What is a tracker bond?

Image attribution: 401(K) 2012; CC BY-SA 2.0

By Catherine Halsey

A tracker bond is a fixed-term investment in the stock market. Upon acquiring one, most of your money will be put in a deposit-based account, while the remainder will be invested in stocks. A tracker bond is set for a fixed term, usually of at least five years. During this time, no withdrawals can be made from the tracker bond. The buyer is given a certain level of capital guarantee, with the level varying according to the degree of risk they wish to take.

A tracker bond can be treated as a long-term saving option, for only once the bond has matured will the investor be able to access it.

Things to consider

When purchasing a tracker bond, the buyer has a number of options to consider. The term of the investment – be it five, seven or more years – will first be determined. Then there is the level of capital guarantee to set, depending on the buyer’s chosen level of risk. In addition, there is the participation rate, which measures the level of participation the investor will have in the growth of the chosen stocks. Finally, a cap may be placed on gains. Ideally, the investor will want there to be no cap on gains, as this limits the potential profit to be made.

Low risk

Tracker bonds are generally regarded as being low-risk investments. This is because many tracker bonds offer 100 percent capital security. This ensures that even if your stocks perform worse than expected, you will at the very least receive your initial investment back at the end of the full term. However, it is worth bearing in mind that were this to happen, your money would likely be worth less in five years’ time due to inflation.

Conversely however, if your bond performs well, there is the opportunity to make a significant return on your investment. How much you stand to make depends on a number of factors, including the cap (if any) that has been set; this may be set at 50% of your initial investment for example.

To maximise your return, choose a tracker bond that doesn’t offer 100% capital security. Provided you’re confident in the ability of your chosen stocks or financial indices to perform, this a smart way to increase your potential profit.

If you’ve got a sum you’re looking to invest but don’t relish the stock market’s unpredictability, a tracking bond could be the answer. There’s less risk, and if you choose well, you could be enjoying a lump sum in just five years.

About the author: Catherine Halsey writes for a digital marketing agency on a range of subjects. This article links back to http://www.ulsterbank.co.uk/ni/personal/saving/long-term.ashx

How the risk-free interest rate is determined

 US-PDGov

On the surface a risk-free interest rate is perceived to be the rate of return on an a financial allocation that has no financial risk associated with it. However, 'risk' itself is a word that has more depth to its meaning when coupled with financial instruments. This is because risk also includes the influence of variables such as devaluation from inflation, opportunity cost, and issuer default.

According to Aswath Damodaran of the New York University Stern School of Business, risk-free assets have no variance from the expected rate of return. In other words, what you see is what you get without question; an example of such being guaranteed fixed interest rates. In this sense, risk-free rates do not have to be universal or the same across financial instruments such as savings accounts and government bonds, but do have to possess a strongly assured yield. 

Risk-free interest rates do not include a 'risk premium' or an added amount of interest yield that accounts for the risk associated with investing or depositing money into a financial instrument. For example, a 5 year corporate bond from Company A offers 4.5%, whereas a 5 year bond from Company B offers 5.6% These yields differ with perceived risk as measured in part by credit ratings. These ratings are determined by credit rating agency methodologies such as those used by Moody's. 

To illustrate 'risk premium' and 'risk-free rate' further, bond issuers with lower credit ratings have more credit risk associated with them, and are not therefore 'risk free'. The risk premium is determined by market forces such as the rate of return  investors are willing to accept for financial instruments  priced at certain levels with specific levels of risk as defined by credit rating and investor valuation(s). The risk free rate is often bench-marked using a shorter-term financial instrument such as 3-month Treasury Bills according to Rutgers University. 

Even if an issuer has a very high credit rating and is considered 'risk free', that can change. A recent example of this, and as reported by Reuters, was when the Standard and Poor's Credit Rating Agency lowered of the U.S. Government's credit rating from AAA to AA. These changes are somewhat predictable via rating agency 'outlooks', but for longer-term time horizons, are not always so clear. It is for this reason that a risk-free short-term financial instrument is not actually risk free when longer loan terms exist for the same issuer and instrument. 

What constitutes a risk free rate is not constant, and multiple financial vehicles can be considered to have risk-free rates.  For example, a financial statistics class at The Wharton School of Business considers a 1-month Treasury Bill as being risk free instead of a 3-month. This difference in opinion is further highlighted in a report by the financial consulting firm Value Advisor Associates. Moreover, in the report, both 5 year and 10 year financial instruments are considered acceptable proxies for the risk-free rate due  to factors such as upward sloping 'term-structure' i.e. higher rates of return for longer duration bonds.

Questions to ask before opening a new brokerage account

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Opening a brokerage account is an important banking decision that affects individual finances and any financial commitment made to the account. Understanding how the account works and where one's individual responsibilities lie in regard to managing the account is necessary. Being properly informed of what brokerage accounts entail is instrumental in the choice to open one. Below are some questions worth considering before opening a new brokerage account.

What types of services are offered?

The types of services offered by brokerage accounts often surpass those of traditional banking. For example, some financial institutions offer spread betting, and full-service brokerage firms typically offer financial planning services as well. In other cases, premium services are only reserved for account holders with higher net worths. An alternative to this is to obtain the advice of a licensed securities professional on a per transaction basis via commission on services rendered.

Are the financial instruments worthwhile?

The range of financial instruments offered by various brokerage houses is staggering. Choosing the right financial institution is therefore, of paramount importance to the future of one's finances. This is because the financial products invested in influence potential yields, capital gains taxes, and opportunity cost. Carefully researching what an individual brokerage firm has to offer in addition to the advantages and disadvantages of a brokerage firm is key to making the right banking decision.

How well are the account assets protected?

Asset protection is something all investors should take seriously because of the potential consequences of not being fully aware of specific investment risks. For instance, assets held within a brokerage account are not necessarily insured, and not all account types are protected from creditors. Different assets and accounts have varying levels of security that investors would do well to understand prior to opening an account, and before engaging in transactions through that account.

Do available accounts suit specific financial goals?

Differing accounts are offered by various brokerage businesses. To illustrate, some brokerage firms offer individual retirement accounts and individual business accounts, but do not necessarily offer exotic financial instruments, whereas other firms make more unique financial products available including simulations such as a currency spread betting trial account, but do not necessarily provide those products through a wide range of accounts.

Which jurisdiction is the best choice?

Jurisdiction is a major factor when opening a new brokerage account. Since each jurisdiction is subject to the laws and regulations governing it, the impact on individual banking is noteworthy. For example, Panamanian corporate brokerage accounts are not taxed in the same way as an individual brokerage account located in the United States. Before opening a brokerage account with a large balance, investigating brokerage account jurisdiction options and advantages is potentially a time worthy pursuit.

Types of financial instruments held in offshore accounts

US-PDGov

Offshore bank accounts provide individuals seeking an alternative avenue of financial management an opportunity to improve their financial planning options. Financial instruments held within expat bank accounts often include products that's value is based on market forces, or pre-determined contracts that offer lower interest rates and  costs. The potential benefits of offshore banking outweigh those of more restrictive banking regulation and policy. This is achievable via a range of products.

Currencies

Foreign currency of various countries and denominations is held within offshore bank accounts. Money held in offshore accounts for foreign exchange trading also have several benefits. For starters many offshore banking facilities offer enhanced privacy protection, and the ability to pay bills or expenses in foreign currency rather than a domestic one. Some offshore financial institutions even provide accounts able to hold more than one currency or multi-currency accounts. 

CFDs

Contracts for difference such as currency pairs, equity swaps and similar financial instruments are in effect derivative financial securities. These products provide traders an opportunity to capitalize on price movements without actually having to hold the underlying asset. In some cases these CFDs are purchased using capital leveraging or margin. In other words, a credit account is used in addition to the primary fully funded offshore account.

Funds

Funds come in many shapes and sizes, and are either directly managed by offshore banks, or traded with their services. Bond funds, exchange traded funds, and mutual funds are just a few of the fund types that are held within expat bank accounts. Additional funds such as hedge funds, money market funds and fixed income funds are examples of others. These funds are either maintained independently through a trust established at an international bank, or managed with the assistance of financial service professional.

OTCs

Over the counter securities trading services are available via select offshore financial institutions. These include pink sheets, another term for stocks not traded on larger exchanges. Collateralized debt obligations are another type of OTC exchanged through offshore accounts. Essentially, if it is not traded via a major formal exchange that is regulated by a particular organization, then financial instruments are considered OTCs.

Equities

Equities are an asset class within several offshore financial institutions and expat bank accounts. Moreover, stocks that are not over the counter can be traded via accounts at offshore banks. This is because when the offshore bank has a headquarters in the domicile of residence, the trading networks are interlinked enabling offshore securities trading. Stock options or stock derivatives, are also available via some offshore banks.

CDs

Certificate of deposits are able to yield as high as eight percent or more at select offshore financial institutions. Specific rates are determined based on deposit amount, location, term and applicable banking policy. These rates are above and beyond some of the best international CD rates available, and this makes these negotiable instruments an attractive investment opportunity. Additionally, offshore banks do not necessarily withhold interest income tax due to differences in regulatory requirements.

Bonds

Due to the fact offshore accounts are located in foreign jurisdictions, they are not subject to the monetary decisions of other banks in larger jurisdictions. It is for this reason, interest rates on loans from offshore banks are able to be more competitive. For example, offshore bonds that cost less to underwrite are better able to offer higher yields to lenders or investors. Similarly, just as loans are made, debt instruments such as international treasuries, corporate debentures and convertible bonds are also held or purchased within offshore accounts.

The range of financial products made available through offshore accounts is as diverse as the jurisdiction's regulations and banking policies allow. Due to the more liberal banking practices made possible via these financial institutions, more money management opportunities are available to investors and traders seeking investment alternatives with higher yields and potentially higher capital gains. In any case it is important to understand how any offshore investment, deposit or account is protected and to carefully study and discuss the risk and safety of such decisions with a financial professional.

How Repurchase Agreements Work

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Repurchase agreements are short-term financial transactions between traders of government securities; often financial institutions and government agents, but also private parties. These transactions typically involve large amounts of money and require the seller of financial instruments to repurchase them in the future. The cost of 'repos' varies with the financial security, and the market conditions surrounding the transaction; it is referred to as either the general collateral rate or in the case of discounted repurchase agreements, special collateral rates.

The Government Finance Officers Association (GFOA) states repurchase agreements are primarily used to assist with the financing of organizational cash-flow needs. In a broader sense, and in the case of repurchase agreements involving the Federal Reserve Bank, the agreements are also intended to assist with the implementation of monetary policy according to the New York Federal Reserve Bank. An example of how repurchase agreements can help implement monetary policy is given by the Inter-American Development Bank that claims a strong 'repo market' is key in facilitating bond market and secondary market liquidity.

The types of government securities traded in repurchase agreements include Treasuries such as Treasury Bills, but also include other securities such as home loan bank bonds per the GFOA. The term of a repurchase agreements generally does not exceed two months in the case of Federal Reserve Bank "repos". The transactions may also involve three parties where the third party or bank acts as the financial intermediary between the two parties engaged in the repurchase agreement. In some cases a second sale of repurchased assets can also occur when multiple transactions by a dealer have been pre-arranged. 

The repurchase agreement market can be influenced by demand for short-term financing via repurchase agreements and Treasury auctions according to an article by Bradford and Susan Jordan in the Journal of Finance. Specifically, in the case of Treasury auctions, when demand is high, the demand for repurchase agreements can also rise leading to a reduction of financing cost for sellers of securities in repurchase agreements. Moreover, if a significant amount of buyers at the auction fail to acquire enough treasuries that have already been pre-sold, resulting higher competition for repurchase agreements can lead to special rates for the sellers of Treasuries.

The risk associated with repurchase agreements is more dependent on the credibility of the transaction than the quality of the financial instrument, especially in the case of high grade treasury securities. In other words, it is more likely an investor will be left holding a security beyond the extent of the repurchase agreement than it is the Treasury Bill or other government security will lose a great deal of value. However, the Inter-American Development Bank points out that repurchase agreements involving assets that do not sell easily do present a liquidity risk.

Advantages and Disadvantages of Investing in Warrants

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Warrants are a type of financial instrument similar to stock options. They offer the choice to purchase underlying financial securities such as stock at a specific price. If a company is destined to grow along with its price per share, a favorably priced warrant is a reasonable investment, but is not without its disadvantages.

Complete article link: http://www.helium.com/items/2332037-are-warrants-worth-investing-in

How interest rate swaps work

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Interest rate swaps are a trading of interest based cash-flows. To illustrate an interest rate swap, if Company A has an initial floating interest rate of five percent on a $10,000 investment but prefers to have a fixed interest rate while still owning the investment, it can trade with another company that prefers a floating rate. This kind of transaction is called a plain vanilla swap per Natalie Moyen, Associate Professor of Finance at the University of Colorado.

When a plain vanilla swap exchange first occurs the swap is generally not profitable for either company; however, if the the variable rate changes one of the companies financial position improves. For example, if the variable rate drops to four percent, interest rate risk has effectively been avoided by Company A all other variables held constant. Also according to Moyen, negative cash-flows in the form of debt obligations can be traded for similar reasons i.e. to avoid increases in debt payment or potentially reduce debt obligations.

Fixed interest rate swaps may also be profitable if the exchange is made in competing currencies. To illustrate, if company a exchanges a cash-flow on $100,000 at seven percent in U.S. Dollars with company B's cash-flow on the Euro equivalent of $100,000 at seven percent, company A will profit if Company B's currency increases in value over the dollar.



Moreover, $100,000 at an exchange rate of .68 will require company B's initial equivalent currency investment to be valued at €68,000 and €4,760 at a seven percent interest rate. If that exchange rate becomes .55 but the initial investment doesn't change, then the interest cash-flow on that investment rises in value even though the original investment on which the cash-flow is based stays the same. In other words, when €4,760 is converted into dollars on day 1 it is equal to $7,000, but when the Euro strengthens against the dollar by .13 that same €4,760 becomes $8,654.54.

Interest rate swaps can be used to protect a company against what is known as currency risk as evident in the previous example. Moreover, if a company is concerned about the value of its investment in terms of import costs, it can hedge against this risk with a fixed interest rate swap. However, for this swap to effectively protect against currency risk the incoming cash-flow must increase in value over the outgoing cash-flow creating an element of risk as floating exchange rates generally cannot be predicted with 100 percent accuracy.

Several types of interest rates swaps exist. In the first example above, a plain vanilla swap took place. These are interest rate swaps that exchange a fixed for floating interest rate. The second example was  a currency swap because the interest rates and principle investment were fixed but the exchange rate was floating. A third type of interest rate swap occurs via financial intermediaries or banks.

 Image attribution: Suicup; CC BY-SA 3.0

In the book 'Modern Commercial Banking', Economist H.R. Machiraju describes additional swaps called base swaps and rate capped swaps. According to Machiraju, base swaps exchange floating rates of interest rather than fixed only or a combination of fixed and floating, and rate capped swaps place limits on how high a floating rate can change before the interest rate based cash-flow can no longer increase or decrease in value.

Financial instruments and accounts that provide protection from creditors

Creditors are limited by laws that protect consumers even if those consumers are late on their bills or are sued for liability compensation. Examples of these laws are state statutes of limitations, and federal credit protection laws such as the Consumers Credit Protection Act.

Despite consumer protection from creditors, these laws do not necessarily protect individuals from liens or seizing of assets by the Internal Revenue Service (IRS) or from specific court rulings.  Having said that, several types of financial instruments and accounts protect consumers from creditors allowing an opportunity to keep retirement savings safe from difficult financial situations. 

Homesteads 

Homesteads are a type of property rather than a financial instrument, but they can also provide financial safety from creditors according to The Coleman Law Firm. Moreover, the Coleman Law Firm states the Homestead exemption provides asset protection for land 160 acres or less in size. The following state exemption chart at Creditor Exemption outlines which states allow homestead exemptions. 

Insurance

Both Ginger Applegarth of MSN Money and Attorneys at Law Unrah, Turner, Burke and Frees appeal to cost effective insurance solutions to asset protection. Namely, auto, and homeowners insurance are able to protect assets from liability lawsuits for less than asset protection insurance and in terms of creditor claims, term life insurance also provides more cost effective financial security. However, it is probably a good idea to keep in mind life insurance financial protection is limited. This limitation is elaborated by Gideon Rothschild and Daniel S. Rubin of Moses & Singer LLP.  For example, although Title 11 of the U.S. Code does protect assets from creditors, the focus is beneficiaries or dependents and not owners.

Trusts

Trusts are a type of legal entity used in estate planning and are often considered financial instruments used to protect assets. Cornell University Law School  describes Trusts as right to property via a fiduciary relationship i.e. not ownership but retention of rights of ownership. Several types of trusts exist, and according to Estate Street Partners, LLC an irrevocable asset protection trust combined with a limited liability corporation provides 'fortress' like asset protection. Several kinds of Trusts can be used for protection according to the Law Offices of Janet Brewer Moreover, of those discussed are Qualified personal residence trusts, irrevocable life insurance trusts and inter-vivos qualified terminable interest property trusts.

IRAs

Individual Retirement Accounts or IRAs are another financial instrument that protect consumers from creditors. However, according to the New York Times,  in the event of bankruptcy, funds in an IRA are only protected up to one million dollars with the exception of rollovers from corporate retirement plans. The New York Times also refers to difference in state law exemption amounts for non-bankruptcy lawsuit protection. In other words, how much monetary protection provided by an IRA varies between states for creditor claims not associated with a bankruptcy filing. 

Pensions

Defined contribution plans such as 401(k)s and 403(b)s are protected by the Employee Retirement Income Security Act (ERISA). However, according to Executive Capital Resources, these types of accounts are not protected against Qualified Domestic Relations Orders (QDROs) which are judicial claims against retirement assets during events such as divorce proceedings. Moreover, according to the Wall Street Journal, a kind of 401(k) called the Solo 401(k) is not protected from creditors in every states.

How Reverse Convertible Securities Work

Reverse convertible securities work in favor of the borrower by allowing them an increased measure of financial risk management. This is because this type of debt instrument has the option to be reversed by the issuer of the security.  In other words, reverse convertible securities are financial instruments, usually short-term bonds called notes, that allow lenders to change the actual financial instrument after it has been sold.

The Financial Management Regulatory Authority (FINRA) describes reverse convertibles as short-term, high-yield financial instruments comprise of debt instruments and put options. This means that the reverse convertible bond is only converted if the underlying stocks drop below a certain value. In essence these financial instruments are corporate hedges against loss in market capitalization or a decline in stock value.

To illustrate how reverse convertible securities work, XYZ Corporation contracts ABC Underwriting corporation to issue $100,000 in reverse convertible bonds to anyone willing to buy the bonds. If after selling the bonds, XYZ Corporation wished to change the type of debt which implies a change to the terms of debt, then they have the freedom to do so because the financial instrument is a reverse convertible security.

Reverse convertible securities can be used for a number of financial purposes because they are diverse financial instruments linked to credit and debt management. For example, by issuing reverse convertible bonds, a company can increase its debt to credit ratio if the money obtained is not used. Since these types of loans may be more favored by other lenders, the company may then obtain lower cost financing elsewhere and then convert the security to equity.

The Seattle Times called reverse convertible securities a stupid investment in late 2008 because the net affect of owning them was little different to owning stocks affected by the financial crisis even though the initial terms had high interest rates hedged by 'good' stocks. For investors, it is probably a good idea to consider how and why these securities are issued in the first place. In other words, companies may issue reverse convertible securities to manage their own financial risk at the expense of the investor. When financial instruments become complex, in some cases, that may serve as warning to the investor to be aware of increased money losing conditions i.e. financial deception via complexity.

A financial principle that may be ignored with reverse convertible securities is the economic cycle i.e. purchasing reverse convertible securities may be a bad idea during periods of economic contraction, but what if the reverse is true? In such case the investment may at least be less risky. That is to say, if the underlying stock is fundamentally strong, and forecasted to have extended increased profit margins for three or more fiscal quarters, the risk of not obtaining one's complete investment principal back is reduced.

Of course, during economic upcycles, a new risk emerges with reverse convertible securities, namely opportunity cost. The opportunity cost is that bonds are generally not the choice investment during these times because other investments may provide higher yields. In light of this, reverse convertible securities may be considered for higher yielding bond diversification only during periods of economic growth.

Sources:

1. http://bit.ly/9nMe4V (FINRA)
2. http://bit.ly/bSrjEn (Seattle Times)
3. http://bit.ly/aMN6dA (Investopedia)
4. http://bit.ly/11kLVP (Wall Street Journal)

Where to Find Listings of Bank CD Rates

Bank Certificate of Deposit (CD) listings can be found at a number of financial institutions and established financial websites like BankRate or MoneyRates. The bank CD rates listed by these organizations vary based on the length of the locked deposit, the size of the deposit and to an extent the financial health of the issuer in the case of regulated banks. The type of CD can also affect the interest rate yield.

• Financial newspapers

Financial newspapers such as the Wall Street Journal or Investors Business Daily (IBD) also list bank CD rates. These listings may also be distinguished by state so as to provide insight into regional economic performance and market conditions. Naturally, banking practice often offers listings of bank CD rates for their financial institution. They may do so at the physical location of the bank and at their online website. An example of the CITI bank listing of CD rates can be viewed here. Since there are so many types and yields of CDs, it may be a good idea to investigate multiple CD listings if side by side listings don't have the CDs or banks you're looking to compare.

• International bank CD listings

For international listings of bank CD rates, the Cannon Financial Center offers country CD interest rate comparisons like those listed at this link. However, for those seeking to avoid the hassle of researching and opening an account in another country, one may choose to invest in financial instruments set up by U.S. banks that invest in multiple global CDs to provide the investor a higher yield. Everbank has one such product called World Currency Basket CD's which can yield much higher interest rates than local banks offer.

• Brokerage firms

Other financial institutions that provide banking services which include Certificates of Deposit may also list CD rates. Brokerage firms such as Fidelity Investments are an example of such a financial institution. What's more, different financial institutions can also offer varying types of Certificates of Deposits. Websites like the Federally Insured Savings Network provide both listings and an overview of diverse CDs such as callable CDs and derivative based CDs.

• Federal interest rate listings

Depending on what bank or company is issuing the Certificates of Deposit both rates and risk can vary. For example, Federally regulated banks are subject to National rate and Rate cap requirements published by the Federal Deposit Insurance Corporation (FDIC). To view the most recently updated Certificate of Deposit interest rates set by the FDIC, click here. These rates aren't necessarily required by all banks as noted by the FDIC.

Both the U.S Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation recommend investing the terms of the CDs and the financial institution offering the CD's before considering purchasing them.  To read more about CD investment precautions both the SEC and FDIC tips can be viewed by visiting the site web addresses listed in the sources section of this article.

Sources:

1. http://bit.ly/cAVChH (SEC)
2. http://bit.ly/aHQaEX (FDIC)
3. http://bit.ly/XsI8J (MoneyRates)
4. http://bit.ly/2bAU4s (EverBank)
5. http://bit.ly/b0bGdA (FISN)

The Benefits of Credit Derivatives

Credit derivatives are exactly what the name implies i.e. derived from credit. In other words the financial instruments such as collateralized bonds are created from a credit instrument such as commercial credit or commercial loans. To illustrate, ABC company takes out a loan for project development from XYZ bank. XYZ bank has several such loan agreements with several companies. XYZ then decides it needs more capital to make more loans so it creates additional bank products such as bonds, that are collateralized by the commercial loans to ABC and other companies. These bonds are an example of credit derivatives since their value is based on the commercial loans.

Types of credit derivatives

Several types of credit derivatives exist, each with it's own purpose, core product, and rules of exchange. The reason derivatives have become more refined over time is because they tend to improve the efficiency of the originators business operations which in turn provides incentive for their creation. A few examples of derivatives are given below:

• Commodities derivatives: Financial instruments that's value is based on commodity value
• Corporate Bonds: Ex-Bundled loans in the form of an actively traded bond
• Credit Derivative Swaps: Ex- Exchanging of derivatives for insurance and/or another derivative.
• Credit Derivative Futures: Obligations to purchase credit derivatives at a future date with optional physical delivery.
• Credit Derivative Forwards: Similar to futures with less regulation and physical delivery

Benefits to buyers and sellers

"Global credit markets today display discrepancies in the pricing of the same credit risk across different asset classes, maturities, rating cohorts, time zones, currencies, and so on. These discrepancies persist because arbitrageurs have traditionally been unable to purchase cheap obligations against shorting expensive ones to extract arbitrage profits." (www.investingbonds.com)

What the above quote means is that credit derivatives in some markets may be under priced due to over supply and inefficiencies in the capitalization of international securities markets. While derivatives are generally favored by financial institutions and companies more than individual investors, there benefits do not discriminate if those taking part in the exchange of the derivatives are able to take advantage of those benefits. A few of the benefits to both buyers and sellers of credit derivatives are listed below.

Benefits to Buyers

• Greater market liquidity: The facilitation of trade is enhanced through liquidity
• Leveraged investment: The liquidity of derivatives allows them to be more easily leveraged
• Opportunity to earn fees: Insurers of credit derivatives can earn money if the value of the original financial instruments increase
• Diversification of insurance products: Allows insurers to diversify and thus lower insurance risk.
• Enhanced efficiency via de-bundling of underlying securities and/or commodities

Benefits to Sellers:

• Risk management and/or investment hedging : Ex: Derivative Bond Insurance
• Improved Efficiency of credit risk separation and timed risk management via duration
• Portfolio diversification: Ex. Credit derivative swaps
• Increased capital cash flow: Ex: proceeds from the sale of corporate derivative bonds

An example of a derivative earnings opportunity was in February of 2008 Warren Buffett extended an offer of insurance to mortgage derived bond insurers ailing from the financial effects of the housing market and credit crisis. In this case, the mortgage backed bonds were the credit derivatives, and the bond insurers were financial institutions willing to insure those derivatives with what is termed a 'credit default swap'. However, when the insurers of the credit derivatives experienced a capital squeeze, Buffett stepped in with an offer of liquidity to help keep the bond insurers credit rating high.

Generally speaking, credit derivatives are a sophisticated financial instrument that take significant know how, mathematical ability and business skill to effectively manage and trade. Credit derivatives are primarily used to manage credit risk but may also be used to increase corporate net worth or utilized for arbitrage in financial markets that exchange derivatives directly or via funds that manage derivatives. There are benefits to credit derivatives, notably to the originators of the derivatives who's purpose the financial instrument's creation was designed to serve. However, as with other types of financial instruments, derivatives also have secondary markets, and potential for gain through arbitrage.

Sources:

1. http://en.wikipedia.org/wiki/Credit_derivative
2. http://www.investinginbonds.com/assets/files/Intro_to_Credit_Derivatives.pdf
3. http://biz.yahoo.com/cnbc/080212/23125353.html

An overview of certificate of deposit rates

Certificates of Deposit (CD's) have numerous interest rates depending on 1) duration of the certificate, 2) denomination of the certificate 3) type of CD and 4) issuer of the certificate. Different banks, financial institutions within various regions and countries offer interest rates that may be higher or lower than one's local financial institution.

This does not mean, CD's from non-local sources cannot be purchased. Certificates of Deposits are insured in the United States Government up to a certain amount. This article will discuss the following aspects of Certificate of Deposit interest rates.

• Differences in fixed and variable CD interest rates
• Compounding options
• Comparing CD alternatives
• Insurability of interest bearing CD's

Differences in fixed and variable CD interest rates

Interest on certificates of deposit is calculated periodically at a fixed or variable rate that is usually higher for larger deposits and longer time periods. For example, a 5 year CD for a value of $1000.00 may have an interest rate as a Jumbo $100,000.00 CD deposited for only 3 years. However, a $100,000.00 CD deposited for 5 years may have a larger interest rate than both the $1000.00, 5 year CD and the $100,000.00 3 year CD.

Different U.S. certificate of deposit rates can be compared online using tools like the bankrate.com rate comparison calculator. In the case of variable rate certificates of deposit, part or all of the interest on the certificate of deposit is linked to changes in national interest rates such as the prime rate. In such cases, when the prime rate changes, so does the interest rate on the CD. Still more variable CD's may have pre-determined changes in interest rates or market index based rate changes.

• Fixed interest rate
• Variable prime rate linked rate
• Market index based rate
• Scheduled changes in interest rate

Compounding options of CDs

Not all certificates of deposit compound the same way that means two CD's with the same deposit value, length of deposit and interest rate could yield different ending interest calculations. To illustrate further, depending on the policy of the financial institution(s) issuing the CD's, interest on the CD's can be compounded daily, monthly, quarterly, annually, or any other way that is deemed useful to the issuing institution. (monitorbankrates.com)

What this means is that the interest on the new balance with interest is calculated more frequently leading to a higher amount of accumulated interest. For example, a $10,000.00 CD compounded annually for 2 years at a rate of 5% will yield an ending balance of $11,025.00 whereas a $10,000.00 CD compounded daily for 2 years at a rate of 5% will yield an ending balance of $11,052.00. The bankrate.com website calculator also has an interest rate calculator that automatically compounds the interest on monthly compounded and other types of CD's.

Intertnational, credit union, and bank CDs

Various different financial institutions offer certificates of deposits to clients. For this reason, shopping around for the best CD rate can be beneficial as financial practices, regulations and policies of financial institutions varies form institution type and governing authority. Some of the higher international certificate of deposit annual percentage yield rates are listed below as sourced from money-rates.com, and offer double the yield of U.S. CD's and higher. A disadvantage of these CD's are that the banking regulations protecting CD holders are different from country to country, be subject to foreign currency exchange fluctuations, and minimum deposits may be required.

• South African 6 month CD 8.75%
• Brazil 3 month CD 6.40%
• New Zealand 6 month CD 6.22%
• Australian 6 month CD 5.58%

Credit Union Certificates of Deposit are insured by the National Credit Union Share Insurance Fund (NCUSIF) which is a federal insurance program that protects depositors up to an amount the same as the Federal Deposit Insurance Corporation (FDIC) Rate i.e. $100,000.00 or $250,000.00 depending on the time period in which deposits are made. U.S. Credit Union CD's aren't necessarily better than U.S. bank CD's as a 6 month rate comparison between bank CD's and Credit Union CD's indicates the bank yields aren't always necessarily lower.

Summary

Interest rate yields on Certificates of Deposit vary considerably across financial institutions, CD types, and issuing currency and/or country. Certificates of Deposit interest rates may be fixed or variable and calculation of interest may compound at fixed intervals ranging from daily to annually.

In the United States, Certificates of Deposit provide an insured way to save earning interest higher than typical savings or money market accounts. The insurance of bank and credit union issued CD's is limited to the pre-set federal insurance per account that is currently $250,000.00. However, this insured amount was scheduled to revert back to $100,000.00 of coverage starting in 2010 pending any future adjustments.

Sources:

1. http://www.bankrate.com/brm/rate/deposits_home.asp
2. http://www.fdic.gov/deposit/deposits/index.html
3. http://www.bankrate.com/brm/calc/cdc/CertDeposit.asp
4. http://www.money-rates.com/intsavings.htm
5. http://www.ncua.gov/shareinsurance/
6. http://www.bestcashcow.com/cash_equivalents/fcuaccounts.html
7. http://financial-dictionary.thefreedictionary.com/Variable-rate+CDs
8. http://www.fdic.gov/deposit/deposits/certificate/index.html

How to define money

Money is a medium of exchange that reflects value either via limited supply and/or economic proxy. How to define money is also asking what method is used to define money. A common conception of what money is, is cash money, however money can be defined purely in terms of numerical value which itself differs within foreign exchange. Money can also be defined in terms of where it comes from, for example Investopedia defines hard money as currency backed by precious metal as well as repeated government funding.

Ancient Chinese 'Spade' or 'Pu' Money

Image license GFDL Attribution: Roger McLassus

Alternatively, money can be defined by how it is used; for example, is it used with physical or digital exchange. How to define money also involves answering different questions about what money is such as what is it made of? Gold and silver were once used as money, but are now mostly used for commemorative and collectible coins when in currency form. Thus the questions asked in defining money also offer a way how to define money i.e. the act of questioning rather than inferring meaning   Some methods for defining money are listed below.

• Inquiry in to the how, why, what and where of money
• Analysis of the answers to the inquiry of what money is
• With counter-hypothesis to reveal vague aspects of money
• Historically, scientifically, sociologically, economically and artistically

Without a method, or means by which to discover how to define money, answering how to define money may be left unanswered or simply defaulted to a basic answer such as 'Money is any object, resource or actualized concept that reinforces the idea all things have worth'.

Thus, assuming thought is a valid way to discover how to define money, thinking what it would be like without money is one way to define money. Moreover, in such instance worth would not be defined in terms of a representational currency and that would have potentially dramatic affects on civilization, society and economics.

Money facilitates economics

Money is the facilitator of economic growth, demographic expansion, and the infrastructure now required to keep so many humans living a life in modern day society. Thus, money is more than just a medium of exchange and valuation metric as defined by the online Merriam Webster Dictionary.

To define money for what it is involves understanding what money does by inquiry and extrapolation of what money is thought to be. Money is a dynamic intermediary facilitator of trade, commerce, lifestyle, standard of living, services, and exchange. Money is also a concept from which other concepts can be derived. For example, financial derivatives are a conceptual abstraction derived in part by and with the metric of monetary value.

Money also partly defines our identities as humans because we use it frequently, and our lives are somewhat dependent on what money makes possible. This is where the phrase “Money is power” is referring to, however money itself is not power but rather a tool of power or power tool! In other words, when defining money as power one means the use of the money holds influence over the actions and possibly even beliefs of others via a greater more important need to survive which to a large extent is only made possible via money. Thus money can be said to be one or more of the following:

• Global facilitator of exchange
• Influential and/or important part of society
• Basis of commerce
• Representational of human belief
• Quantitative metric
• Physical object and/or digital record
• A conceptual abstraction

Money is not an emotion

Money is not that which it represents, meaning when thinking about how to define money, one may equate money with quality of life when all it really does is facilitate standard of living. Moreover, money is not wealth but the measure of wealth; not economic status, but a measure of economic status etc.

Money is also not a feeling or emotion, but rather a means to some feelings or emotions. Nor, in the minds of many but perhaps not all, is money a god or deity which is to be worshiped. Money may indeed be worshiped on or off the record by some, but the worship of money does not mean money itself is a god or deity. Moreover, gods and deities regardless of their true existence, are most commonly personas and not objects.

Another thing that money is not is essential for life from an existential point of view. Moreover, money is a human social construct that has become almost essential for life, but only because humans have made it so. Thus, what is done, can also be undone, therefore money is not necessarily essential per se.

Lastly, money is not defined as any one object or thing. Since money can be coins, bills, an electronic balance, a goat or even a particular action, then money is not any one of these things per se and in its entirety. Money may indeed be a coin, but money just because some money is a coin doesn’t preclude it from being something else.

• Wealth or status
• That which money represents
• Gods or deities
• Emotions or feelings
• Essential for life
• A single object type of exchange

Summary

How to define money is a matter of context and context is the situation in which money is defined. For example, a simple exchange using a dollar bill in and of itself, and not taking into account the role of money in society but simply the use of money will only explain what money is used for, and some of the means by which money is used i.e. paper currency. To define money in a larger context requires the inquirer to place money in different contexts so as to define money more completely as money is more complex than it may seem.

Money as a tool is defined and used in a variety of ways via derivative metrics, multiple forms of money and within differing institutions with different functions and goals ex: non-profit vs profit financial institutions. What money is not is most clearly what it represents as money is at best a reflection of life and all it has to offer and not life itself.

Investment plans for kids

Piggy banks are good for storing money but the money in a piggy bank doesn't teach a child about interest and inflation. They generally can't pay for college tuition either unless they pennies and nickels are invested very well. If you can teach a child to invest his or her allowance so (s)he can retire before you do, you may have done well in getting them started with investing. This article will discuss a number of different investing plans for kids.

The best time to start investing for a child and teaching a kid about investing is before they are born and during their childhood years. What's more if a child starts learning about investing at a young age they won't have to learn about it when they become adults and discover the real world for themselves. In fact financial planning may be just as important as musical training, physical education, and literacy. This article will present some of the savings and investing options for kids, and then follow up with summarizing commentary.

Child savings accounts

The ideal savings account for a child has no annual maintenance fee, a high interest rate, friendly and helpful customer service and online banking. As in the world of adult banking, some bank accounts are better than others in terms of free stuff for opening an account and free services. Credit Unions offer accounts that meet some of these requirements, otherwise separate accounts with joint ownership can be established by the parent. For example, if a financial institution offers an option to open a money market account opened under the same account number and/or owner as a checking and/or savings account, that money market account can be the child's account. Additionally, the child can learn more about the account by visiting websites such as this.

College savings plan

Eventually a child is going to turn 18 and either enter the workforce, stay at home for a little while longer or go off to some kind of post-secondary education program. For the latter there are '529' College savings plans and Coverdell Education Savings Account (ESA). Money used through these plans are completely tax deductible for parents and tax free for the future student when the money is used for education.

Toy and bicycle funds

A toy and bicycle fund can be a parent managed fund that grows with good behavior and discipline and declines with bad behavior and discipline which are things that also lead to wealth in the adult world. Kids can be updated about the amount in the fund and how much they need to do or receive as gifts to acquire additional gifts and toys. This type of fund will help give children a more constant awareness about the value of money.

Individual retirement accounts (IRA's)

It's never too early to save for retirement, however unnecessary or unrealistic it may be. In fact an annual IRA contribution started at birth at maximum contribution amounts could be worth over $120, 000 by age 29 or the same age young people may start thinking about retirement. If that isn't a head start what is?

A/B Trusts

A/B Trusts are a financial instrument that allow parent's with estates invest their money through a trust that may reduce estate taxes. With an A/B Trust, children inherit an estate with potential tax advantages due to use of the estate tax exemption. With an A/B Trust, the surviving spouse is entitled to a portion of the value of an estate and/or its income and the children of the spouse is entitled to another portion. Since the trust is separated this way, estate taxes are reduced and in some cases done away with thereby increasing the value inherited by the children.

Life insurance policies

Other savings vehicles for kids can include a life insurance policy with cash values that fluctuate and appreciate over time. The mere concept of life insurance during childhood is quite abstract and a real step in the direction of financial savvy if a child can grasp the concept. What's more a child life insurance policy can also benefit parents in terms of being reimbursed for costs associated with accidental injury not covered by health insurance and tax deductibility.

Investment plans for kids is ideally one part of a complete financial education program for children as investing does not include other important financial lessons such as budgeting, expensing, employment income and dealing with financial institutions. Nevertheless, investing plans for kids are beneficial to both parents and children and can prevent potential financial crises later in life. The investment products and ideas presented in this article are just a few of the several investment vehicles available, but do embody some of the more important types of investing i.e. toys, college, retirement, and tax savings.