individuals and companies with an additional layer of protection for their bank accounts while many banks often try to do their due diligence when it comes to preventing fraud there may be instances where bad checks fall through the cracks services like this can help cut back if not prevent check fraud positive pay can provide protection against fraud associated with traditional paper checks and with automated clearing house ach debit transactions banks may offer these services separately or in a plan that covers both another benefit is that it eliminates the need to close affected accounts and open new ones this can be cumbersome and lead to unnecessary paperwork clients can assume control of their finances and accounts by enrolling in positive pay this alleviates a third party namely the bank from taking control and clearing checks that you or your business never wrote this decreases the chance of losses while it does allow you as a client to take control of your financial affairs there is an obvious negative that is you ll need more time to devote to positive pay first you are required to take the time to make a list to provide to the bank you must also be available to verify any exception items that the bank may present to you most banks give their clients a certain amount of time to respond to queries about exceptions and other questionable items if you fail to respond on time the bank may either cash or reject the check this may obviously be a problem especially if you wanted it to take the opposite action another disadvantage is the cost like insurance if you enroll in positive pay you may be paying for something that you never end up needing or you may pay for it and find that it saves you large amounts of money and time spent dealing with fraud whether it s a worthwhile cost will depend on your bank your business and your finances | |
how does positive pay work | positive pay is a check fraud prevention tool checks are matched and cross referenced with a list provided by the client including the date check number dollar amount and account number any suspicious items are verified with the client | |
what is a positive pay file | a positive pay file is a complete list of checks that a company or other entity writes against its accounts during a certain period of time this list is provided to the company s bank when they are enrolled in the positive pay program to prevent and eliminate check fraud | |
how expensive is the positive pay service | the costs associated with the positive pay system depend entirely on where you bank other factors can also affect the fees including your relationship with the bank the type of client you are and your net worth some banks offer the service for free while others charge monthly fees or offer it on a per use basis the bottom linealthough check use is dropping thanks to new banking technologies check fraud continues to threaten businesses and banks but there are ways that you can ensure your account is protected the positive pay system can help banks alert you to the possibility of fraudulent checks before they go through your account when you sign up you ll be expected to provide your bank with a list of checks you write so the bank can cash those items and hold or reject those that aren t on the list check the costs and fees with your bank before you enroll | |
what is the post money valuation | post money valuation is a company s estimated worth after outside financing and or capital injections are added to its balance sheet post money valuation refers to the approximate market value given to a start up after a round of financing from venture capitalists or angel investors have been completed valuations that are calculated before these funds are added are called pre money valuations the post money valuation is equal to the pre money valuation plus the amount of any new equity received from outside investors understanding post money valuationinvestors such as venture capitalists and angel investors use pre money valuations to determine the amount of equity they need to secure in exchange for any capital injection for example assume a company has a 100 million pre money valuation a venture capitalist puts 25 million into the company creating a post money valuation of 125 million the 100 million pre money valuation plus the investor s 25 million in a very basic scenario the investor would then have a 20 interest in the company since 25 million is equal to one fifth of the post money valuation of 125 million the scenario above assumes that the venture capitalist and the entrepreneur are in total agreement about the pre and post money valuations in reality there is a lot of negotiation particularly when companies are small with relatively little in the way of assets or intellectual property as private companies grow they are better able to dictate the terms of their financing round valuations but not all companies reach this point importance of post money valuation to financing roundsin subsequent rounds of financing of a growing private company dilution becomes an issue careful founders and early investors to the extent possible will take care in negotiating terms that balance new equity with acceptable dilution levels additional equity raises may involve liquidation preferences from preferred stock other types of financing such as warrants convertible notes and stock options must be considered if applicable in dilution calculations in a new equity raise if the pre money valuation is greater than the last post money valuation it is called an up round a down round is the opposite when pre money valuation is lower than post money valuation founders and existing investors are finely attuned to up and down round scenarios this is because financing in a down round usually results in dilution for existing investors in real terms as a result financing in a down round is often seen as somewhat desperate on the part of the company financing in an up round however there is less reluctance as the company is seen as growing towards the future valuation it will hold on the open market when it eventually goes public there is also a situation called a flat round where the pre money valuation for the round and the post money valuation of the previous round are roughly equal as with a down round venture capitalists usually prefer to see signs of an increasing valuation before putting in more money for related reading see pre money vs post money what s the difference | |
what is post trade processing | post trade processing occurs after a trade is complete at this point the buyer and the seller compare trade details approve the transaction change records of ownership and arrange for the transfer of securities and cash post trade processing is especially important in markets that are not standardized such as the over the counter otc markets | |
how post trade processing works | post trade processing is important in that it verifies the details of a transaction markets and prices move fast transactions are executed quickly often instantaneously many securities trades are done over the phone the ability for mistakes is inherent despite traders skill increasingly trades are executed at high frequency by computers only the chance for small mistakes to compound remains high post trade processing allows the buyer and seller of securities to root out and rectify these errors in addition to matching the details of the buy and sell orders post trade processing includes shifting records of ownership and authorizing payment trade clearing and settlementafter a trade is executed the transaction enters what is known as the settlement period during settlement the buyer must make payment for the securities they purchased while the seller must deliver the security that was acquired depending on the type of security settlement dates will vary as an example of how settlement dates work let s say that an investor buys shares of amazon amzn on monday june 3 2024 the broker will debit the investor s account for the total cost of the order immediately after it s filled but the status as a shareholder of amazon will not be settled in the company s record books for the investor until tuesday june 4 at that time the investor would become a shareholder of record once the trade has settled and the funds in any sale of stock or another type of security have been credited to your account the investor may choose to withdraw the funds reinvest in new security or hold the amount in cash within the account for those looking to cash out some of the profits or what s left from a loss check to see if your broker offers transfers to your bank account using the automated clearing house ach or by using a wire transfer the settlement period for post trade processing of stocks and several other exchange traded assets effective may 28 2024 the sec shortened the settlement period from t 2 to t 1 days to reflect improvements in technology increased trading volumes and changes in investment products and the trading landscape 1clearing is the process of reconciling purchases and sales of various options futures or securities as well as the direct transfer of funds from one financial institution to another the process validates the availability of the appropriate funds records the transfer and in the case of securities ensures the delivery of the security to the buyer non cleared trades can result in settlement risk and if trades do not clear accounting errors will arise where real money can be lost an out trade is a trade that cannot be placed because it was received by an exchange with conflicting information the associated clearinghouse cannot settle the trade because the data submitted by parties on both sides of the transaction is inconsistent or contradictory examples of post trade processingon the nyse bonds platform following trade completions all depository trust clearing corporation dtcc national securities clearing corporation nscc regional interface organization rio eligible bond trades are sent to nscc in order to match trade details of both buyers and respective sellers details are transmitted through the rio 2post trade services have come to the forefront as a means for financial firms to diversify their revenue streams due to a combination of heightened regulations standardization of derivatives and increasingly complex processing measures to accommodate the growth of alternative assets post trade services are an area in which some firms have a chance to outstrip competitors | |
is anything being done to shorten post trade processing | yes in may 2024 the sec shortened the clearing time for most stock trades to t 1 it is exploring the feasibility of same day settlement or t 0 3 | |
why does the trade date differ from the settlement date for stocks | if you buy or sell shares of stock or other securities the settlement date will typically be one day after the actual trade date this is because it takes time for the post trade processing clearing and settlement of the trade barriers to same day settlement include older systems still in place to reconcile asset ownership and payment between exchanges clearing firms and brokerages 4 | |
what kinds of securities currently clear t 1 t 0 | most stocks etfs corporate bonds municipal bonds listed options and government securities clear t 1 5 spot fx trades typically settle t 2 t 1 for usd cad 6 certificates of deposit cds and commercial paper settle t 0 | |
what is a posterior probability | a posterior probability in bayesian statistics is the revised or updated probability of an event occurring after taking into consideration new information the posterior probability is calculated by updating the prior probability using bayes theorem in statistical terms the posterior probability is the probability of event a occurring given that event b has occurred bayes theorem formulathe formula to calculate a posterior probability of a occurring given that b occurred p a b p a b p b p a p b a p b where a b events p b a the probability of b occurring given that a is true p a and p b the probabilities of a occurring and b occurring independently of each other begin aligned p a mid b frac p a cap b p b frac p a times p b mid a p b textbf where a b text events p b mid a text the probability of b occurring given that a text is true p a text and p b text the probabilities of a occurring text and b occurring independently of each other end aligned p a b p b p a b p b p a p b a where a b eventsp b a the probability of b occurring given that ais truep a and p b the probabilities of a occurringand b occurring independently of each other the posterior probability is thus the resulting distribution p a b 1 | |
what does a posterior probability tell you | bayes theorem can be used in many applications such as medicine finance and economics in finance bayes theorem can be used to update a previous belief once new information is obtained prior probability represents what is originally believed before new evidence is introduced and posterior probability takes this new information into account posterior probability distributions should be a better reflection of the underlying truth of a data generating process than the prior probability since the posterior included more information a posterior probability can subsequently become a prior for a new updated posterior probability as new information arises and is incorporated into the analysis | |
what is poverty | the term poverty refers to the state or condition in which people or communities lack the financial resources and other essentials for a minimum standard of living as such they cannot meet their basic human needs people and families who live in poverty may go without proper housing clean water healthy food and medical attention each nation may have its own criteria for determining the poverty line and counting how many of its people live in poverty poverty is a socioeconomic condition that is the result of multiple factors not just income these factors include race sexual identity sexual orientation and access to education among others understanding povertypoverty refers to the lack of adequate financial resources such that individuals households and entire communities don t have the means to subsist or to acquire the basic necessities for a flourishing life this absence of means can result in struggles to obtain food clothing shelter and medicine poverty is both an individual concern as well as a broader social problem at the individual or household level not being able to make ends meet can lead to a range of social physical and mental issues at the societal level high poverty rates can be a damper on economic growth and be associated with problems like crime unemployment urban decay poor education and poor public health governments often put social welfare programs in place to help lift individuals families and communities out of poverty some countries have stronger welfare states social safety nets than others for instance the united states tends to be much more individualistic and has relatively limited welfare programs european countries in comparison have a much broader range of welfare programs and supports for those in need according to the latest census the number of people in the u s who lived in poverty in 2022 or 11 5 of the nation s population 1aspects of povertypoverty status in the u s is assigned to people whose income falls under a certain threshold which is set by the department of health and human services hhs 2 u s poverty rates or the percentage of the u s population living in poverty are calculated by the u s census bureau 3 | |
when measuring poverty the census bureau excludes the following people | each year the census bureau updates its poverty threshold statistics the table below shows the 2022 income thresholds for those in poverty each column represents the number of people living in a household under the age of 18 poverty thresholds as well as the number of children under the age of 18 in a home are important because they help determine how government aid such as food assistance and medical care should be allocated 6 the measurement for those in poverty uses pretax income or income before taxes are taken out by the internal revenue service irs 4poverty has decreased in developed countries since the industrial revolution increased production reduced the cost of goods making them more affordable while advancements in agriculture increased crop yields as well as food production the international poverty line is a monetary threshold under which an individual is considered to be living in poverty this figure is calculated by taking the poverty threshold from each country given the value of the goods needed to sustain one adult and converting it into u s dollars the current international poverty line is 2 15 per day 7many people around the globe still struggle to make ends meet according to the world bank an estimated 700 6 million people lived in extreme poverty in september 2023 8it s estimated that more than 40 of the world s population lives in poverty with the u s scoring the worst among developed nations according to a report published in the journal frontiers in public health communities of color are more susceptible to poverty because of racist notions of racial inferiority and frequent denial of the structural forms of racism and classism globally and within the u s 9covid 19 was responsible for plunging roughly 100 million more people into extreme poverty according to the world bank 10the impact of poverty on children is substantial children who grow up in poverty typically suffer from severe and frequent health problems infants born into poverty have an increased chance of low birth weight which can lead to physical and mental disabilities 11in certain developing countries poverty stricken infants are nine times more likely to die in their first month compared to babies born in high income countries 1213 those who live may have hearing and vision problems children in poverty tend to miss more school due to sickness and endure more stress at home homelessness is particularly hard on children because they often have little to no access to healthcare and lack proper nutrition which often results in frequent health issues | |
what causes poverty | poverty is a difficult cycle to break and can pass from one generation to the next it is often determined by socioeconomic status ethnicity gender and geography many people are born into poverty and have little hope of overcoming it others may fall into poverty because of negative economic conditions natural disasters or surging living costs as well as drug addiction depression and mental health issues other root causes of poverty include for those able to move out of poverty progress is often temporary economic shocks food insecurity and climate change threaten their gains and may force them back into poverty typical consequences of poverty include alcohol and substance abuse little to no access to education poor housing and living conditions and increased levels of disease access to good schools healthcare electricity clean drinking water and other critical services remains elusive for many in poverty heightened poverty is likely to cause increased tensions in society as inequality increases and in turn lead to rising crime rates discrimination and povertyas noted above poverty isn t simply related to income levels in fact there are a number of factors that can push people to or below the poverty line discrimination is just one of them in some cases governments may pass certain laws and regulations that prevent certain individuals or communities from accessing services such as healthcare education or social services these people may also be denied access to the labor market or housing which can prevent them from reaching a suitable standard of living in other cases deep rooted societal beliefs can isolate individuals families and entire communities some of the most common groups of people who may experience this type of discrimination include according to the most recent statistics from the williams institute at the ucla school of law poverty rates among members of the lgbtq community have dropped since the covid 19 pandemic but rates are still higher than for those who don t identify as lgbtq the most recent report showed that the report also indicated that lgbtq people of color notably black latinx hispanic native hawaiian pacific islander nh pi american indian alaskan native ai an and multiracial people are more likely to experience poverty compared to white or asian americans 14 | |
how poverty is measured | poverty is commonly measured using income thresholds in many countries centralized bodies like the census bureau collect data and update the information on an annual basis based on inflation this information which in the u s is reported through the consumer price index for all urban consumers cpi u generally includes income thresholds compiled from different sizes and types of families or households each family member in a household that falls under the threshold is considered to be in poverty according to the census bureau 4certain types of individuals are not included in the count as their level of poverty cannot be determined these groups include keep in mind that using income thresholds is just one way that countries measure poverty | |
how to reduce poverty | the united nations and the world bank are major advocates of reducing world poverty the world bank has an ambitious target of reducing poverty to less than 3 of the global population by 2030 10 some of the actionable plans to eliminate poverty include the following for poverty to be eradicated as the world bank intends communities governments and corporations need to collaborate to implement strategies that improve living conditions for the world s poor some of these strategies may include boosting socioeconomic conditions fighting and eliminating systemic racism establishing minimum wages that align with the cost of living providing paid leave and promoting pay equity | |
what countries have the highest poverty rates | the countries with the highest poverty rates include south sudan 82 30 equatorial guinea 76 80 madagascar 70 70 central african republic 68 80 and burundi 64 09 16 | |
which states have the highest poverty rates | as of 2024 the states with the highest poverty rates were louisiana 19 60 mississippi 19 40 new mexico 18 40 west virginia 16 80 and kentucky 16 50 the district of columbia s poverty rate is 16 50 17can poverty be solved the answer to this question is complicated and nuanced social welfare programs and private philanthropy are some avenues through which to provide for those in poverty along with access to essentials like clean water good food and adequate healthcare however more is needed programs that encourage and help impoverished individuals to obtain skills jobs and education are crucial for a longer term cure the bottom linepoverty is defined as the state or condition where people and communities cannot meet a minimum standard of living because they lack the proper resources these include but aren t limited to financial resources basic healthcare and education clean drinking water and infrastructure living in the socioeconomic condition of poverty is a result of multiple factors such as race sexual identity sexual orientation and access to education among others organizations such as the united nations and the world bank which believe that poverty will continue to grow well beyond 2030 urge nations to fight it by implementing policies and regulations that can drastically improve the quality of living for all communities | |
what is a poverty trap | a poverty trap is a mechanism that makes it very difficult for people to escape poverty a poverty trap is created when an economic system requires a significant amount of capital to escape poverty when individuals lack this capital they may also find it difficult to acquire it creating a self reinforcing cycle of poverty understanding poverty trapsmany factors contribute to creating a poverty trap including limited access to credit and capital markets extreme environmental degradation which depletes agricultural production potential corrupt governance capital flight poor education systems disease ecology lack of public healthcare war and poor infrastructure in order to escape the poverty trap it is argued that individuals in poverty must be given sufficient aid so that they can acquire the critical mass of capital necessary to raise themselves out of poverty this theory helps to explain why certain aid programs that do not provide a high enough level of support may be ineffective at raising individuals from poverty if those in poverty do not acquire the critical mass of capital they will simply remain dependent on aid indefinitely and regress if aid is ended 2recent research has increasingly focused on the role of other factors such as healthcare in sustaining the poverty trap for a society researchers at the national bureau of economic research nber found that countries with poorer health conditions tend to be mired in a cycle of poverty as compared to others with similar educational attainments 3researchers at the university of florida in gainesville collected economic and disease data from 83 of the world s least and most developed countries they found that people living in areas with limited human animal and crop disease were able to lift themselves out of the poverty trap as compared to people who lived in areas with rampant disease 4types of poverty trapspoverty traps can vary in their underlying causes and characteristics but they all share the common feature of perpetuating poverty or making it difficult for individuals or communities to escape poverty here is an overview of the various types of poverty traps economic poverty traps are characterized by low income and limited economic opportunities people in these traps may face challenges such as unemployment or underemployment low wages and lack of access to credit or financial services this makes it difficult for them to save invest or escape poverty because they are often living hand to mouth struggling to meet their basic needs geographic poverty traps occur in areas that are geographically isolated or marginalized these regions may lack essential infrastructure like roads electricity and clean water making it hard for residents to access education healthcare and job opportunities limited connectivity to markets and resources can further perpetuate poverty in these areas health related poverty traps are linked to poor health and inadequate healthcare access individuals in these traps often face chronic illnesses lack of preventive care or insufficient treatment options medical expenses can drain their limited resources and ill health can limit their ability to work and earn a stable income educational poverty traps stem from inadequate access to quality education high dropout rates lack of schools and limited educational opportunities hinder individuals ability to acquire skills and knowledge necessary for better employment prospects without education they may remain trapped in low paying low skilled jobs social factors such as discrimination social exclusion or limited social support networks can create social poverty traps these factors may restrict individuals access to resources opportunities and social mobility discrimination based on factors like race gender or ethnicity can perpetuate inequality and poverty and social factors can perpetuate other types of poverty traps listed within this section generational poverty traps occur when poverty is passed down from one generation to the next within families children born into impoverished households may face limited access to quality education healthcare and proper nutrition these individuals may also face barriers or limitations based on debts or financial limitations passed down from generation to generation institutional poverty traps are related to weak governance corruption and ineffective institutions inadequate rule of law lack of property rights protection and rampant corruption can stifle economic growth discourage entrepreneurship and hinder access to essential services like healthcare and education these institutional weaknesses can keep individuals and communities in poverty poverty traps are often the subject of political debate some believe the government has a responsibility to alleviate poverty traps while others believe markets should evolve on their own the public and private role in addressing the poverty trapin his book the end of poverty economic possibilities for our time jeffrey sachs recommends that as a way of combating the poverty trap aid agencies should function as venture capitalists that fund startup companies 1sachs proposes that just like any other startup developing nations should receive the full amount of aid necessary for them to begin to reverse the poverty trap he points out that the extremely poor lack six major kinds of capital human capital business capital infrastructure natural capital public institutional capital and knowledge capital sachs added in his book sachs postulates that the public sector should concentrate its efforts on investing in business capital investments sachs says should be the domain of the private sector which he claims would more efficiently use the funding to develop the profitable enterprises necessary to sustain growth enough to lift an entire population and culture out of poverty 1solutions to overcome poverty trapswith sachs context in mind let s dig deeper into potential solutions that could overtake poverty traps bear in mind that this list is not meant to be exhaustive in addition this list is meant to be a high level overview of potential strategies whose success may ebb and flow over time investing in education is often cited as being crucial for breaking the poverty cycle quality education with well trained teachers updated curriculum and modern facilities ensures that children have the skills and knowledge needed for better job opportunities equitable distribution of educational opportunities particularly for marginalized groups is vital for addressing inequality additionally vocational and technical training programs prepare individuals for skilled employment which can be a pathway out of poverty via better job opportunities access to affordable healthcare services is an essential poverty reduction strategy establishing and maintaining healthcare facilities especially in underserved areas guarantees access to medical services preventive care measures such as immunizations and health education reduce the prevalence of diseases and lower healthcare costs in the long run expanding health insurance coverage is crucial to protect low income individuals and families from the financial burden of healthcare expenses investing in basic infrastructure like roads electricity and water supply improves living conditions and stimulates economic activity this is especially true in remote or marginalized areas that may have a lack of physical accessibility for resources and access this development facilitates growth to markets education healthcare and professional opportunities poverty traps may be alleviated by increasing financing and credit accessibility microfinance institutions can provide small loans to aspiring entrepreneurs and small business owners who lack access to traditional banking services these loans enable individuals to invest in income generating activities and improve their economic prospects in addition expanding access to formal banking services savings accounts and insurance products for marginalized populations promotes financial inclusion promoting gender equality and women s empowerment is not only a human rights issue but also a key driver of poverty reduction when women have equal access to education economic opportunities and leadership roles entire communities can benefit effective anti discrimination laws and policies can also protect the rights of minority groups and promote social inclusion transparent governance the rule of law and accountability are crucial for reducing corruption and ensuring equitable resource allocation independent anti corruption agencies can investigate and prosecute corruption cases discouraging corrupt practices in addition advocacy efforts push for policy changes and reforms at various levels to address the root causes of poverty and promote equity and inclusion according to world bank group the number of individuals in extreme poverty rose to over 700 million people during the pandemic and may be around 685 million at the end of 2022 during the pandemic the global extreme poverty rate reached 9 3 6examples of a poverty trapone of the most important considerations in studying the poverty trap is the amount of government aid necessary to lift a family out of their present conditions consider the case of a family of four made up of parents and two children who are below legal working age the family has an annual income of 24 000 with the parents working in jobs that pay 10 per hour according to the latest federal poverty guidelines a family of four is considered to be poor if its income is less than 30 000 7in a simple case let us assume that the government begins handing out aid amounting to 1 000 per month this raises the family s annual income to 36 000 while it is capped at 1 000 the government aid decreases in proportion to increases in the family s income for example if the family s earnings increase by 500 to 2500 per month government aid reduces by 500 the parents would have to work an extra 50 hours in order to make up for the shortfall the increase in working hours comes at an opportunity and leisure cost to the parents for example they might end up spending less time with their children or may have to hire babysitters for the time that they are out of the home the extra hours also mean that the parents will not have the leisure to upgrade their skill sets for a better paying job the aid amount also does not take into account living conditions for the family because they are poor the family lives in one of the most dangerous neighborhoods in the city and does not have access to proper healthcare facilities in turn crime or susceptibility to disease could drive up their average monthly spending making an increase in the family s income effectively useless in the real world the case of rwanda a country wracked by genocide and civil war until recently is often held up as an example of a nation that tackled the poverty trap by identifying factors beyond income the african country focused on healthcare and insurance to increase the average daily calorie intake 8however certain researchers charge the country s government with reducing the measurement threshold in order to make rwanda rate better on poverty statistics 9 | |
what causes poverty traps | there are several factors that make it difficult for people to escape poverty a lack of access to capital is a major contributor to poverty traps as is poor education infrastructure and healthcare | |
why is it so hard to get out of poverty | many of the things that can help pull people out of poverty require the one thing poor people don t have money for example without money it s difficult to get a decent education and acquire new skills to boost job prospects and earnings potential spare time to address issues and boost wellbeing is also in short supply as every hour spent not sleeping is dedicated to earning money and surviving | |
how many people in the u s live in poverty | according to the united states census bureau 37 9 million people in the u s lived in poverty in 2022 which represents 11 5 of the population 10the bottom linepoverty traps are self perpetuating cycles of poverty where individuals or communities struggle to escape the reasons for poverty cycles may include low income limited access to education healthcare and limited economic opportunities these factors reinforce one another trapping people in a cycle of deprivation and hindering their ability to break free from poverty without external interventions and support however there are numerous ways to break poverty traps and solutions to promote economic and financial equity for all | |
what is the power distance index pdi | the power distance index pdi is a measurement of the acceptance of a hierarchy of power and wealth by the individuals who make up the general population of a nation culture or business developed by dutch social psychologist geert hofstede the pdi ultimately provides insight into the extent to which regular citizens or subordinates accept or challenge the authority of the person or people in charge hofstede s pdi is lower in countries and organizations where authority figures work closely with subordinates the pdi is higher in places with a strong hierarchy understanding the power distance index pdi the power distance index focuses on increasing understanding between people from different cultures in a business setting an american car manufacturer planning to open a factor in latvia for example will find that latvians tend to show respect and deference towards management but younger workers in particular value an open and collaborative work environment latvia s pdi is a relatively low 44 highly structured businesses societies and institutions have high indices a high index indicates that the hierarchy is clearly defined present and unchallenged a low index indicates a less rigid or authoritarian system the people in a low index society or group are willing to challenge authority and readily interact with authority figures in the expectation that they can influence decisions 1the power distance index is one component of hofstede s cultural dimensions theory which was the first attempt to quantify the differences among cultures this theory is now applied extensively in fields including cross cultural psychology cross cultural communication and international business 1driven by factor analysis the cultural dimensions theory in its original form was based on the results of hofstede s global survey of the values of ibm employees testing and collection of the results were conducted between 1967 and 1973 2based on these and other results hofstede determined that there are six distinct dimensions to every culture power distance uncertainty avoidance individualism versus collectivism short term versus long term masculinity versus femininity and self restraint versus indulgence 3the pdi of the united states1the original model had only four dimensions but was later expanded to six long term versus short term was added after hofstede performed independent research in hong kong and indulgence versus self restraint was added in 2010 2business and the pdihofstede s theory gained considerable notoriety because of its analysis and conclusions about cultural and national differences it has been particularly influential in the business world with the growth of the global economy the pdi and the factors that contribute to it have been used to foster an understanding of cultural differences and how they affect international business dealings the differences in perception of power seem particularly relevant during business negotiations for example austria has a power distance index of approximately 11 while many arab nations have indices of around 80 employing austrian business practices or management styles in an arab country may be counterproductive or at the very least can produce a degree of culture shock 1the united states by the way has a pdi of 40 1 | |
does the u s have a high or low pdi | the u s has a pdi of 40 according to the power distance index this relatively low score is seen as reflecting a focus on equal rights in american business it concludes managers rely on individuals and teams and management is accessible to employees communication is informal direct and participative | |
what nation has a very high pdi | russia has a very high pdi of 93 power holders are remote from the people political and financial power are highly centralized in moscow any business interactions are expected to take a top down approach | |
which nation has a very low pdi | denmark scores an 18 on the pdi scale danes do not lead the summary states they coach and employee autonomy is required danes have a highly egalitarian mind set and expect to be consulted not ordered around the bottom linethe power distance index can provide useful information to people doing business abroad about the work culture of foreign employees however one should be careful to avoid over generalizing or using these metrics to stereotype other cultures it may be true that some cultures are more or less deferential to authority structures but that doesn t mean that they re less capable of independent thought and aspirations not only would such generalizations be grossly offensive they could also lead to bad business decisions | |
what is a power of attorney poa | a power of attorney poa is a legal authorization that gives the agent or attorney in fact the authority to act on behalf of an individual referred to as the principal the agent may be given broad or limited authority to make decisions about the principal s property finances investments or medical care poas can be financial or they can pertain to health care both provide the attorney in fact with general or limited powers | |
how a power of attorney poa works | a power of attorney is a legal document that binds the agent or attorney in fact and the principal it s used in the event of a principal s temporary or permanent illness or disability or when they can t sign necessary documents 1 both parties must sign the document and a third party is usually required to witness it most poa documents authorize the agent to represent the principal in all property and financial matters as long as the principal s mental state of mind is good the agreement automatically ends if the principal becomes incapable of making decisions for themself 2a power of attorney can end for several reasons such as when the principal revokes the agreement or dies when a court invalidates it or when the agent can no longer carry out the responsibilities outlined in the agreement in the case of a married couple the authorization may be invalidated if the principal and the agent divorce someone who wants the power of attorney to remain in effect after their health deteriorates should sign a durable power of attorney dpoa this remains in force even if the person they re representing becomes mentally or physically incapacitated but it doesn t persist after the principal s death the authority is also voided if the power of attorney isn t designated as durable and the client becomes mentally incapacitated 3there are many good reasons to make a power of attorney because it ensures that someone will look after your financial affairs if you become incapacitated but signing a poa that grants broad authority to an agent is very much like signing a blank check types of powers of attorneya durable poa takes effect when the document is signed and continues in the case of incapacitation of the principal a springing power of attorney comes into effect only if and when the principal becomes incapacitated a power of attorney may also be limited to only medical matters enabling the agent to make crucial decisions on behalf of an incapacitated person 3the two key types of poas are financial and health care health care power of attorney hcpoa the principal can sign a durable health care poa hcpoa if they want an agent to have the power to make health related decisions for them this document is also called a health care proxy it outlines the principal s consent to give the agent poa privileges in the event of an unfortunate medical condition this poa kicks in when the principal can no longer make health related decisions on their own 3financial power of attorneya financial poa allows an agent to manage the business and financial affairs of the principal such as signing checks filing tax returns depositing social security checks and managing investment accounts when and if the principal becomes unable to understand or make decisions the agent must carry out the principal s wishes to the best of their ability at least to the extent of what the agreement spells out as being the agent s responsibility a financial poa can give the agent a wide range of power over the principal s bank account including the ability to make deposits and withdrawals sign checks and make or change beneficiary designations financial poas can be divided up into several categories this poa allows the agent to act on behalf of the principal in all matters as allowed by state law the agent under such an agreement may be authorized to handle bank accounts sign checks sell property manage assets and file taxes for the principal 3a limited power of attorney gives the agent the power to act on behalf of the principal in specific matters or events it might explicitly state that the agent is only permitted to manage the principal s retirement accounts this type of poa may be in effect for a specific period the authorization might be effective only for two years if the principal will be out of the country for that length of time 1a durable poa dpoa remains in control of certain legal property or financial matters that are specifically spelled out in the agreement even if and when the principal becomes mentally incapacitated a dpoa can pay medical bills on behalf of the principal but the durable agent can t make decisions related to the principal s health such as taking them off life support 3the conditions for which a durable poa may become active are set up in a document called a springing power of attorney a springing poa defines the kind of event or level of incapacitation that should occur before the dpoa springs into effect 3a power of attorney can remain dormant until a negative health occurrence activates it to a dpoa a springing power of attorney should be very carefully worded to avoid any problems in identifying precisely when and if the triggering event has happened an individual who s appointed as the agent in a power of attorney is not necessarily an attorney the person could be a trusted family member friend or acquaintance 1 | |
how to set up a power of attorney | you can buy or download a poa template but be sure it s for your state because requirements can differ there s no standard poa form for all 50 states although all states do accept some version of a durable power of attorney 1a few key powers cannot be delegated including the right to make amend or revoke a will or contract a marriage in most states although a handful of states do allow this you can t delegate the power to vote but the guardian can request a ballot on behalf of the principal some rules generally apply in all states and jurisdictions some regions of the country accept oral poa grants but verbal instruction isn t a reliable substitute for spelling out the terms word for word on paper written clarity helps to avoid arguments and confusion later at a crucial time decide what powers you want to grant and prepare a poa that s specific to that desire the poa must also satisfy the requirements of your state perform an internet search or ask a local estate planning professional to help you find a form that will be accepted by a court of law in the state where you live the best option is to seek the help of an attorney a poa can be as broad or as limited as the principal wishes but each of the powers granted must be clear even if the principal grants the agent a general poa the principal can t grant sweeping nonspecific authority such as i delegate all things having to do with my life a poa terminates if the principal becomes incapacitated in most states the only way an agent can keep their power if this happens is if the poa is written with an indication that it s durable this designation makes it last for the principal s lifetime unless the principal revokes it powers of attorney must be notarized in most states it s potentially easier for the agent if a notary s seal and signature are on the document even in states that don t require it some states require that specific kinds of poas be filed with a court or government office before they can be made valid so look into the rules where you live ohio requires that any poa used to grant grandparents guardianship over a child must be filed with the juvenile court 4 it also requires that a poa that transfers real estate must be recorded by the county in which the property is located 5not all powers of attorney must be formally recorded or filed but it s a standard practice for many estate planners and individuals who want to create a record that the document exists file it with your state or county to be on the safe side you can start the process of establishing a power of attorney by locating a lawyer who specializes in family or estate law in your state legal services offices that are staffed with credentialed attorneys exist in virtually every part of the united states if attorney fees are more than you can afford visit the legal services corporation s website and use the get legal help search function clients who qualify will receive pro bono cost free assistance 6choosing an agenta poa grants immense ownership authority and responsibility it s a matter of life and death in the case of a medical poa you could find yourself facing financial privation or bankruptcy if you end up with a mishandled or abused durable poa choose your agent with the greatest care to ensure your wishes are carried out to the greatest extent possible it s critical to name someone who is both trustworthy and capable to serve as your agent any mistakes may be difficult to correct and there may be a danger of self dealing depending on the extent of the powers you grant an agent may have access to your bank accounts the power to make gifts and transfer your funds and the ability to sell your property your agent can be any competent adult including a professional such as an attorney accountant or banker but they may also be a family member such as a spouse an adult child or another relative naming a family member as your agent saves the fees a professional would charge and may also keep confidential information about your finances and other private matters in the family parents who create poas often choose their adult children to serve as their agents the relative youth of the child is an advantage when the purpose of the poa is to relieve a parent of the burden of managing the details of financial and investment affairs or provide management for their affairs should they become incapacitated a spouse who is near the same age as the person creating the poa may come to suffer the same debilities that led the poa s creator to establish the poa in the first place a child who is honest capable and who respects the parent s desires can be a good choice for an agent but there may be complications parents may struggle with the decision of who to select if they have more than one child the good news is that you can have multiple poas naming separate agents and customize them for each child s skill set temperament and ability to act on your behalf specific abilities of your children may make them best suited to take on particular roles in managing your affairs you can use limited poas to give each child different defined and limited power over specific aspects of your finances more than one agent can be named in a poa either with the authority to act separately or they can be required to act jointly having two agents who are separately authorized to manage routine items can be a convenience if one becomes unavailable for some reason requiring two or more to agree on major actions like selling a house can ensure family agreement over major decisions but naming multiple agents can cause problems if disputes arise between them an investment account may be effectively frozen if two agents are required to act jointly in managing it but they disagree as to how to do so be sure that your chosen agents not only have the skills for the task but personalities to cooperate a general poa enables the agent to act with the authority of the poa s creator in all matters a special poa can limit that authority to a specific subject such as managing an investment account or to a limited time when the creator of the poa is unavailable maybe one of your agents is a busy financial expert who lives in a distant city and another works part time and lives conveniently close by you can have one poa that names the first to manage your investment portfolio and another that names the second to manage your routine daily expenses if necessary and pay your monthly bills risks and precautionsperiodically review and update the poas you ve created when and if family circumstances change you can cancel a poa by simply writing a letter that identifies it and states that you re revoking it then delivering the letter to your former agent some states require such a letter to be notarized it s also a good idea to send copies to third parties with whom the agent may have acted on your behalf then create a new poa and deliver it to your new choice of an agent 3a power of attorney can provide you with both convenience and protection by giving a trusted individual the legal authority to act on your behalf and in your interests adult children who are both trustworthy and capable of accomplishing your wishes may make the best agents but don t name a person simply because they re related to you trusted professional advisors such as lawyers accountants and doctors can help you understand the wisdom and necessity of adopting poas you can do so gradually if you aren t comfortable granting broad powers all at once but don t delay there could be costly consequences because the grantor must be mentally competent to create a power of attorney it s too late to create a poa if you lose the capacity to manage your affairs court proceedings may be required at that point it would become necessary for someone to go to court to ask to be named as your conservator or guardian a process that may prove costly and slow it could also be contested leading to family conflicts make sure the poa requires that the agent periodically report all actions taken to a trusted third party whom family members agree upon such as the family s lawyer or accountant you can also name two agents and require they agree on major transactions such as the sale of a home nobody may have the right to take individual retirement account ira distributions the parent needs for income borrow funds to pay medical bills or deal with the internal revenue service irs concerning the parent s taxes can somebody with power of attorney do anything they please no the scope of legal authority that s granted by a poa is laid out when it s established the person who is granted power of attorney has a legal fiduciary duty to make decisions that are in the best interests of the person they re representing 3can next of kin override a power of attorney no next of kin or other family members do not have any legal authority to override or nullify an existing power of attorney | |
how can i revoke a power of attorney that i ve given to someone | power of attorney can be terminated if you expressly revoke it it may also have a set termination date or duration of time for which it s in force a poa will also end if you become mentally incapacitated unless it is a durable power of attorney all powers of attorney cease if you die 3who can i name to have power of attorney you can technically name anybody as your agent as long as it s done under your free will and you re mentally competent 1 it should be somebody trustworthy and capable such as a spouse close family member or friend you can also designate your lawyer to have a poa the bottom linecreating a power of attorney and specifying how it will operate even if you lose your ability to think or function ensures that you ll have a plan in place for overseeing your financial affairs and health directives if and when you re unable to do so be sure to choose somebody you trust and who will be able to faithfully carry out their responsibilities on your behalf | |
what is pre foreclosure | pre foreclosure refers to the first phase of a legal proceeding that ultimately can conclude in a property being repossessed from a defaulted borrower the lender files a notice of default on the property in pre foreclosure because the borrowing owner exceeds the contractual terms for delinquent payments a notice of default informs the borrowing owner that the lender is pursuing legal actions toward foreclosure borrowers have a few options available if they find themselves in pre foreclosure lenders may even be willing to negotiate with them to avoid moving to the foreclosure phase | |
what is a pre ipo placement | a pre initial public offering ipo placement is a private sale of large blocks of shares before a stock is listed on a public exchange the buyers are typically private equity firms hedge funds and other institutions willing to buy large stakes in the firm due to the size of the investments being made and the risks involved the buyers in a pre ipo placement usually get a discount from the price stated in the prospective for the ipo understanding the pre ipo placementfrom the perspective of a young company a pre ipo placement is a way to raise money before going public it also is a way to offset the risk that the ipo price will prove to be optimistic and the price will not go up immediately after it opens moreover and often investors in these private sales are institutional investors and help the company with governance matters and getting institutionalized before going ipo from the buyer s perspective the amount per share may be discounted from the expected ipo price but there is no way to know the price per share that the market will actually pay in fact the purchase is typically made without a prospectus and with no guarantee that the public listing will occur the discounted price is compensation for this uncertainty not many individual investors take part in pre ipo placements they are generally restricted to 708 investors as the irs calls them these are high net worth individuals with a sophisticated knowledge of the financial markets the company however does not want these private buyers to immediately sell all their shares if their stock soars once it opens on an exchange to prevent this a lock up period is generally attached to the placement preventing the buyer from selling shares in the short term an example of pre ipo placementplenty of investors were excited about the impending ipo of alibaba group the e commerce conglomerate based in china when it announced it would be listed on the new york stock exchange as baba in september 2014 in advance of its public debut alibaba opened up a pre ipo placement for large funds and wealthy private investors one of the buyers was ozi amanat a venture capitalist based in singapore he purchased a block of 35 million of pre ipo shares at a price below 60 per share and then allocated the shares among asian investors who had ties to his fund k2 global pre ipo placements are generally open only to high net worth individuals with a sophisticated knowledge of the financial markets on its first day of public trading baba closed just below 90 per share as of the start of november 2020 it was trading at above 276 per share you might suspect that alibaba s management regretted that pre ipo placement however the money paid by amanat and other investors ensured that the company had adequate funding before its ipo and mitigated the risk for alibaba that the ipo would not be as successful as the company hoped and it certainly worked out well for amanat s clients | |
what is pre market trading | pre market trading is the period of trading activity that occurs before the regular market session the pre market trading session typically occurs between 8 a m and 9 30 a m est each trading day many investors and traders watch the pre market trading activity to judge the strength and direction of the market in anticipation of the regular trading session pre market trading can only be executed with limited orders through an electronic market like an alternative trading system ats or electronic communication network ecn market makers are not permitted to execute orders until the 9 30 a m est opening bell 1understanding pre market tradingpre market trading activity generally has limited volume and liquidity therefore large bid ask spreads are common 1 many retail brokers offer pre market trading but may limit the types of orders that can be made during the pre market period several direct access brokers allow access to pre market trading to commence as early as 4 a m est from monday through friday it is important to remember there is very little activity for most stocks so early in the morning unless there is news the liquidity is also extremely thin with most stocks only showing stub quotes index based exchange traded funds etfs such as the spdr s p 500 etf spy have moving quotes due to the trading in the s p 500 futures contracts many of the most widely held top holdings in benchmark indices may also get movement in the event of a significant gap up or down in the s p 500 futures large cap widely held stocks such as apple inc aapl tend to get trades as early as 4 15 a m est 2after hours trading was introduced before pre market trading the new york stock exchange nyse introduced after hours trading in june 1991 by extending trading hours by an hour the move was a response to increased competition from international exchanges in london and tokyo and private exchanges which offered more hours of trading and 2 24 million shares changed hands in two sessions of trading 3 over the years as exchanges became increasingly computerized and the internet s reach spread across borders nyse began extending the number of hours of trading available for trading eventually allowing pre market trading between the hours of 4 a m and 9 30 a m 4pre market trading benefitspre market trading and after hours trading collectively known as extended hours trading share similar benefits and risks let s look at the benefits first pre market trading riskswe now turn to the risks of pre market trading which include these risks mean that only experienced traders should consider trading in the pre market because the odds are stacked against retail traders seasoned traders have the knowledge and experience to gauge the many nuances that make trading a challenge such as assessing whether the pre market reaction to the news is an under reaction or over reaction and taking decisive action on trading matters like opening a new stock position or closing an existing one setting limit prices at certain levels for buys and sells etc | |
when does pre market trading begin | pre market trading can start as early as 4 a m est although most of it takes place from 8 a m est and before regular trading commences at 9 30 a m est 54 | |
what securities can be traded in the pre market session options | generally only listed stocks can be traded in the pre market session not all stocks though stocks such as those that have a limited float or are not widely held or small cap stocks may not have sufficient volumes to make pre market trading a viable proposition options cannot be traded in the pre market session | |
do online brokers offer pre market trading | almost all online brokers offer pre market trading although the hours differ from one broker to the other here s a sample of pre market trading hours at select online brokers as of dec 21 2021 note that these hours may be subject to change can a limit order from pre market trading carry over into the regular session in most cases limit orders from pre market trading are only valid for that particular session and if not executed do not carry over into the regular session however interactive brokers permits limit or stop limit type orders that can be active in all trading sessions including pre market regular trading hours rth and after market for such orders the attribute allow outside rth needs to be added 9 | |
why are extended trading hours necessary | extended trading hours enable investors to react to news and events when the markets are closed it is also a convenient way to trade for people who cannot buy and sell securities during the regular trading session | |
what is the nasdaq 100 pre market indicator | the nasdaq 100 pre market indicator is calculated based on the last sale of nasdaq 100 securities during the pre market trading period of 4 a m to 9 30 a m est for nasdaq 100 securities that do not trade in the pre market the calculation uses the last sale from the previous day s 4 p m closing price the nasdaq 100 pre market indicator and after hours indicator are useful gauges of market sentiment during extended trading hours 12 | |
is 24 hour trading for stocks going to be a reality soon | the 24 hour trading that is a feature of the foreign exchange and cryptocurrency markets may come to equity markets within the next few years on february 6 2024 24x national exchange submitted to the securities and exchange commission a form 1 application under the securities exchange act of 1934 seeking registration as a national securities exchange the intention is that 24x allows equities trading 24 hours a day 7 days per week 365 days a year 24x has proposed specific rules to govern trading outside of regular trading hours 13 | |
what is predatory pricing | predatory pricing is the illegal business practice of setting prices for a product unrealistically low in order to eliminate the competition predatory pricing violates antitrust laws as its goal is to create a monopoly however the practice can be difficult to prosecute defendants may argue that lowering prices is a normal business practice in a competitive market rather than a deliberate attempt to undermine the marketplace predatory pricing doesn t always work since the predator is losing revenue as well as the competition the predator must raise prices eventually at that point new competitors will emerge understanding predatory pricingto understand how predatory pricing affects markets and eventually consumers it is necessary to take a longer view consumers enjoy the short term benefits of competitive pricing heightened competition creates a buyer s market in which the consumer enjoys lower prices increased leverage and wider choice however if one company cuts its prices unrealistically low or even below cost other competitors will be forced to abandon the market at that point the advantages for consumers quickly evaporate or even reverse a monopolistic marketplace allows a single producer to raise prices safe in the knowledge that the consumer has no alternatives workers also suffer as the company that retains a monopoly has no competition to drive up wages 1the effects of predatory pricingin order to drive all rivals out of a business the predator must cut prices below their manufacturing costs once the initial competitors have been eliminated the predatory company will raise prices back to normal or above normal this disadvantages consumers at first who have no alternatives to the higher pricing however it also creates an opportunity for new rival companies to emerge or for old competitors to re enter the market at this point they can offer competitive prices that are equal to or lower than the original predatory company s eventually consumers may be given more choices again however if the company s monopoly has grown past a certain point it may no longer be feasible for new companies to emerge creating a permanent monopoly in that market the challenges of predatory pricingfortunately for consumers predatory pricing isn t an easy strategy to pull off eliminating all rivals in a given market comes with considerable risk for instance if a town has many gas stations any one of them could attract more business by cutting prices deeply sustaining those prices long enough to kill off the competition is harder even if a company can use predatory pricing to drive competitors out of business the strategy will succeed only if the revenue lost through predatory pricing can be recouped quickly as soon as the sole gas station raises its prices to normal levels other competitors will spot an opportunity and step in dumping as predatory pricingdumping is a form of predatory pricing practiced by businesses attempting to dominate a foreign market typically businesses that practice dumping sell their products in a foreign market for cheaper than they can at home an increasingly global marketplace has added a new risk to those attempting to dump products some dumped goods are bought abroad and then shipped back to the home country to be sold at higher prices a famous cautionary tale from the early 20th century involved dumping by a german cartel that controlled the european market for bromine then an essential ingredient in many medicines and a vital element in photography after the american company dow chemical started exporting competitively priced bromine to europe the germans retaliated by exporting bromine to the u s for sale at below their manufacturing cost 2dow responded by simply buying the bromine stateside at the dumped price and reselling it profitably in europe which allowed the company to strengthen its european customer base at the expense of the german cartel 2legal risks of predatory pricingprosecution of predatory pricing is difficult given that the prosecutors are trying to prove that low prices can be a bad thing and even an illegal one the federal trade commission ftc says it examines allegations of predatory pricing carefully but that the courts have been skeptical of such claims the u s department of justice doj has asserted that predatory pricing is a real problem and that courts have adopted an overly cautious view of the practice a high bar has been set on antitrust claims in general the u s supreme court has required that plaintiffs show a likelihood that the pricing practices will affect not only rivals but also competition in the market as a whole to establish that there is a substantial probability that the attempt to monopolize will succeed further the court established that predatory pricing must be not just aggressively low but actually below the seller s cost it is not illegal for a business to set prices below its costs for reasons other than having a specific strategy to eliminate competitors example of predatory pricingone of the most active areas of enforcement against predatory pricing is the u s government s effort to crack down on exporters who sell their products too cheaply in the u s the international trade commission of the commerce department defines too cheaply as less than fair market value any u s company can file a petition against any foreign company that it believes is selling its goods at less than fair market value current complaints under review include a wide range of products from many countries from frozen shrimp and steel nails shipped from india to lemon juice from south korea if the international trade commission finds that an importer has sold its products for less than fair market value it has the power to impose a duty at a rate that is calculated to eliminate any benefit derived from dumping goods | |
what does predatory pricing mean | predatory pricing is the lowering of prices by one company for the purpose of driving rivals out of the business at that point the company can raise prices and in fact must raise prices in order to recoup losses and survive the practice is illegal because if successful it creates a monopoly and eliminates choice | |
which companies have been accused of predatory pricing | walmart is among the companies that have been accused of predatory pricing in 1993 a judge ordered the retailer to stop selling drugs and health and beauty products below cost after three stores in conway arkansas accused the company of undercutting them to drive them out of business similar allegations were leveled at walmart from rival companies in other states and the company has been accused of predatory pricing on several other occasions | |
is predatory pricing illegal | predatory pricing is illegal but it s difficult to prove predatory pricing violates antitrust laws in the u s and other countries that are intended to ensure fair competition the prosecutors have to prove that the accused company did not just intend to compete but intended to eliminate the competition the bottom line | |
is that product an example of predatory pricing or just a great bargain from the consumer s viewpoint it s hard to tell | if it s predatory pricing the low prices will last only enough for the manufacturer to drive its rivals out of business at that point it must raise prices to make up for the losses it incurred by cutting its prices so low and it can raise prices with impunity now that the competition has been eliminated this disadvantages both consumers and workers predatory pricing violates antitrust laws and if proved in court may have severe legal consequences for the company engaging in this strategy | |
what are preemptive rights | preemptive rights give a shareholder the opportunity to buy additional shares in any future issue of a company s common stock before the shares are made available to the general public this right is a contractual clause that is generally available in the u s only to early investors in a newly public company or to majority owners who want to protect their stake in the company when and if additional shares are issued a u s company may give preemptive rights to all of its common shareholders but this is not required by federal law if the company recognizes such rights it will be noted in the company charter the shareholder also may receive a subscription warrant entitling them to buy a number of shares of a new issue usually equal to their current percentage of ownership 1a preemptive right is sometimes called an anti dilution provision or subscription rights it gives an investor the ability to maintain a certain percentage of ownership in the company as more shares are issued understanding preemptive rightsa preemptive right is essentially a right of first refusal the shareholder may exercise the option to buy additional shares but is under no obligation to do so the preemptive right clause is commonly used in the u s as an incentive to early investors in return for the risks they undertake in financing a new venture that early investor generally buys convertible preferred shares in the company at the time that it is still a private entity the preemptive rights give the investor the option to convert the preferred shares to common shares after the company goes public the use of preemptive rights in the u s is notably different from that of european union nations and great britain where preemptive rights for purchasers of common stock are required by law 2this right is not routinely granted to shareholders in the u s several states grant preemptive rights as a matter of law but even these laws allow a company to negate the right in its articles of incorporation the preemptive right cushions the investor s loss if a new round of common stock is issued at a lower price than the preferred stock owned by the investor in this case the owner of preferred stock has the right to convert the shares to a larger number of common shares offsetting the loss in share value the preemptive right offers the shareholder an option but not an obligation to buy additional shares of stock types of preemptive rightsa contract clause may offer either of two types of preemptive rights the weighted average provision or the rachet based provision benefits of preemptive rightspreemptive rights generally are meaningful only to a major investor with a large stake in a company and a vested interest in maintaining a voice in its decisions few individual investors acquire a large enough stake in a company to raise any concerns about a reduction in the fractional percentage that their shares represent among millions of shares outstanding those more likely to benefit are early investors and company insiders preemptive rights protect a shareholder from losing voting power as more shares are issued and the company s ownership becomes diluted since the shareholder is getting an insider s price for shares in the new issue there also can be a strong profit incentive in the worst case there is the option of reducing losses by converting preferred stock to more shares if the new issue is priced lower preemptive rights are essentially an additional incentive to early investors in a new venture but they have additional benefits for the company that awards them it is less expensive for a company to sell additional shares to its current shareholders than to issue additional shares on a public exchange issuing stock to the public entails paying an investment banking service to manage the sale of the shares the savings in direct sales to existing shareholders lower the company s cost of equity and hence its cost of capital increasing the firm s value preemptive rights also are an additional incentive for a company to perform well so it can issue a new round of stock at a higher price example of preemptive rightslet s assume that a company s initial public offering ipo consists of 100 shares and an individual purchases 10 of the shares that s a 10 equity interest in the company down the road the company makes a secondary offering of 500 additional shares the shareholder who holds a preemptive right must be given the opportunity to purchase as many shares as necessary to protect that 10 equity stake in this example that would be 50 shares if the prices of both issues were the same the investor who exercises that right will maintain a 10 equity interest in the company the investor who opts not to exercise the preemptive right will still have 10 shares but they will represent less than 2 of the outstanding shares preemptive rights faqshere are the answers to some commonly asked questions about preemptive rights preemptive rights give a shareholder the option to buy additional shares of the company before they are sold on a public exchange they are often called anti dilution rights because their purpose is to give the shareholder the ability to maintain the same level of voting rights as the company grows otherwise the shareholder s stake would dwindle as the number of shares in other hands increases preemptive rights are an additional incentive for early investors to take on the risk of funding a new venture well before it begins making money or launches an initial public offering ipo these rights are rarely made available to regular investors in the u s although they are commonly offered by european companies if you have preemptive rights you should have received a subscription warrant when you bought the stock this entitles you to buy a number of shares of a new issue usually equal to your current percentage of ownership u s corporations are not required by law to offer their common shareholders preemptive rights and most don t those that do outline the rights in their company charters if this is the case the shareholder should receive a subscription warrant entitling them to buy a number of shares of a new issue before is release on the public exchange the number will usually be equal to their current percentage of ownership 3great britain and the european union recognize the preemptive rights of common shareholders however in the u s such rights are generally awarded only to early investors and other insiders who have purchased shares or been awarded options in companies that have yet to go public 4they are used as an incentive to investment and a commitment that the holder of preemptive rights will be able to retain voting rights at the same level as the company grows the u s securities and exchange commission sec provides a form that allows the removal of preemptive rights from a previous agreement if both parties agree to the change 5in the u k preemptive rights can be canceled if every shareholder signs a waiver in the absence of such a waiver the company must pursue a legal process if it wishes to cancel its preemptive rights 6the bottom linepreemptive rights in the u s are relevant primarily to shareholders with a significant stake in a company who want to maintain that stake generally they are early investors in a company or other major stakeholders who are given the contractual right to buy additional shares of any new issue in order to maintain the size of their stake the ability to buy additional shares also cushions any losses they will incur if the newly issued shares bear a lower price | |
what are preference shares | preference shares more commonly referred to as preferred stock are shares of a company s stock with dividends that are paid out to shareholders before common stock dividends are issued if the company enters bankruptcy preferred stockholders are entitled to be paid from company assets before common stockholders most preference shares have a fixed dividend while common stocks generally do not preferred stock shareholders also typically do not hold any voting rights but common shareholders usually do investopedia jessica olahunderstanding preference sharespreference shares fall under four categories cumulative preferred stock non cumulative preferred stock participating preferred stock and convertible preferred stock 1cumulative preferred stock includes a provision that requires the company to pay shareholders all dividends including those that were omitted in the past before the common shareholders are able to receive their dividend payments these dividend payments are guaranteed but not always paid out when they are due unpaid dividends are assigned the moniker dividends in arrears and must legally go to the current owner of the stock at the time of payment at times additional compensation interest is awarded to the holder of this type of preferred stock non cumulative preferred stock does not issue any omitted or unpaid dividends if the company chooses not to pay dividends in any given year the shareholders of the non cumulative preferred stock have no right or power to claim such forgone dividends at any time in the future participating preferred stock provides its shareholders with the right to be paid dividends in an amount equal to the generally specified rate of preferred dividends plus an additional dividend based on a predetermined condition this additional dividend is typically designed to be paid out only if the amount of dividends received by common shareholders is greater than a predetermined per share amount if the company is liquidated participating preferred shareholders may also have the right to be paid back the purchasing price of the stock as well as a pro rata share of remaining proceeds received by common shareholders convertible preferred stock includes an option that allows shareholders to convert their preferred shares into a set number of common shares generally any time after a pre established date under normal circumstances convertible preferred shares are exchanged in this way at the shareholder s request however a company may have a provision on such shares that allows the shareholders or the issuer to force the issue how valuable convertible common stocks are is based ultimately on how well the common stock performs | |
what are preference shares | preference shares also known as preferred shares are a type of security that offers characteristics similar to both common shares and a fixed income security the holders of preference shares are typically given priority when it comes to any dividends that the company pays in exchange preference shares often do not enjoy the same level of voting rights or upside participation as common shares | |
what are the main types of preference shares | there are four main types of preference shares cumulative preferred non cumulative preferred participating preferred and convertible holders of cumulative preferred shares are entitled to receive dividends retroactively for any dividends that were not paid in prior periods whereas non cumulative preferred shares do not carry this provision for this reason cumulative preferred shares will generally be more expensive than non cumulative preferreds similarly participating preferred shares offer the benefit of additional dividends if certain performance targets are reached such as company profits exceeding a specified level convertible preferreds like convertible bonds allow the holder to convert their preference shares into common shares at a specified exercise price | |
what happens if you own preference shares in a company that goes bankrupt | if a company goes bankrupt then the different securityholders in that company will have claim to the company s assets the order in which those securityholders receive their share of the assets will depend on the specific rights given to them in their security agreements preference shares for instance will generally have priority over the common shares and will therefore be paid before the common shareholders however preference shares will generally have lower priority than corporate bonds debentures or other fixed income securities 2 | |
what are preference shares | preference shares more commonly referred to as preferred stock are shares of a company s stock with dividends that are paid out to shareholders before common stock dividends are issued if the company enters bankruptcy preferred stockholders are entitled to be paid from company assets before common stockholders most preference shares have a fixed dividend while common stocks generally do not preferred stock shareholders also typically do not hold any voting rights but common shareholders usually do investopedia jessica olahunderstanding preference sharespreference shares fall under four categories cumulative preferred stock non cumulative preferred stock participating preferred stock and convertible preferred stock 1cumulative preferred stock includes a provision that requires the company to pay shareholders all dividends including those that were omitted in the past before the common shareholders are able to receive their dividend payments these dividend payments are guaranteed but not always paid out when they are due unpaid dividends are assigned the moniker dividends in arrears and must legally go to the current owner of the stock at the time of payment at times additional compensation interest is awarded to the holder of this type of preferred stock non cumulative preferred stock does not issue any omitted or unpaid dividends if the company chooses not to pay dividends in any given year the shareholders of the non cumulative preferred stock have no right or power to claim such forgone dividends at any time in the future participating preferred stock provides its shareholders with the right to be paid dividends in an amount equal to the generally specified rate of preferred dividends plus an additional dividend based on a predetermined condition this additional dividend is typically designed to be paid out only if the amount of dividends received by common shareholders is greater than a predetermined per share amount if the company is liquidated participating preferred shareholders may also have the right to be paid back the purchasing price of the stock as well as a pro rata share of remaining proceeds received by common shareholders convertible preferred stock includes an option that allows shareholders to convert their preferred shares into a set number of common shares generally any time after a pre established date under normal circumstances convertible preferred shares are exchanged in this way at the shareholder s request however a company may have a provision on such shares that allows the shareholders or the issuer to force the issue how valuable convertible common stocks are is based ultimately on how well the common stock performs | |
what are preference shares | preference shares also known as preferred shares are a type of security that offers characteristics similar to both common shares and a fixed income security the holders of preference shares are typically given priority when it comes to any dividends that the company pays in exchange preference shares often do not enjoy the same level of voting rights or upside participation as common shares | |
what are the main types of preference shares | there are four main types of preference shares cumulative preferred non cumulative preferred participating preferred and convertible holders of cumulative preferred shares are entitled to receive dividends retroactively for any dividends that were not paid in prior periods whereas non cumulative preferred shares do not carry this provision for this reason cumulative preferred shares will generally be more expensive than non cumulative preferreds similarly participating preferred shares offer the benefit of additional dividends if certain performance targets are reached such as company profits exceeding a specified level convertible preferreds like convertible bonds allow the holder to convert their preference shares into common shares at a specified exercise price | |
what happens if you own preference shares in a company that goes bankrupt | if a company goes bankrupt then the different securityholders in that company will have claim to the company s assets the order in which those securityholders receive their share of the assets will depend on the specific rights given to them in their security agreements preference shares for instance will generally have priority over the common shares and will therefore be paid before the common shareholders however preference shares will generally have lower priority than corporate bonds debentures or other fixed income securities 2 | |
what is a preferred provider organization ppo | a preferred provider organization ppo is a health insurance plan for individuals and families ppos involve networks that are made up of contracted medical professionals and health insurance companies healthcare facilities and practitioners known as preferred providers offer services to the insurer s plan policyholders at reduced rates plan participants receive the maximum ppo benefit when they visit in network healthcare professionals and are also offered coverage when they see out of network providers | |
how preferred provider organizations ppos work | a preferred provider organization is a managed care network consisting of medical professionals and facilities such as primary and specialty physicians hospitals and other healthcare professionals who contract with insurance providers to render services to subscribed participants these are plan participants or consumers who are covered by the insurer s healthcare plan 1plans negotiate fees and schedules for services with healthcare professionals and facilities as such the agreed upon rate is typically lower than their usual charges in exchange for reduced rates insurers pay the ppo a fee to access the network of providers ppo participants are free to use the services of any provider within their network they are encouraged but not required to name a primary care physician and don t need referrals to visit a specialist subscribers may go out of network for coverage but it often comes at a higher cost ppos may be sponsored by a particular insurance company one or more employers or some other type of organization the costs of a ppo planthere are a number of costs associated with ppos and premiums tend to be higher than other types of insurance plans ppo plans tend to charge higher premiums because they are costlier to administer and manage participants are generally responsible for copayments which are paid directly to the provider at each visit there are also deductibles that patients must meet before the plans start kicking in and paying claims in full as noted above plan participants are also allowed to visit out of network facilities usually at a higher cost these charges are based on a reasonable and customary fee schedule if those claims made by these healthcare providers exceed the reasonable and customary fees for services rendered coverage may not apply or most commonly the excess charge is passed on to the patient one important point to note is the degree of flexibility associated with the higher cost of ppos these plans offer more options than others available on the market ppo networks are typically large with providers in many cities and states choosing a provider or accessing one in urgent situations provides value to participants most health insurance plans are serviced through a ppo or an hmo other arrangements include exclusive provider organization epos which are a managed care plan where services are covered only if you use doctors specialists or hospitals in the plan s network except in an emergency point of service pos plans involve lower fees for using providers that belong to the plan s network pos participants can go out of network but need referrals to see a specialist 1preferred provider organization ppo vs health maintenance organization hmo in contrast to ppos health maintenance organization hmo plans require participants to receive healthcare services from an assigned provider this is a primary care doctor who coordinates the insured s care both programs allow the insured to seek specialist care but under an hmo plan the designated primary care physician must provide a referral to a specialist as noted above ppo plans charge higher premiums than almost every other plan for the convenience accessibility and freedom they offer this includes a wider choice of hospitals and doctors plans with the lowest fewest out of pocket expenses such as those with low deductibles and low copayments have higher premiums the elevated premium cost is due to the insurer absorbing more of the associated costs conversely lower premium alternatives translate into higher out of pocket costs for the insured and lower costs for the insurer ppo plans come with more comprehensive coverage including many services that other managed care programs might exclude or for which they would charge an additional premium ppo plans have historically been the preferred choice among employer group participants however today participants want more options for managed healthcare therefore many employers offer hmo plans as well because hmo premiums are less expensive some participants favor hmo plans for their affordability although services and freedoms typically associated with ppo plans are often restricted | |
how do ppo deductibles work | a health insurance deductible is an amount you must pay out of pocket for medical services each year after you ve met it your insurance coverage kicks in ppo plans may have two different annual deductibles one applies to providers in the ppo network the other usually a larger sum to providers outside the network the latter is larger because the ppo wants to encourage you to stay in network using its preferred providers | |
what are disadvantages of ppo plans | ppo plans tend to be more expensive than other managed care options they typically have higher monthly premiums and out of pocket costs like deductibles you often have both coinsurance and copays this is the tradeoff for the flexibility ppos provide of letting you use providers both within and outside the ppo system without needing referrals the costs for coinsurance and deductibles can be different for in network and out of network providers and services some may find it onerous to have more responsibility for managing and coordinating their own care without a primary care doctor | |
what is the difference between a ppo and a pos | the biggest difference between ppo and pos plans is generally flexibility both plans cover you whether you use providers and facilities in or out of the network however a pos requires you to have a primary care physician and get referrals from them if you want to see a specialist or anyone else ppos don t costs are another consideration ppos tend to be more expensive than pos plans the premiums are higher and they usually come with deductibles that must be met before your coverage begins the bottom linea preferred provider organization ppo is a type of managed care health insurance plan ppo plan participants are free to use the services of any provider within their network they are encouraged but not required to name a primary care physician and don t need referrals to visit a specialist ppo plans are more comprehensive in their coverage and offer a wider range of providers and services than hmos however the costs associated with ppos include higher insurance premiums copays and deductibles choosing between a ppo and an hmo generally involves weighing one s desire for greater accessibility to doctors and services versus the cost of the plan | |
what is preferred stock | the term stock refers to ownership or equity in a firm there are two types of equity common stock and preferred stock preferred stockholders have a higher claim to dividends or asset distribution than common stockholders the details of each preferred stock depend on the issue jiaqi zhou investopediaunderstanding preferred stockpreferred shareholders have priority over common stockholders when it comes to dividends which generally yield more than common stock and can be paid monthly or quarterly 1 these dividends can be fixed or set in terms of a benchmark interest rate like the london interbank offered rate libor and are often quoted as a percentage in the issuing description adjustable rate shares specify certain factors that influence the dividend yield and participating shares can pay additional dividends that are reckoned in terms of common stock dividends or the company s profits the decision to pay the dividend is at the discretion of a company s board of directors unlike common stockholders preferred stockholders have limited rights which usually does not include voting 1 preferred stock combines features of debt in that it pays fixed dividends and equity in that it has the potential to appreciate in price this appeals to investors seeking stability in potential future cash flows types of preferred stockall of the types of preferred stock are exactly that preferred stock however not all preferred stocks are the same each may or may not have different features that make them more or less favorable compared to other types prior preferred stockprior preferred stock refers to the order in which preferred stock is ranked when considered for prioritization for creditors or dividend awards though regular preferred stock and prior preferred stock both hold precedence over common stock prior preferred stock refers to an earlier issuance of preferred stock that takes priority for example if a company can only financially afford to pay one tier of shares its dividend it must start with its prior preferred stock issuance preference preferred stockpreference preferred stock is considered the next tier of stock in terms of prioritization though it falls behind prior preferred stock preference preferred stock often has greater priority compared to other issuances of preferred stock if there are multiple tiers of preference preferred stock each issuance is usually given its rank i e most senior second senior etc perpetual preferred stocksome types of preferred stock have a fixed end date in which much like a bond the original capital contributed is returned to shareholders in most cases preferred stock is considered perpetual this means that the initial capital invested will not be returned an investor must sell their shares at their choosing to redeem the shares convertible preferred stockin most cases convertible preferred stock allows a shareholder to trade their preferred stock for common stock shares the exchange may happen when the investor wants regardless of the price of either share once the exchange has occurred the investor has relinquished its right to trade and cannot convert the common shares back to preferred shares convertible preferred stock usually has predefined guidance on how many shares of common stock it can be exchanged for cumulative preferred stockif a company issues a dividend it may issue cumulative preferred stock this means that should a company issue a dividend but not actually pay it out that unpaid dividend is accumulated and must be made in a future period it is also important to note that preferred stock takes precedence over common stock for receiving dividend payments this means that a share of cumulative preferred stock must have all accumulated dividends from all prior years paid before any other lower tier share can receive dividend payments noncumulative preferred stockit s worth pointing out that some preferred stock may explicitly state that it is noncumulative this means that if a company does not pay a dividend in a given year that missed dividend is not directly made up for in a future period dividends are treated as year to year any prior period does not carry over and does not hold weight into the order of who gets paid what this type of stock is common in banking as there are international rules that dictate how certain capital is classified by regulators participating preferred stockin some years a company may decide it cannot financially afford to issue a dividend however participating preferred stockholders may still be entitled to a dividend these participating dividends may be tied to company achievements such as total sales earnings or specific margins a participating preferred stockholder may also earn these types of dividends on top of what the company issues as normal dividends assuming the company has enough finances to make all payments preferred stock vs common stockequity ownership of a companytradable on public exchanges for public companies | |
have first right to dividends and must be paid before common stockholders | typically do not have as much capital appreciationtypically have no voting rightsmay have the option to be convertible to common stockreceive better treatment during liquidationsequity ownership of a companytradable on public exchanges for public companies no guarantee of dividends must wait until preferred stockholders are made wholeoften have higher capital appreciationtypically have voting rights | |
do not have the option to be convertible to preferred stock | receive worse treatment during liquidationswhile preferred stock and common stock are both equity instruments they share important distinctions first preferred stock receive a fixed dividend as dividend obligations to preferred shareholders must be satisfied first common stockholders on the other hand may not always receive a dividend a company may fully pay all dividends even prior years to preferred stockholders before any dividends can be issued to common stockholders second preferred stock typically do not share in the price appreciation or depreciation to the same degree as common stock the inherent value of preferred stock is the ongoing cash proceeds that investors receive common stock on the other hand are more difficult to value however because they are not tied to semi fixed payments investors hold common stock for the potential capital appreciation lastly the two types of equity have different terms or conditions preferred stockholders typically have no voting rights whereas common stockholders do preferred stockholders may have the option to convert shares to common shares but not vice versa preferred shares may be callable where the company can demand to repurchase them at par value preferred stock also receives better treatment during liquidations preferred stock vs bondsoften issue periodic ongoing cash paymentsissued at par value which is independent of market value dividends may increase decrease or end at a company s discretionpreferred stockholders are behind bondholders during bankruptcy or liquidationsoften do not have an end dateoften issue periodic ongoing cash paymentsissued at par value which is independent of market value interest is fixed and will not change over the life of the bondbondholders receive preferential treatment during bankruptcy or liquidation | |
have a fixed term or maturity date | preferred stock is often compared to bonds because both may offer recurring cash distributions however as there are many differences between stocks and bonds there are differences with preferred equity as well in terms of similarities both securities are often issued at face value or par value this value is used to calculate future dividend payments and is unrelated to the market price of the security then companies may issue dividends similar to how bonds issue coupon payments though the mechanism is different the end result is ongoing payments derived from an investment there are still many differences between the two preferred stock dividend payments are not fixed and can change or be stopped however these payments are often taxed at a lower rate than bond interest in addition bonds often have a term that matures after a certain amount of time there is theoretically no end date to preferred stock in addition there are considerations to make regarding the order of rights should a company be liquidated in most cases debtholders receive preferential treatment and bondholders receive proceeds from liquidated assets then preferred shareholders receive distributions if any assets remain common stockholders are last in line and often receive minimal or no bankruptcy proceeds companies in distressif a company is struggling and has to suspend its dividend preferred shareholders may have the right to receive payment in arrears before the dividend can be resumed for common shareholders 1 shares that have this arrangement are known as cumulative if a company has multiple simultaneous issues of preferred stock these may in turn be ranked in terms of priority the highest ranking is called prior followed by first preference second preference etc preferred shareholders have a prior claim on a company s assets if it is liquidated though they remain subordinate to bondholders preferred shares are equity but in many ways they are hybrid assets that lie between stock and bonds they offer more predictable income than common stock and are rated by the major credit rating agencies unlike bondholders failing to pay a dividend to preferred shareholders does not mean a company is in default because preferred shareholders do not enjoy the same guarantees as creditors the ratings on preferred shares are generally lower than the same issuer s bonds with the yields being accordingly higher 2cumulative preferred stock have the condition that any previously awarded dividends that have not yet been paid must be distributed before any common shareholder receives any dividend distribution this is in contrast to noncumulative preferred stock which does not accumulate prior unpaid dividends voting rights calling and convertibilitypreferred shares usually do not carry voting rights although under some agreements these rights may revert to shareholders who have not received their dividend 1preferred shares have less potential to appreciate in price than common stock and they usually trade within a few dollars of their issue price most commonly 25 whether they trade at a discount or premium to the issue price depends on the company s creditworthiness and the specifics of the issue for example whether the shares are cumulative their priority relative to other issues and whether they are callable 2if shares are callable the issuer can purchase them back at par value after a set date if interest rates fall for example and the dividend yield does not have to be as high to be attractive the company may call its shares and issue another series with a lower yield shares can continue to trade past their call date if the company does not exercise this option 2some preferred stock are convertible meaning they can be exchanged for a given number of common shares under certain circumstances 2 the board of directors might vote to convert the stock the investor might have the option to convert or the stock might have a specified date when it automatically converts whether this is advantageous to the investor depends on the market price of the common stock pay attention to whether a preferred stock is callable the issuing company holds the right to buy the security back typical buyers of preferred stockpreferred stock come in a wide variety of forms and are generally purchased through online stockbrokers by individual investors the features described above are only the more common examples and these are frequently combined in a number of ways a company can issue preferred shares under almost any set of terms assuming they don t fall afoul of laws or regulations most preferred issues have no maturity dates or have very distant ones 2institutions are usually the most common purchasers of preferred stock especially during the primary distribution phase this is due to certain tax advantages that are available to them but that are not available to individual investors 3 because these institutions buy in bulk preferred issues are a relatively simple way to raise large amounts of capital private or pre public companies issue preferred stock for this reason preferred stock issuers tend to group near the upper and lower limits of the creditworthiness spectrum some issue preferred shares because regulations prohibit them from taking on any more debt or because they risk being downgraded on the other hand several established names like general electric bank of america and georgia power issue preferred stock to finance projects 456 | |
what are the advantages of a preferred stock | a preferred stock is a class of stock that is granted certain rights that differ from common stock namely preferred stock often possess higher dividend payments and a higher claim to assets in the event of liquidation in addition preferred stock can have a callable feature which means that the issuer has the right to redeem the shares at a predetermined price and date as indicated in the prospectus in many ways preferred stock share similar characteristics to bonds and because of this are sometimes referred to as hybrid securities who buys preferred stock preferred stock often provides more stability and cash flow compared to common stock therefore investors looking to hold equities but not overexpose their portfolio to risk often buy preferred stock in addition preferred stock investors receive favorable tax treatment the company issuing the preferred stock does not receive a tax advantage however institutional investors and large firms may be enticed to the investment due to its tax advantages | |
what is an example of a preferred stock | consider a company is issuing a 7 preferred stock at a 1 000 par value in turn the investor would receive a 70 annual dividend or 17 50 quarterly typically this preferred stock will trade around its par value behaving more similarly to a bond investors who are looking to generate income may choose to invest in this security the most common sector that issues preferred stock is the financial sector where preferred stock may be issued as a means to raise capital can you lose money on preferred stock like any other type of equity investment there are risks of investing including the loss of capital you invest into the company preferred stock have specific features different from common stock so they may perform differently however both investments are reflections of the performance of the underlying company should the company begin to struggle this may result in a loss or decrease in value in the preferred stock price | |
what is the downside of preferred stock | though preferred stock often have greater rights and claims to dividends this type of investment often does not appreciate in value as much as common stock in addition preferred stockholders have little to no say in the operations of the company as they often forgo voting capabilities the bottom lineinvestors interested in generating cash flow from their equity holdings may be better suited holding preferred equity or preferred stock this type of equity investment represents ownership of a company and results in prioritized treatment for dividend distributions though there are sacrifices for this right preferred stock are simply a different vehicle for owning part of a business | |
what is a premium | premium has several meanings in finance most commonly it refers to understanding a premiumbroadly speaking a premium is a price paid for above and beyond some basic or intrinsic value relatedly it is the price paid for protection from a loss hazard or harm e g insurance or options contracts the word premium is derived from the latin praemium where it meant reward or prize types of premiuma price that exists above some sort of fundamental value is referred to as a premium and such assets or objects are said to be trading at a premium assets may trade at a premium due to increased demand limited supply or perceptions of increased value in the future a premium bond is a bond trading above its face value or in other words it costs more than the face amount on the bond a bond might trade at a premium because its interest rate is higher than current rates in the market the concept of a bond price premium is related to the principle that the price of a bond is inversely related to interest rates if a fixed income security is purchased at a premium this means that then current interest rates are lower than the coupon rate of the bond the investor thus pays a premium for an investment that will return an amount greater than existing interest rates 1a risk premium involves returns on an asset that are expected to be in excess of the risk free rate of return an asset s risk premium is a form of compensation for investors it represents payment to investors for tolerating the extra risk in a given investment over that of a risk free asset similarly the equity risk premium refers to an excess return that investing in the stock market provides over a risk free rate this excess return compensates investors for taking on the relatively higher risk of equity investing the size of the premium varies and depends on the level of risk in a particular portfolio it also changes over time as market risk fluctuates premiums for options are the cost to buy an option options give the holder owner the right but not the obligation to buy or sell the underlying financial instrument at a specified strike price the premium for a bond reflects changes in interest rates or risk profile since the issuance date the buyer of an option has the right but not the obligation to buy call or sell put the underlying instrument at a given strike price for a given period of time 2the premium that is paid is its intrinsic value plus its time value an option with a longer maturity always costs more than the same structure with a shorter maturity the volatility of the market and how close the strike price is to the then current market price also affect the premium 3sophisticated investors sometimes sell one option also known as writing an option and use the premium received to cover the cost of buying the underlying instrument or another option buying multiple options can either increase or reduce the risk profile of the position depending on how it is structured premiums for insurance include the compensation the insurer receives for bearing the risk of a payout should an event occur that triggers coverage the premium may also contain a sales agent s or broker s commissions the most common types of coverage are auto health and homeowners insurance premiums are paid for many types of insurance including health homeowners and rental insurance these payments must be submitted on a regular mode or schedule to continue a policy a common example of an insurance premium comes from auto insurance a vehicle owner can insure the value of their vehicle against loss resulting from accident theft fire and other potential problems the owner usually pays a fixed premium amount in exchange for the insurance company s guarantee to cover any economic losses incurred under the scope of the agreement premiums are based on both the risk associated with the insured and the amount of coverage desired premium faqsto pay a premium generally means to pay above the going rate for something because of some perceived added value or due to supply and demand imbalances to pay a premium may also refer more narrowly to making payments for an insurance policy or options contract synonyms for premium include prize fee dividend or bonus in insurance and options trading it may be synonymous with price premium pricing is a marketing strategy that involves tactically setting the price of a particular product higher than either a more basic version of that product or versus the competition the purpose of premium pricing is to convey higher quality or desirability than other options | |
what is a premium bond | a premium bond is a bond trading above its face value or in other words it costs more than the face amount on the bond a bond might trade at a premium because its interest rate is higher than current rates in the market these bonds are different from a type of lottery bond account sold in the united kingdom that is also called a premium bond premium bonds explaineda bond that s trading at a premium means that its price is trading at a premium or higher than the face value of the bond for example a bond that was issued at a face value of 1 000 might trade at 1 050 or a 50 premium even though the bond has yet to reach maturity it can trade in the secondary market in other words investors can buy and sell a 10 year bond before the bond matures in ten years if the bond is held until maturity the investor receives the face value amount or 1 000 as in our example above a premium bond is also a specific type of bond issued in the united kingdom in the united kingdom a premium bond is referred to as a lottery bond issued by the british government s national savings and investment scheme investopedia tara anandbond premiums and interest ratesfor investors to understand how a bond premium works we must first explore how bond prices and interest rates relate to each other as interest rates fall bond prices rise while conversely rising interest rates lead to falling bond prices most bonds are fixed rate instruments meaning that the interest paid will never change over the life of the bond no matter where interest rates move or by how much they move bondholders receive the interest rate coupon rate of the bond as a result bonds offer the security of stable interest payments fixed rate bonds are attractive when the market interest rate is falling because this existing bond is paying a higher rate than investors can get for a newly issued lower rate bond for example say an investor bought a 10 000 4 bond that matures in ten years over the next couple of years the market interest rates fall so that new 10 000 10 year bonds only pay a 2 coupon rate the investor holding the security paying 4 has a more attractive premium product as a result should the investor want to sell the 4 bond it would sell at a premium higher than its 10 000 face value in the secondary market so when interest rates fall bond prices rise as investors rush to buy older higher yielding bonds and as a result those bonds can sell at a premium conversely as interest rates rise new bonds coming on the market are issued at the new higher rates pushing those bond yields up also as rates rise investors demand a higher yield from the bonds they consider buying if they expect rates to continue to rise in the future they don t want a fixed rate bond at current yields as a result the secondary market price of older lower yielding bonds fall so those bonds sell at a discount bond premiums and credit ratingsthe company s credit rating and ultimately the bond s credit rating also impacts the price of a bond and its offered coupon rate a credit rating is an assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation if a company is performing well its bonds will usually attract buying interest from investors in the process the bond s price rises as investors are willing to pay more for the creditworthy bond from the financially viable issuer bonds issued by well run companies with excellent credit ratings usually sell at a premium to their face values since many bond investors are risk averse the credit rating of a bond is an important metric credit rating agencies measure the creditworthiness of corporate and government bonds to provide investors with an overview of the risks involved in investing in bonds credit rating agencies typically assign letter grades to indicate ratings standard poor s for instance has a credit rating scale ranging from aaa excellent to c and d a debt instrument with a rating below bb is considered to be a speculative grade or a junk bond which means it is more likely to default on loans effective yield on premium bondsa premium bond will usually have a coupon rate higher than the prevailing market interest rate however with the added premium cost above the bond s face value the effective yield on a premium bond might not be advantageous for the investor the effective yield assumes the funds received from coupon payment are reinvested at the same rate paid by the bond in a world of falling interest rates this may not be possible the bond market is efficient and matches the current price of the bond to reflect whether current interest rates are higher or lower than the bond s coupon rate it s important for investors to know why a bond is trading for a premium whether it s because of market interest rates or the underlying company s credit rating in other words if the premium is so high it might be worth the added yield as compared to the overall market however if investors buy a premium bond and market rates rise significantly they d be at risk of overpaying for the added premium premium bonds typically pay a higher interest rate than the overall market premium bonds are usually issued by well run companies with solid credit ratings the higher price of premium bonds partly offsets their higher coupon rates bondholders risk paying too much for a premium bond if it is overvalued premium bondholders risk overpaying if market rates rise significantly real world exampleas an example let s say that apple inc aapl issued a bond with a 1 000 face value with a 10 year maturity the interest rate on the bond is 5 while the bond has a credit rating of aaa from the credit rating agencies as a result the apple bond pays a higher interest rate than the 10 year treasury yield also with the added yield the bond trades at a premium in the secondary market for a price of 1 100 per bond in return bondholders would be paid 5 per year for their investment the premium is the price investors are willing to pay for the added yield on the apple bond | |
what is a prepaid expense | a prepaid expense is an expense that has been paid for in advance but not yet incurred in business a prepaid expense is recorded as an asset on the balance sheet that results from a business making advance payments for goods or services to be received in the future prepaid expenses are initially recorded as assets but their value is expensed over time onto the income statement unlike conventional expenses the business will receive something of value from the prepaid expense over the course of several accounting periods madelyn goodnight investopediaunderstanding prepaid expensescompanies make prepayments for goods or services such as leased office equipment or insurance coverage that provide continual benefits over time goods or services of this nature cannot be expensed immediately because the expense would not line up with the benefit incurred over time from using the asset due to the nature of certain goods and services prepaid expenses will always exist for example insurance is a prepaid expense because the purpose of purchasing insurance is to buy proactive protection in case something unfortunate happens in the future clearly no insurance company would sell insurance that covers an unfortunate event after the fact so insurance expenses must be prepaid by businesses recording prepaid expensesaccording to generally accepted accounting principles gaap expenses should be recorded in the same accounting period as the benefit generated from the related asset for example if a large copying machine is leased by a company for a period of 12 months the company benefits from its use over the full time period 1recording an advanced payment made for the lease as an expense in the first month would not adequately match expenses with revenues generated from its use therefore it should be recorded as a prepaid expense and allocated to expenses over the full 12 months journal entries that recognize expenses related to previously recorded prepaid expenses are called adjusting entries they do not record new business transactions but simply adjust previously recorded transactions adjusting entries for prepaid expenses is necessary to ensure that expenses are recognized in the period in which they are incurred example of a prepaid expensefor example assume company abc purchases insurance for the upcoming 12 month period it pays 120 000 upfront for the insurance policy company abc will initially book the full 120 000 as a debit to prepaid insurance an asset on the balance sheet and a credit to cash each month an adjusting entry will be made to expense 10 000 1 12 of the prepaid amount to the income statement through a credit to prepaid insurance and a debit to insurance expense in the 12th month the final 10 000 will be fully expensed and the prepaid account will be zero | |
is prepaid expense a current asset | yes prepaid expense is recorded as a current asset current assets are assets that a company plans to use or sell within a year they are short term assets most often this is where the prepaid expense line item is recorded if any prepaid expense will not be used within a year then it must be recorded as a long term asset | |
what is the difference between prepayment and prepaid expense | prepayments and prepaid expenses are different from one another a prepayment means that you are just paying your bill earlier for example if you have a debt obligation such as a loan and you owe 1 000 next month but decide to pay that amount this month that is a prepayment a prepaid expense on the other hand is any good or service that you ve paid for but have not used yet | |
what are examples of prepaid expenses | common examples of prepaid expenses include leases rent legal retainers advertising costs estimated taxes insurance salaries and leased office equipment the bottom lineprepaid expense is an accounting line item on a company s balance sheet that refers to goods and services that have been paid for but not yet incurred recording prepaid expenses must be done correctly according to accounting standards they are first recorded as an asset and then over time expensed onto the income statement | |
what is prepayment | prepayment is an accounting term for the settlement of a debt or installment loan in advance of its official due date a prepayment may be the settlement of a bill an operating expense or a non operating expense that closes an account before its due date an individual a corporation or any other type of organization may make a prepayment | |
what is a prepayment penalty | a prepayment penalty is usually specified in a clause in a mortgage contract stating that a penalty will be assessed if the borrower significantly pays down or pays off the mortgage before term usually within the first three years of committing to the loan the penalty is sometimes based on a percentage of the remaining mortgage balance or it can be a certain number of months worth of interest prepayment penalties protect the lender against the financial loss of interest income that would otherwise have been paid over time | |
how a prepayment penalty works | prepayment penalties are written into mortgage contracts by lenders to compensate for prepayment risk particularly in difficult economic climates and under circumstances where the incentive for a borrower to refinance a subprime mortgage is high these penalties don t only kick in when a borrower pays off the entire loan some penalty provisions go into effect if the borrower pays a large portion of the loan balance in a single payment adding a prepayment penalty to a mortgage can safeguard against early refinancing or a home sale within the first three years after closing on a mortgage when a borrower is considered a risk to the lender alternatively prepayment penalties might be added as a way to recoup some profit when a mortgage is advertised with a lower than average interest rate mortgage lenders are required to disclose prepayment penalties at the time of closing on a new mortgage such penalties can t be imposed without a borrower s consent or knowledge 1 however borrowers should be made aware of any potential for prepayment penalties well before closing if the lender hasn t said anything about one borrowers should ask early on making small additional principal payments over the life of the loan does not normally trigger penalties but it can t hurt to ask your lender to make sure types of prepayment penaltiesa prepayment penalty that applies to both the sale of a home and a refinancing transaction is called a hard prepayment penalty a prepayment penalty that applies to refinancing only is referred to as a soft one limitations of prepayment penaltieswhile some home loans include prepayment penalties they are not legal on single family fha loans for other home loans lenders can only inflict prepayment penalties during the first three years with limits on the size of the penalty additionally the lenders have to offer a loan that does not include a prepayment penalty as an alternative these rules are in effect for loans issued after january 10 2014 established by the consumer financial protection bureau cfpb following the passage of the 2010 dodd frank act 2va mortgage loans issued to military and student loans do not allow prepayment penalties 3special considerationsprepayment penalties vary among lenders this means borrowers should be diligent about asking for and fully understanding the prepayment disclosure document prior to closing prepayment penalties can be set either as a fixed amount or as a percentage of the remaining mortgage balance they may also be assessed on a sliding scale based on the length of time the mortgage has been in place some lenders impose a penalty when a refinance or sale of the home is completed within the first two to three years of the original mortgage others charge a fee when the balance is paid off within the first five years example of a prepayment penaltya homeowner decides to refinance a two year old mortgage with a remaining balance of 250 000 if there is a prepayment penalty of 4 said homeowner would pay 10 000 to the original lender for paying off the mortgage early borrowers should be aware of the specifics of their lender s prepayment penalties they can substantially increase the cost of refinancing a mortgage or selling a home | |
what is prepayment risk | prepayment risk is the risk involved with the premature return of principal on a fixed income security when debtors return part of the principal early they do not have to make interest payments on that part of the principal that means investors in associated fixed income securities will not receive interest paid on the principal the prepayment risk is highest for fixed income securities such as callable bonds and mortgage backed securities mbs bonds with prepayment risk often have prepayment penalties understanding prepayment riskprepayment risk exists in some callable fixed income securities that may be paid off early by the issuer or in the case of a mortgage backed security the borrower these features give the issuer the right but not the obligation to redeem the bond before its scheduled maturity with a callable bond the issuer has the ability to return the investor s principal early after that the investor receives no more interest payments issuers of noncallable bonds lack this ability consequently prepayment risk which describes the chance of the issuer returning the principal early and the investor missing out on subsequent interest is only associated with callable bonds for mortgage backed securities mortgage holders may refinance or pay off their mortgages which results in the security holder losing future interest because the cash flows associated with such securities are uncertain their yield to maturity cannot be known for certain at the time of purchase if the bond was purchased at a premium a price greater than 100 the bond s yield is then less than the one estimated at the time of purchase criticism of prepayment riskthe core problem with prepayment risk is that it can stack the deck against investors callable bonds favor the issuer because they tend to make interest rate risk one sided when interest rates rise issuers benefit from locking in low rates on the other hand bond buyers are stuck with a lower interest rate when higher rates are available there is an opportunity cost when investors buy and hold bonds in a rising rate environment from a total return perspective bondholders also suffer a capital loss when interest rates rise | |
when interest rates fall investors only benefit if the bonds are not called as market interest rates go down the bondholders gain by continuing to receive the old interest rate which was higher investors can also sell the bonds to obtain a capital gain however issuers will call their bonds and refinance if interest rates decline substantially eliminating the possibility for bondholders to benefit from rate changes investors in callable bonds lose when interest rates rise but they can t win when rates fall | as a practical matter corporate bonds often have call provisions while government bonds rarely do that is one reason why investing in government bonds is often a better bet in a falling interest rate environment however corporate bonds still have higher returns in the long run investors should consider prepayment risk as well as default risk before choosing corporate bonds over government bonds requirements for prepayment risknot all bonds have prepayment risk if a bond cannot be called then it does not have prepayment risk a bond is a debt investment in which an entity borrows money from an investor the entity makes regular interest payments to the investor throughout the bond s maturity period at the end of the period it returns the investor s principal bonds can either be callable or noncallable examples of prepayment riskfor a callable bond the higher a bond s interest rate relative to current interest rates the higher the prepayment risk with mortgage backed securities the probability that the underlying mortgages will be refinanced increases as current market interest rates fall further below the old rates for example a homeowner who takes out a mortgage at 7 has a much stronger incentive to refinance after rates drop to 4 or 5 when and if the homeowner refinances those who invested in the original mortgage on the secondary market do not receive the full term of interest payments if they wish to keep investing in the mortgage market they will have to accept lower interest rates or higher default risk investors who purchase a callable bond with a high interest rate take on prepayment risk in addition to being highly correlated with falling interest rates mortgage prepayments are highly correlated with rising home values that s because rising home values provide an incentive for borrowers to trade up their homes or use cash out refinances both of which lead to mortgage prepayments | |
what is present value | present value pv is the current value of a future sum of money or stream of cash flows it is determined by discounting the future value by the estimated rate of return that the money could earn if invested present value calculations can be useful in investing and in strategic planning for businesses katie kerpel investopediaunderstanding present valuepresent value is based on the concept that a particular sum of money today is likely to be worth more than the same amount in the future also known as the time value of money conversely a particular sum to be received in the future will not be worth as much as that same sum today for example 1 000 today should be worth more than 1 000 five years from now because today s 1 000 can be invested for those five years and earn a return if let s say the 1 000 earns 5 a year compounded annually it will be worth about 1 276 in five years 1present value looks at it in reverse for example if you are due to receive 1 000 five years from now the future value fv what is that worth to you today using the same 5 interest rate compounded annually the answer is about 784 2 in this formulation the rate of return is known as the discount rate the word discount refers to future value being discounted back to present value present value formula and calculationthis is how to calculate the present value of a future sum of money present value fv 1 r n where fv future value r rate of return n number of periods begin aligned text present value dfrac text fv 1 r n textbf where text fv text future value r text rate of return n text number of periods end aligned present value 1 r nfv where fv future valuer rate of returnn number of periods to calculate the present value of a stream of future cash flows you would repeat the formula for each cash flow and then total them fortunately you can easily do this using software or an online calculator rather than by hand determining the discount ratea mentioned the discount rate is the rate of return you use in the present value calculation it represents your forgone rate of return if you chose to accept an amount in the future vs the same amount today the discount rate is highly subjective because it s simply the rate of return you might expect to receive if you invested today s dollars for a period of time which can only be estimated in many cases investors will use a risk free rate of return as the discount rate that is often the rate on u s treasury bonds which are considered virtually risk free because they are backed by the u s government 3the higher the discount rate you select the lower the present value will be because you are assuming that you would be able to earn a higher return on the money benefits of present valuelimitations of present valueyou can also incorporate the potential effects of inflation into the present value formula by using what s known as the real interest rate rather than the nominal interest rate example of present valueas a simple example let s say you have the choice of being paid 2 000 today or 2 200 one year from now you expect that you could safely invest the 2 000 and earn 3 on it which is the better option in this case 2 200 is the future value fv so the formula for present value pv would be 2 200 1 0 03 1 the result is 2 135 92 so if you were to be paid now you d need to receive at least 2 135 92 not just 2 000 to come out even calculating future value vs present valuein the present value formula shown above we re assuming that you know the future value and are solving for present value it is also possible to solve for future value when you know the present value using a formula like this fv pv x 1 r n so plugging in the same numbers as in the example above fv 2 000 1 03 2 060 as both the present value and future value calculations show you d be better off waiting for the 2 200 a year from now than taking 2 000 now of course both calculations also hinge on whether the rate of return you chose is accurate | |
how do you calculate present value | present value is calculated using three data points the expected future value the interest rate that the money might earn between now and then if invested and number of payment periods such as one in the case of a one year annual return that doesn t compound with that information you can calculate the present value using the formula present value fv 1 r nwhere fv future valuer rate of returnn number of periods begin aligned text present value dfrac text fv 1 r n textbf where text fv text future value r text rate of return n text number of periods end aligned present value 1 r nfv where fv future valuer rate of returnn number of periods | |
what is an example of present value | consider a scenario where you expect to receive a 5 000 lump sum payment in five years time if the discount rate is 8 25 you want to know what that payment will be worth today so you calculate the pv 5 000 1 0 0825 5 3 363 80 4 | |
why is present value important | present value is important because it allows investors and businesses to judge whether some future outcome will be worth making the investment today it is also important in choosing among potential investments especially if they are expected to pay off at different times in the future the bottom linepresent value is a way of representing the current value of a future sum of money or future cash flows while useful it is dependent on making good assumptions on future rates of return assumptions that become especially tricky over longer time horizons | |
what is the present value interest factor pvif | the present value interest factor pvif is a formula used to estimate the current worth of a sum of money that is to be received at some future date pvifs are often presented in the form of a table with values for different time periods and interest rate combinations formula for the present value interest factor pvif p v i f a 1 r n where a the future sum to be received r the discount interest rate begin aligned pvif frac a 1 r n textbf where a text the future sum to be received r text the discount interest rate n text the number of years or other time period end aligned pvif 1 r na where a the future sum to be receivedr the discount interest rate understanding the pvifthe present value interest factor is based on the key financial concept of the time value of money that is a sum of money today is worth more than the same sum will be in the future because money has the potential to grow in value over a given period of time provided money can earn interest any amount of money is worth more the sooner it is received present value interest factors are often used in analyzing annuities the present value interest factor of an annuity pvifa is useful when deciding whether to take a lump sum payment now or accept an annuity payment in future periods using estimated rates of return you can compare the value of the annuity payments to the lump sum the present value interest factor may only be calculated if the annuity payments are for a predetermined amount spanning a predetermined range of time example of the pvifhere is an example of how to use the pvif to calculate the present value of a future sum assume an individual is going to receive 10 000 five years from now and that the current discount interest rate is 5 using the formula for calculating the pvif the calculation would be 10 000 1 0 05 5 the resulting pvif figure from the calculation is 7 835 26 the present value of the future sum is then determined by subtracting the pvif figure from the total future sum to be received thus the present value of the 10 000 to be received five years in the future would be 10 000 7 835 26 2 164 74 a pvif can only be calculated for an annuity payment if the payment is for a predetermined amount and a predetermined period of time pvif tables often provide a fractional number to multiply a specified future sum by using the formula above which yields the pvif for one dollar then the present value of any future dollar amount can be figured by multiplying any specified amount by the inverse of the pvif number | |
how do i calculate the pvif | add 1 and the discount interest rate then multiply the sum by the number of years or another time period divide the future sum to be received by that multiplication result and you have the present value interest factor pvif | |
what is the pvif based on | the pvif is based on the time value of money the meaning of that key financial concept is that a sum of money today is worth more than the same sum will be in the future because money has the potential to grow in value over a given period of time | |
how do pvifs apply to annuities | the present value interest factor of an annuity pvifa is useful when you are deciding whether to take a lump sum payment now or an annuity payment in future periods using estimated rates of return you can compare the value of the annuity payments to the lump sum the bottom linea present value interest factor pvif is used to simplify a calculation of the time value of a sum of money to be paid in the future it is a formula commonly used in analyzing annuities and is available in table form for reference | |
the present value interest factor of an annuity is a factor that can be used to calculate the present value of a series of annuities when it is multiplied by the recurring payment amount the initial deposit earns interest at the interest rate r which perfectly finances a series of n consecutive withdrawals and may be written as the following formula | pvifa is also a variable used when calculating the present value of an ordinary annuity understanding present value interest factor of annuitythe calculation of pvifa is based on the concept of the time value of money this idea stipulates that the value of currency received today is worth more than the value of currency received at a future date this is because the currency received today may be invested and can be used to generate interest the most common values of both n and r can be found in a pvifa table which immediately shows the value of pvifa this table is a particularly useful tool for comparing different scenarios with variable n and r values the rate is displayed across the table s top row while the first column shows the number of periods the major drawback of a present value interest factor table is the necessity to round calculated figures which sacrifices precision the cell in the pvifa table that corresponds to the appropriate row and column indicates the present value factor this factor is multiplied against the dollar amount of the recurring payment annuity payment in question to arrive at the present value the usefulness of the present value interest factor of annuitythe present value interest factor of an annuity is useful when determining whether to take a lump sum payment now or accept an annuity payment in future periods using estimated rates of return you can compare the value of the annuity payments to the lump sum the present value interest factor may only be calculated if the annuity payments are for a predetermined amount spanning a predetermined range of time using the discount rate for the present value interest factorthe discount rate used in the present value interest factor calculation approximates the expected rate of return for future periods it is adjusted for risk based on the duration of the annuity payments and the investment vehicle utilized higher interest rates result in lower net present value calculations this is because the value of 1 today is diminished if high returns are anticipated in the future present value interest factor of annuity dueif annuity payments are due at the beginning of the period the payments are referred to as an annuity due to calculate the present value interest factor of an annuity due take the calculation of the present value interest factor and multiply it by 1 r with r being the discount rate frequently asked questions | |
how do you calculate present value interest factor for an annuity | the formula to calculate pvifa is 1 1 r n r where r represents the period rate and n represents the number of payments or withdrawals | |
what is the present value interest factor of an annuity table | it is a simple table that features the pvifas of common combinations of rates and terms for example each column might feature a different rate while each row features a different term the corresponding cell for each rate term is the pvifa | |
what is the relationship between pvif and pvifa | the pvif formula calculates the current worth of a lump sum to be received at a future date while the pvifa calculates the present value of a series of annuities the bottom linethe present value interest factor of an annuity provides a useful way to determine if a lump sum payment now is a better option than future annuity payments tables exist to help determine the pvifa depending on variable factors such as rates and number of payments or withdrawals a precise factor can be calculated using the formula | |
what is the present value of an annuity | the present value of an annuity is the current value of future payments from an annuity given a specified rate of return or discount rate the higher the discount rate the lower the present value of the annuity present value pv is an important calculation that relies on the concept of the time value of money whereby a dollar today is relatively more valuable in terms of its purchasing power than a dollar in the future understanding the present value of an annuityan annuity is a financial product that provides a stream of payments to an individual over a period of time typically in the form of regular installments annuities can be either immediate or deferred depending on when the payments begin immediate annuities start paying out right away while deferred annuities have a delay before payments begin because of the time value of money money received today is worth more than the same amount of money in the future because it can be invested in the meantime by the same logic 5 000 received today is worth more than the same amount spread over five annual installments of 1 000 each present value is an important concept for annuities because it allows individuals to compare the value of receiving a series of payments in the future to the value of receiving a lump sum payment today by calculating the present value of an annuity individuals can determine whether it is more beneficial for them to receive a lump sum payment or to receive an annuity spread out over a number of years this can be particularly important when making financial decisions such as whether to take a lump sum payment from a pension plan or to receive a series of payments from an annuity the pension provider will determine the commuted value of the payment due to the beneficiary 1 they do this to ensure they are able to meet future payment obligations present value calculations can also be used to compare the relative value of different annuity options such as annuities with different payment amounts or different payment schedules the discount rate is a key factor in calculating the present value of an annuity the discount rate is an assumed rate of return or interest rate that is used to determine the present value of future payments the discount rate reflects the time value of money which means that a dollar today is worth more than a dollar in the future because it can be invested and potentially earn a return 2 the higher the discount rate the lower the present value of the annuity because the future payments are discounted more heavily conversely a lower discount rate results in a higher present value for the annuity because the future payments are discounted less heavily in general the discount rate used to calculate the present value of an annuity should reflect the individual s opportunity cost of capital or the return they could expect to earn by investing in other financial instruments for example if an individual could earn a 5 return by investing in a high quality corporate bond they might use a 5 discount rate when calculating the present value of an annuity the smallest discount rate used in these calculations is the risk free rate of return u s treasury bonds are generally considered to be the closest thing to a risk free investment so their return is often used for this purpose 3it s important to note that the discount rate used in the present value calculation is not the same as the interest rate that may be applied to the payments in the annuity the discount rate reflects the time value of money while the interest rate applied to the annuity payments reflects the cost of borrowing or the return earned on the investment the opposite of present value is future value fv the fv of money is also calculated using a discount rate but extends into the future formula and calculation of the present value of an annuitythe formula for the present value of an ordinary annuity is below an ordinary annuity pays interest at the end of a particular period rather than at the beginning 4p pmt 1 1 1 r n r where p present value of an annuity stream pmt dollar amount of each annuity payment r interest rate also known as discount rate n number of periods in which payments will be made begin aligned text p text pmt times frac 1 big frac 1 1 r n big r textbf where text p text present value of an annuity stream text pmt text dollar amount of each annuity payment r text interest rate also known as discount rate n text number of periods in which payments will be made end aligned p pmt r1 1 r n1 where p present value of an annuity streampmt dollar amount of each annuity paymentr interest rate also known as discount rate n number of periods in which payments will be made example of the present value of an annuityassume a person has the opportunity to receive an ordinary annuity that pays 50 000 per year for the next 25 years with a 6 discount rate or take a 650 000 lump sum payment which is the better option using the above formula the present value of the annuity is present value 50 000 1 1 1 0 06 25 0 06 639 168 begin aligned text present value 50 000 times frac 1 big frac 1 1 0 06 25 big 0 06 639 168 end aligned present value 50 000 0 061 1 0 06 251 639 168 given this information the annuity is worth 10 832 less on a time adjusted basis so the person would come out ahead by choosing the lump sum payment over the annuity annuity vs annuity duean ordinary annuity makes payments at the end of each time period while an annuity due makes them at the beginning all else being equal the annuity due will be worth more in the present 5 in the case of an annuity due since payments are made at the beginning of each period the formula is slightly different to find the value of an annuity due simply multiply the above formula by a factor of 1 r 6p pmt 1 1 1 r n r 1 r begin aligned text p text pmt times frac 1 big frac 1 1 r n big r times 1 r end aligned p pmt r1 1 r n1 1 r so if the example above referred to an annuity due rather than an ordinary annuity its value would be as follows present value 50 000 1 1 1 0 06 25 0 06 1 06 677 518 begin aligned text present value 50 000 times frac 1 big frac 1 1 0 06 25 big 0 06 times 1 06 677 518 end aligned present value 50 000 0 061 1 0 06 251 1 06 677 518 in this case the person should choose the annuity due option because it is worth 27 518 more than the 650 000 lump sum | |
why is future value fv important to investors | future value fv is the value of a current asset at a future date based on an assumed rate of growth it is important to investors as they can use it to estimate how much an investment made today will be worth in the future this would aid them in making sound investment decisions based on their anticipated needs however external economic factors such as inflation can adversely affect the future value of the asset by eroding its value 7 | |
how does ordinary annuity differ from annuity due | an ordinary annuity is a series of equal payments made at the end of consecutive periods over a fixed length of time an example of an ordinary annuity includes loans such as mortgages the payment for an annuity due is made at the beginning of each period a common example of an annuity due payment is rent this variance in when the payments are made results in different present and future value calculations 5 | |
what is the formula for the present value of an ordinary annuity | the formula for the present value of an ordinary annuity is 4p pmt 1 1 1 r n rwhere p present value of an annuity streampmt dollar amount of each annuity paymentr interest rate also known as discount rate n number of periods in which payments will be made begin aligned text p text pmt times frac 1 big frac 1 1 r n big r textbf where text p text present value of an annuity stream text pmt text dollar amount of each annuity payment r text interest rate also known as discount rate n text number of periods in which payments will be made end aligned p pmt r1 1 r n1 where p present value of an annuity streampmt dollar amount of each annuity paymentr interest rate also known as discount rate n number of periods in which payments will be made | |
what is the formula for the present value of an annuity due | with an annuity due in which payments are made at the beginning of each period the formula is slightly different than that of an ordinary annuity to find the value of an annuity due simply multiply the above formula by a factor of 1 r 6p pmt 1 1 1 r n r 1 r begin aligned text p text pmt times frac 1 big frac 1 1 r n big r times 1 r end aligned p pmt r1 1 r n1 1 r the bottom linethe present value pv of an annuity is the current value of future payments from an annuity given a specified rate of return or discount rate it is calculated using a formula that takes into account the time value of money and the discount rate which is an assumed rate of return or interest rate over the same duration as the payments the present value of an annuity can be used to determine whether it is more beneficial to receive a lump sum payment or an annuity spread out over a number of years |
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