Mutual funds review: New York Life

New York Life mutual funds are called Mainstay funds and are part of the larger financial management and planning services offered by New York Life. Mainstay Investments is a separate financial institution owned and operated by New York Life. A little background into the company can help one understand where the Mainstay funds fit into the overall picture in terms of New York Life's financial services.

The company itself is a very old and established insurance company that has a quality track record in terms of its financial management and client-company relationship overall. The Mainstay funds are the funds New York Life offers to clients as part of their financial planning services. Detailed information about Mainstay funds can be viewed via New York Life's website, www.newyorklife.com and/or in the financial section of various newspapers.

Kinds of mutual funds

Mainstay funds span across the typical classes of stock capitalizations and diversification categories including small cap, mid cap and large cap funds in addition to international, money market and index funds. The funds come in three primary types, class A, class B, and class C. Class B and C shares of Mainstay funds don't have front end sales charges but incur higher annual management costs of .75% in addition to a contingent back end sales charge. Class B shares are convertible to Class A shares but A and C shares are not convertible. Sales charges for investments in Class A Mainstay Funds typically range between 1.5-5.5% at the front end of the purchase.

Mainstay funds can be invested in through New York Life's individual retirement accounts, life insurance policies, college savings plans or directly through a New York Life account depending on what one's financial goals are.

Historical Performance of New York Life's Mainstay Funds 

• Mainstay All Cap Growth Fund Class A, Lifetime performance 10.98% 

• Mainstay ICAP International Fund Class A, Lifetime performance 12.29% 

• Mainstay Small Cap Growth Fund Class A, Lifetime performance 5.28% 

• Mainstay small Cap Opportunity Fund Class A, Lifetime performance 10.42% 

• Mainstay Total Return Fund Class A, Lifetime performance 9.19%

(www.newyorklife.com)

Advantages and disadvantages of Mainstay mutual funds

Since New York Life is an insurance company, mutual funds may be bought as part of a life insurance policy and incur monthly premiums and fees that may eat into the actual stated performance of the mutual funds. In exchange, an account holder receives insurance benefits and an account with cash value depending on the funds performance, consistency of premium payments etc. depending on the type of insurance policy.

New York life financial statements sent out to clients may be complicated and the process of managing one's funds may be time consuming as this has to be facilitated by New York Life in accordance with pre-established policies and the type of account. In other words, holding Mainstay funds may be best considered part of a long-term family personal financial package rather than a sole investment strategy in and of themselves.

Information about the management of and performance of mainstay funds can be obtained via New York Life's website which includes significant background, management and financial information such as annual and bi-annual reports, regulatory information and prospectuses.

In terms of Mainstay funds' history, management and consistency they can be considered a good to reasonable investment. However, the fees associated with some classes of the shares in addition to the type of account they are held through may limit or reduce the total annual percentage gains realized by the account holder. These drawbacks are offset by knowing one's money is being managed by a reputable company and that one's other needs such as Insurance requirements and retirement savings management are being factored into the equation.

Written 01/07/2008

Do Permanent Open Market Operations affect the stock market

In the spring of 2009, the New York Federal Reserve Bank, a component bank of the U.S. Federal Reserve Bank, announced it would initiate what was to be called Permanent Open Market Operations which has since been abbreviated to POMO by market commentators and investors.

The purpose of the Permanent Open Market Operations is to counterbalance inflows and outflows from the Federal Reserve Bank. By adjusting its balance sheet of assets and liabilities, the Federal Reserve Bank can also maintain the available amount of money supply which in turn affects market liquidity i.e. how much money is in the economy.

Tips on how to shop for auto insurance

Shopping for car insurance is a rather uniform process that is assisted by competition among auto insurers, and large amounts of information regarding auto insurance regulations, requirements, features etc. When shopping for car insurance your safety, financial security, and the protection of others on the road are primary concerns.

To shop for car insurance it's good to know about these things in addition to your vehicle, driving history, coverage types and insurers because car insurance is based on all these things. Doing this can be done in a step by step manner for the purpose of understanding what rates you qualify for, if you're being overcharged, and if you have enough car insurance.

What to do if you receive a counterfeit money order

Identifying a fake money order before purchase prevents an indemnification process

Counterfeit money orders are fraudulent and should be reported immediately. If the money orders are used for a transaction, the transaction should not be completed. Knowing what to look for and how counterfeit money order scams work is a good start to preventing receipt of counterfeit money orders, but after that time has passed additional measures are necessary.

First, the money order must be identified as counterfeit; section III of this article illustrates how to do that. Following identification of the counterfeit money order, steps should be taken to protect yourself, your money, and your business' money in addition to preventative measures that can help you avoid similar events in the future and/or allow legal action against the fraudulent party.

Steps to take if a money order is identified as fake

The situation of how, where and why a fake money order is received can vary making the process of dealing with the money order different in some cases. For example, if the money order is identified as such during a business transaction the method for dealing with it will be different than if one has received a phony money order through the mail in exchange for a product or service.

Step 1: Don't panic, ask sender for identifiation i.e. driver's license 

Step 2: Record contact and identifying information

Step 3: Stop or cancel the transaction if it's not to late

Step 4: Make a copy of the money order

Step 5: Contact authorities ex. Police or FBI, or Citizen's arrest

Step 6: Inform fraud alert distributors of the crime

Additional fraudulent money order tips

Since money orders vary, the quality and scope of the money order counterfeiting can either be localized, national and in some cases international. There may already be fraud alerts put out for money order counterfeiting so checking these may be of assistance. In all instances, being aware that money order fraud exists and that it can be identified is an important step in prevention of money order fraud victimization.

• Sign up to local and national fraud and scam alert systems

• Do not accept money orders as payment

• Educate yourself on the behavior of fraudsters and scam artists

• Know what physical differences to spot on fake money orders

• React quickly by contacting authorities as soon as possible

• Be willing to press charges and expose those attempting fraud

Identifying counterfeit money orders

Depending on where one is located the types of money orders that may be fake can vary. In the United States several such possibilities exist including counterfeit U.S.P.S. money Orders, 7-11 money orders, Western Union money orders, Credit union, Bank money orders etc. All money orders in the U.S. are not allowed to by issued in an amount higher than $1000.00 and holding a money order under an ultraviolet light may reveal security markings otherwise difficult to see or invisible to the eye. Some fake money order features to look for and/or lack thereof are listed below.

• Faulty or no watermark

• Fake hologram

• Poor ink quality

• Color variation

• No security thread or micro-printing

• Inset fibers may be missing

• Higher than $1000.00 in the United States

Fraud resources links and educational information

The above information was partially sourced from the following resources which may be of additional assistance in preventing, dealing with and counteracting money order counterfeiting.

1. Federal Citizen Scam and Fraud Information Center: http://www.pueblo.gsa.gov/scamsdesc.htm
2. Federal Bureau of Investigation: http://www.fbi.gov/majcases/fraud/fraudschemes.htm
3. New York Times article on Postal money order fraud: https://postalinspectors.uspis.gov/radDocs/consumer/mofeatur.htm
4. E-How article on identifying fake postal money orders: http://www.ehow.com/how_4489385_recognize-fake-money-order.html
5. Postal Money Order Scam Alert by the Texas Attorney General: http://www.oag.state.tx.us/agency/weeklyag/2006/0706counterfeit.pdf

Image license: Dvortygirl, CC BY-S.A. 2.0

Are Federal Reserve Quantiative Easing Programs Helpful to Markets?

Quantitative easing is a term used to describe a form of economic stimulus offered by the Federal Reserve Bank to help boost market activity including business lending. This type of economic aid is an alternative to government funded investments, tax breaks and subsidizing. In the case of the U.S. Government, as of October, 2010, deficit spending has become so high that it has reached levels near that of World War II and the Great Depression. Hence, the assistance of the Federal Reserve Bank is seen as a viable alternative to increase business and lending activity. This however, may not be as beneficial to business and market activity as some predict for more than one reason.

The first reason quantitative easing by the Federal Reserve might not be as helpful as intended is method. On October 27, 2010, reports that the U.S. Federal Reserve bank would only place hundreds of billions of dollars into the economy via treasury purchases over three months caused concern. This is due in part to market psychology, and second, due to actual quantitative availability of funds for potential lending, spending and investment. Skeptics became concerned that a gradual and cautious approach to a second round of Federal spending in a way that did not mirror an earlier version was not the amount priced into market values.

How to read an SEO report

A Search Engine Optimization (SEO) report is a briefing that illustrates traffic aspects and effectiveness of a websites search engine optimization. Search Engine Optimization (SEO) is important because search engines are structured to locate internet queries using pre-defined models. Reading SEO reports involves being able to understand what information the reports provide and why that information is useful. This article will illustrate why SEO reports are important, what is included in them, and where to find them. Before discussing SEO reports, the relevance of SEO is good to understand in the first place. The video below explains SEO in detail:

Why SEO reports are important 

Search engine optimization reports are important because they can help webmasters and/or website managers determine how effective certain web pages are at driving traffic to their site. Since the SEO report statistics are broken down into key areas of website performance, the webmaster can assess which areas of web development could improve the overall traffic to a site and listings via search engine spider searches. Search engine optimization reports compile data on a number of relevant site statistics such as those listed below:

How a C Corporation is taxed

C corporations are the largest of U.S. corporations and also subject to the most extensive tax reporting requirements and documentation. C corporations may include a private company with 200 shareholders or a large publicly traded company with market capitalization in the billions of dollars. C corporations are subject to reporting a lot of financial activities and thus require strong bookkeeping and documentation throughout the tax year. According to the following presentation, C-Corporations' combined federal and state taxes amount to apporoximately 40 percent in some states, and which is deducted from earnings prior to shareholder distributions:

Tax forms required

There is a considerable amount of required documentation for filing as a C corporations. The primary IRS form is the 1120 which is different from the 1120S, a tax form required for S-Corporations which are small businesses with 100 or less shareholders. The form 1120 also includes several schedules that are used for calculating cost of goods sold, tax credit, total officer compensation, balance sheet items and dividends. The necessary documents to fill out and their complete instructions are freely available through the Internal Revenue Service.

Perils associated with day trading stock options

Day trading has between a 5-30% statistical chance of success according to market observers and financial analysts. The North American Securities Administrators Association (NASAA) has reported 70% of stock day traders lose all their capital through day trading. (1)

Risk alone is a major peril of day trading stock options. The reasons why day trading stock options is risky, especially to those unfamiliar with the practice, is lack of know how, the debt leveraging involved in day trading stock options, and the unpredictability of the market in general.

Stock options are risky derivative financial instruments

Complexity of options rules

The actual process of day trading stock options is a peril because of the complexity and attention to detail that rapidly changes with fluctuations in market conditions. Moreover, risk management methods vary with the financial instrument, industrial sector, investment type etc., and a new technique may be needed for each trade depending on what is most financially suitable for the market. Properly learning how to day trade stock options can have positive results on the probability of success, but this isn't necessarily easy. However, those who are able to learn how to day trade mostly do not lose money as confirmed in a U.S. Securities and Exchange Commission (SEC) report that quotes the Electronic Traders Association (ETA).(2)

High capital investment

According to the Financial Industry Regulatory Authority (FINRA), day traders who do so more than 4 times in one week with more than 6% of their trading capacity are subject to a minimum stock reserve of $25,000.(3) This is a large amount of liquid capital that can incur opportunity cost and risk of its own.  For example, if the $25,000 consists of the majority of the day traders net capital worth, and the aforementioned day trading risks apply, then that day trader is putting a large amount of their financial security at risk.

Margin calls, commissions and fees

Another peril of day trading stock options are the costs of day trading. Since day trading involves frequent buying and selling, transaction commissions and fees can add up fast. If those transactions do not yield a profit in excess of the commissions and fees, not only has the option day trader lost money, but time as well.

Options contracts are usually based on cost per 100 shares not including broker commissions and generally cost more per contract when the perceived chance of success is higher. For example, an option to buy 10 option contracts to sell British Petroleum before January 2012 might cost  $38.80 per contract at a share price below $70.00 but only $3.50 at a share price below $17.50.(4)

Increased stress

A fourth peril of day trading stock options is the stress. The U.S. Bureau of Labor Statistics (BLS) sites professions in Securities, Commodities and Financial Services Sales to be among the more stressful.(5) In the case of retail stock option day traders, this follows by extension as the amount of money that can be gained or lost in a matter of moments is large making the threat of bankruptcy, massive debt and great loss of financial stability real.

In summary, the perils of day trading stock options are considerable and worth paying attention to if sound financial planning, and a relatively stable life are of interest. The potential loss, stress, costs, time and risks involved in day trading stock options are significant perils that make it less of an easy money scenario, and more of a high stakes, time consuming and complex series of tasks that repeat themselves several times per week.

Sources:

1. http://bit.ly/cjZBLs (NASAA)
2. http://bit.ly/bHsmy5 (Securities and Exchange Commission)
3. http://bit.ly/9PzpRD (FINRA)
4. http://yhoo.it/cTv1Gp (Yahoo Finance)
5. http://bit.ly/9sFnOT (Bureau of Labor Statistics)

Image license: Damian Gadal, CC BY 2.0

Mutual Fund Review: Pioneer Mid-Cap Value Fund Class A

Pioneer Mid-Cap Value Fund Class A (PCGRX) is one of several classes of Middle Capitalization funds managed by Pioneer funds. The Pioneer Mid-Cap Value sister funds are class B, C, R, and Y. The class A mutual fund is the largest of the 5 with over $900 million dollars in managed assets, a 1.13% expense ratio and a total return of nearly 4% since its 1990 inception date.

The Pioneer Mid-Cap Value Fund Class A is managed by a financial services and investments firm called Pioneer Investment Management, Inc. that is of European ownership and registration with offices and mutual fund tailored to the United States market(s). The company and/or asset management by the company has been in operation since the late 1920's. This review will discuss the Pioneer Mid Cap Value fund in regard to its performance, characteristics and competitiveness as a choice among an array of similar funds.

Pros and cons of stock buybacks

Stock buybacks occur when a corporation uses available cash to repurchase shares of itself either from shareholders or from the market in which available shares circulate. There are a number of advantages when corporations buy back stocks, however there are also a few disadvantages. Knowing and recognizing when a stock buyback is genuinely good for a company can help distinguish between the pros and cons of stock buybacks. The video and text that follow further explain what stock buybacks are and what the advantages and disadvantages exist with them:

Pros of stock buybacks

• Reduces dilution of shares

Unless a company is about to reissue a different class of shares or resell shares at a future point the medium to long-term affect of share repurchases is a reduction of outstanding available shares. Investors tend to favor stock repurchases because the affect is usually a dilution of available shares which can increase both price and demand.

Types of international bonds

Some types of international bonds sound more like an athletic league listing than financial instruments with names like Kangaroo, Dragon, Bulldog and Yankee bonds. What these bonds have in common is that they are all international in the sense they can by issued by foreign countries or international corporations. For example, a Kangaroo foreign bond is denominated in Australian dollars, but is not issued by the Australian government. Rather, the issuer of the Kangaroo bond is the foreign organization, country, or corporation seeking to raise money exclusively in Australia.

Not all international bonds may be available for purchase according to Laura Bruce of Bankrate.com. However, as Bruce points out, there are other ways to invest in the foreign bond market. Moreover, in addition to bond funds, there are plenty of other international bonds to choose from, all with varying interest rates and ratings, which may also trade via accessible bond exchanges or purchasing services. Below is a listing of some of the different types of international bonds that can be purchased.

The United States Agency for International Development describes international bonds as coming in three types of markets 1. Eurobonds, 2. Foreign bonds, and 3. Global bonds.  These bonds are classified by who the issuer is, what currency the bond is denominated in and where the bond is sold. Eurobonds don't have to be issued in or by the country of currency denomination, but foreign bonds do. Global bonds are a type of international bond that can be issued both in and out of the country of denomination. The video below provides additional information about international bonds:

Types of foreign bonds

Matador bonds

Matador bond is a term given to bonds issued in Spain by foreign organizations. These bonds, as with any bonds, may be subject to default. According to Investopedia, Matador bonds can be issued despite low bond ratings thereby increasing the potential risk to investors.

Maple bonds

The Maple leaf is the symbol on the national flag of Canada hence the term Maple bond identifying this type of international bond. Maple bonds are issued in Canadian dollars by international entities such as corporations. These types of international bonds provide a lower risk avenue of foreign investment provided the bonds are highly rated. According to the bank of Canada, the majority of Maple bonds issued in the mid 2000's where from U.S. and non-U.S. banks.

Yankee bonds

Yankee bonds may sound like they are American bonds, but they're not. Yankee bonds are a type of international bond because they are issued by foreign entities and denominated in U.S. Dollars after having registered with the national regulatory authority i.e. the Securities and Exchange Commission (SEC).

Sumarai bonds

Similar to Yankee bonds in the sense registration and approval are required by Japan's securities regulator i.e. the Japanese Financial Services Agency. Samurai bonds can be issued by entities outside of Japan. These types of international bonds are issued in Yen and can be purchased by the public to help raise Japanese investment capital.


Each type of international bond is subject to regulation by the country in which it is issued and the underwriting requirements of the bond. A list of international securities regulators can be found at Mondovisione for further investigation of international bond regulation. The terms of international bonds can vary considerably. For example, Eurobonds can be issued with fixed and variable rates in addition to asset backed and convertible bonds. Investigating the benefits, fees, commission, and terms of bonds are generally a good idea before considering purchasing these types of financial instruments.

Sources: (Date of record, October 20, 2010)

1. http://bit.ly/cAhYHe (US Agency for International Development)
2. http://bit.ly/9GvE4q (Bank of Canada)
3. http://bit.ly/ap2Whq (Bankrate.com)
4. http://bit.ly/cluqwS (Investopedia)
5. http://bit.ly/coml7q (Eurobonds.Info)

Mutual Fund Reviews: Charles Schwab

Charles Schwab mutual funds are named after Charles R. Schwab, the Founder and Board of Directors Chairman of Charles Schwab Corporation (SCHW). Charles Schwab mutual funds began in 1984, and have evolved into a developed and researched medley of investment selections as managed by a financial services firm that is well entrenched within the industry. Schwab mutual funds include over 60 funds and more than $230 billion in managed assets.

Schwab funds are subdivided by management and itemization categories. For example, fund groups include those maintained by Charles Schwab Investment Management and/or Laudus funds, or funds that are a part of Schwab's Mutual Fund One Source and Mutual Fund Select List programs. Many of the Schwab funds are no load and no transaction fee meaning they do not charge for purchase or sale of the mutual funds, but rather pay for services through maintenance fees and/or service charges. Some of the Charles Schwab mutual funds include affiliated funds such as the Laudus funds in addition to Schwab owned and managed funds such as the following:

• Schwab Tax-free bond fund (SWNTX)
• Schwab balanced fund (SWOBX)
• Schwab Market track growth portfolio (SWHGX)
• Schwab Core Equity Fund (SWANX)
• Schwab Inflation Protected Fund (SWRSX)

How to save money on surgery

Low cost high quality surgery may sound like a contradiction but isn't always the case. The reason highly valued medical services such as surgery can be obtained at a low cost is due to improved international health care training. Moreover, international medical operations that develop at a faster pace than standard of living in addition to different medical business models overseas can save money on surgery. 

In other words, when well trained doctors and dentists live in countries where the standard of living is lower, health insurance and surgery tends to be cheaper for individuals coming from economies with a higher standard of living; going to these countries for surgery can save money. Thus, finding low cost high quality surgery is an advantage for those patents who can take advantage of exchange rates, and geographic variation in cost of services.

Where to find cost effective surgery

Saving money on surgery does require a little research, after all, life is a precious thing and if one didn't value life, surgery wouldn't be necessary in the first place. Having said that, different countries have different surgical advantages. For example, for individuals in the United States seeking more cost effective cosmetic surgery, why not consider Mexico? The travel costs are relatively inexpensive, especially via automobile and the net medical costs are a lot cheaper. Additionally Doctors that are Board  Certified can be referred through former patients, referral services and Doctors.

If you're in the market to save money on heart surgery and don't have insurance don't despair just yet. Heart surgery costs in India might be able to give you a bypass for a few thousand dollars compared to the tens to hundreds of thousands charged in the U.S. If you're wondering if the Doctors there can be trusted with you heart, research might give you confidence. According to the Economist magazine (2), Indian hospitals have developed smarter and cheaper ways to provide quality heart surgery to patients. Moreover, some Indian medical models are being duplicated and sold to other countries.

The list of places to go to save money on specific surgery goes on and essentially involves what is known as medical tourism. Medical tourism is an industry that is comprised of patients, patient's families, specialized travel agents, medical facilities, and medical networks.

Surgery via the medical tourism industry

The medical tourism industry is growing according to health-tourism.com (1) and is attractive to both patients and health providers for a number of reasons stated in a an article by Forbes.com. (3) There's no doubt, globalization has created a more competitive playing field when it comes to current international medical treatment and costs. This lowers the cost of high ticket health care items such as surgery depending on the location and type of surgery. The following news report describes this growing industry:

Costs to keep in mind when considering medical tourism include pre-hospitalization stay, travel, post-operation facility, and any therapy that may be required after the surgery. If the total costs after individual and family travel are significantly lower for a surgical procedure similar to or better than a local procedure, then medical tourism may be a wise choice to save money on surgery after additional considerations and contingencies are also considered. For additional information on researching and obtaining medical treatment abroad, the following resources may be helpful.

• Patients without borders

• Medical Tourism Association

• Healthbase

• Med retreat

Medical tourism has emerged for a number of reasons including excessive costs of health care in foreign countries, lower operating costs in other countries, improved international medical professional training, differentials between medical care and standard of living, and improved medical operations. Individual patients might do well to take advantage of the plethora of potential benefits available through medical tourism. Life is precious, but it might end up costing less for an even better medical result with medical tourism.

Sources:

1. http://www.health-tourism.com/medical-tourism/statistics/
2. http://www.economist.com/displayStory.cfm?story_id=13496367
3. http://www.forbes.com/2006/10/25/health-medical-tourism-biz-cx_1026oxford.html
4. http://www.time.com/time/magazine/article/0,9171,1003450-2,00.html
5. http://healthbeyondborders.files.wordpress.com/2009/01/med-tourism-cost-comparison.jpg

Taxes on inherited Roth IRAs

Taxes on Roth Individual Retirement Accounts (IRA's) can be minimized and/or avoided if certain tax rules are heeded with financial caution and prudence. This article will discuss the taxation of inherited Roth IRA's, and some of the scenarios in which Roth IRA's might be taxed after inheritance. Roth IRA's are a retirement savings instrument that might be best considered as part of an overall retirement plan so as to maintain federal insurance of retirement funds,minimize taxation during life and after life in the case of inherited Roth IRA's and in the diversification of assets for purposes of risk management. The following instructional video explains what happens and what is required when a Roth IRA is inherited:

Taxes on inherited Roth IRAs

When faced with inheritance, the beneficiaries may be exposed to three to four types of taxes, specifically, estate tax, federal and state income tax and possibly property tax on inherited property. Estate tax determines how much of the deceased's income will be taxed before distribution, then federal income tax follows, with state income tax after that. For example, if estate tax charges 48% of the estate's value, the taxable income from the estate is the value after estate tax is deducted. 

In some cases, estate and income tax combined can end up costing a beneficiary near half of the inheritance. In the case of Roth IRA's, the insured amount is only $250,000 for a single Roth IRA, so it might be imprudent to have a Roth with a value above this amount. If however, the value of the Roth IRA is higher than this amount, the following hypothetical example illustrates how it might be taxed with close to maximum estate tax rates.

1) Roth IRA value $5 million (subject to estate tax for amount of $3.5 million in 2009) 2) Tax equals $555,800 + 45%=$555,800 3) $555,800+ 45% x ($944,200)=$555,800+$444,890=$980,690 4) $3.5Million -$980,690=$2,519,310

How to minimize or avoid estate tax on Roth IRAs

To avoid the estate tax on inherited Roth IRA's the deceased can do a number of things prior to dying, as can the beneficiaries of the deceased. First, if the Roth IRA is included in an estate valued under the taxable inheritance minimum, estate tax may not be charged on the Roth IRA's value. Second, the Roth IRA can be part of an AB trust in which ownership of the trust is not assumed by the beneficiaries at the time of death. Other options include better tax planning several years prior to dying so that asset growth is less likely to be subject to high taxes.

• Place the Roth IRA in an AB trust before dying
• Ensure the value of the estate is below the minimum taxable amount
• Reallocate Roth funds into non-taxable instrument prior to death
• Transfer ownership of the Roth IRA to a foreign owned Trust company

Roth IRA's are useful financial instruments for avoiding income tax but not estate tax. (investmentguide.com) Thus, if an estate is worth over the taxable benchmark set by the government for that year, for example $3 million, then that value is taxed if it includes a Roth IRA. For this reason it can be important to know which assets and financial instruments are not included in the estate value calculation.

Moreover, being aware of what methods exist for lowering potential tax on inherited Roth IRA's can also be important. For example, in some instances, trusts such as AB trusts are not taxable following the death of the primary trustee. It may be unlikely that a Roth IRA would be subject to estate tax regardless of their ability to avoid this tax because Roth IRA's are only insured up to $250, 000.00. For this reason, controlling the size of the Roth IRA and hedging against taxes through tax protected investment vehicles such as insurance policies or non-taxable bonds may be a good idea.

Sources:

1. http://www.irs.gov/pub/irs-pdf/p590.pdf
2. http://tinyurl.com/64rgbz2
3. http://fsc.fsonline.com/fsj/archive/2004est.html
4. http://rothiraexplained.com/fdic-insurance-coverage-for-iras.html
5. http://www.schwab.com/public/file?cmsid=P-1625576&cv1
6. http://tinyurl.com/6d4qsw7 (Expired reference link)

Mutual fund reviews: T. Rowe Price New Asia Fund

The T. Rowe Price New Asia Fund (PRASX) was initiated on September 28, 1990, and is one of numerous international mutual funds managed by T. Rowe Price. T. Rowe Price (TROW) is a publicly owned and traded investment management firm that has been in business for over 80 years, has offices worldwide, and has a market capitalization/worth of over $10 billion dollars. According to the T. Rowe Price mutual fund prospectus, the New Asia Fund invests in small and large growth orientated companies throughout emerging markets within Asia, thus naturally excludes Japan.

Mutual fund performance

The New Asia Fund is ranked by Morningstar's star rating system with 2 stars for its 3 and 10 year return performance and 3 stars for its 5 year progress meaning it ranked between the 10-67.5th percentile of all mutual funds reviewed by Morningstar. Despite this relatively low ranking by Morningstar, the T. Rowe Price New Asia Fund has performed relatively well in terms of long term average annual returns yielding 6.01% if held since its first issue. Moreover, the New Asia Fund has returned higher 3, 5 and 10 year yields than the T. Rowe price International Growth and Income fund, the T. Rowe Price Global Stock Fund and the T. Rowe Price International Equity Index Fund.

How the Wall Street Reform Bill regulates derivatives

The U.S. Senate Committee on Banking and Housing approved a financial reform bill titled 'Restoring American Financial Stability Act of 2010', in March of 2010.(3) The bill was released by Senator Christopher Dodd (D) and did not initially garner enough votes to pass through the Senate in late April of 2010. A no vote from Senate Majority Leader Harry Reid (D) however, allowed the bill to return to the Senate according to an April 26, 2010 Reuters report.(1) In early May, the bill once again became active in the Senate as Democrats attempted to rally enough votes to pass the bill.

Among the objectives of the financial reform bill is the regulation of derivatives, financial instruments that's value is derived from underlying commodities or assets. Out of control derivatives spending is a culprit that led to the collapse of the U.S. Housing Market that began in 2007, and subsequently to massive financial assistance to large U.S. Banks deemed too big to fail. The Restoring American Financial Stability Act of 2010 was designed to prevent similar scenarios from becoming as damaging to the U.S. economy in the future.

The impact of temporary tax hikes to fill city budget gaps

In a study by the Lincoln Institute of Land Policy called 'The Nuts and Bolts of Development Finance' Jack R. Huddleston states "Ultimately, it is the characteristics of new development that will determine financial impacts for a municipal government." (Huddleston, p.10) 

What Huddleston is saying is that the impact of city budgets, be they comprised of debt, services revenue, municipal tax or a combination of all three, is determined by how well planned development takes into account future financial costs, and municipal revenue growth. Three areas to consider when ascertaining the financial impact of temporary tax hikes to fill city budget gaps are proper implementation,  accurate assessment and quality decision making.

Proper implementation of tax hike

The impact of temporary tax hikes to fill city budget gaps depends on what or who is being taxed. For example, if a business development area is being subsidized, but that subsidy is being paid for by taxpayers, what are the effects on the business revenue stream and thereafter government wealth.

This depends on if the businesses stay in the area or not; if the businesses rely on a municipal revenue stream and the temporary tax policy is prohibitive to consumer spending local employment may rise temporarily, but if the tax isn't lowered shortly thereafter, the revenue base for those companies may not allow sustainable business leading to unemployment once again.

Accurate assessment of tax benefit

This is clarified by Huddleston where he states "Property tax reductions for economic activities may simply shift the burden of paying property taxes to other land and property owners (e.g. residents), without producing an overall decrease in the amount of property taxes collection."(p.21) So in the short run, if business development needs to be financed by a temporary rise in taxes, it should have controlled impact on the municipal tax base if incrementally or realistically applied.

By 'realistically applied', one means the tax increase should be measured based on a combination of trends that include the tax hikes impact on business activity, population, employment, and revenue utilization. If these factors are ascertained to be related to the tax hike in a statistically significant way, then past tax hikes and their affects can be used as a measuring instrument by which to forecast the impact of future tax hikes used to fill city budget gaps.

Quality of tax decision

Another factor to consider is what the budget gap actually is and how well the existing city budget is managed. If the budget gap is a shortcoming or inhibitor of economic development rather than city maintenance then the use of temporary tax revenue as stimulus for economic growth is financially healthier. Moreover, it is financially healthier to solicit temporary taxes for this purpose than say an installation of upgraded utility equipment when the need for the upgrade is minimal.  In the latter case, the financial affects will not be optimized for best use or return on investment.

The impact of temporary tax hikes used to fill city budget gaps is also a matter of decision making capacity within a seeming enigma of financial input from multiple analyses, assessments and objectives. Huddleston states "The important point for planners attempting to increase their understanding of local government finance is that seemingly complex financial mechanisms and concepts can usually be broken into more simple and understandable basic concepts." (p.23)

In other words, if the time is taken to properly understand the impact of temporary tax hikes used to fill city budgets, then the resulting decisions made in light of such, are at least more likely to be inline with a shorter term tax policy's impact in terms of demographic, economic and municipal sustainability.

Source:

http://www.lincolninst.edu/subcenters/teaching-fiscal-dimensions-of-planning/materials/huddleston-plan-budget.pdf Huddleston, Jack R. 'Lincoln Institute of Land Policy: 'The Intersection Between Planning and the Municipal Budget', 2005.

Assessing the European Investors Working Group (EIWG)

The European Investors Working Group (EIWG) is an organization that emerged to provided non-governmental input from the investing community to European financial regulatory bodies. The EIWG was created in 2009 and consists mostly of corporate executives, and attorneys in European organizations and companies. The EIWG's first two sessions took place on June 30, 2009 and September 18, 2009. This article will discuss the EIWG in terms of their identity within the Chartered Financial Analyst Program, their independent objectives and its path toward those goals.

Who the European Investors Working Group is

The European Investors Working Group was established by a similar and larger group called the 'CFA Program' that is an organization that tests and documents Chartered Financial Analysts (CFA) The CFA Institute also administers Investment Performance Measurement Certifications (CIPM). In addition to investment credentialing, the CFA Institute primarily advocates for the investment community, maintains standards within its industry and is globally recognized financial credential. The following is a list of objectives the CFA initiated the EIWG to carry out.

Understanding the meaning of market risk

Market risks are threats investors face that are derived from conditions external to the investor him or herself. Market risk is sometimes referred to as systematic risk but is different from systemic risk.(2) To be more specific, market risk includes inherent uncertainties that can occur at any time regardless of preventative measures, whereas systemic risk is more influenced by controllable business variables rather than adjustments to individual investment strategy.

Why market risk is mostly unavoidable

Market risk is unavoidable in any situation where an investor places money in a financial instrument such as stocks or bonds. Some financial instruments are exposed to less market risk than others, but all investments are not immune from market risk. For example, even government issued inflation protected securities are subject to risks having to do with the currency in which the securities pay interest. Inflation protection may be incorporated into the securities, but if that currency devalues against many other currencies, the purchasing power against those currencies can still decline.

Types of market risk

A number of market risks exist, some of which are more probable than others depending on the type of investment and the market environment in which the investments are made. (1) For example, the above section states currency risk depreciates the value of inflation protected securities, but what if the currency is stable, or goods purchased with the currency are cheaply made and acquired domestically? The answer is other risks such as interest rate risk may also apply. Since interest rates are subject to economic conditions, in the case of floating rate inflation protected securities, they could still decline in interest payments even if inflation rises.

How market risk affects investments

Market risk affects investments by making them worth less, but risk sometimes can preclude higher returns. Risk can also be priced into securities so that the more cautious investor feels they are exposing themselves to less market risk. An example of this is a risk premium added to bonds that are rated lower than investment grade; another word for these bonds is 'junk bonds'.  Market risk can also cause volatility in the value of an investment such as stocks. For example, if economic conditions change, and the industry in which stocks are held is affected by that change in economic climate, then the risk of business failure or profit decline emerges.

Methods for dealing with market risk

Apart from industry regulation,(5) market risk can be limited through risk management methods such as investment techniques, calculated selection and market analysis. Just as one would not go out in a hurricane to buy a bag of apples, investing in certain market conditions is like walking into a hurricane. By studying the market, the specific risks that investments pose and ways to hedge against those risks, market risk can be reduced. Common techniques for risk reduction in include diversification and investment in FDIC insured accounts. The reasons why diversification is thought to be effective in reducing market risk is because it spreads out investment over a number of industries or businesses. However, it is important to note than in macro-economic instability, even diversification can fail.

Measuring market risk

Market risk can be measured in a number of ways. According to the Financial Times, Systematic indices exist that keep track of risk levels of various investments.(3) Moreover, these indices specifically measure performance of investments that are known to be vulnerable to different kinds of risks. For example, a fund that trades currencies is not necessarily subject to the same risks as a fund that invests in precious metals.  Several other methods of measuring risk also exist, and for example, they may involve risk formulas(4) or qualitative evaluation of business management. Another measure of market risk is the market risk premium. This calculation is illustrated in the video below:

Market risk varies between financial instruments and the amount of risk individual investors or investment firms take depends on their financial investment model and objectives. In any case, taking market risk in to account when making financial decisions is commonly practiced by non-speculative investors and is an important part of the financial planning process.

Sources:

1. http://bit.ly/aEUUxt (FINRA)
2. http://bit.ly/cJfwfw (Investopedia)
3. http://bit.ly/b2MMMm (Financial Times)
4. http://bit.ly/bogSd2 (University of Wisconsin)
5. http://bit.ly/anZomF (SEC)

Estate planning tips for Connecticut residents

Planning an estate in Connecticut may require careful consideration and diligence to the State's laws because doing otherwise could end up costing more money and time than necessary when the estate transfers ownership. This article will discuss the planning of Connecticut estates in terms of estate deductions, estate relevant taxes, and  additional Connecticut estate planning information. It will also provides links throughout as reference, and sources of additional information regarding a particular aspect of estate planning in Connecticut.

Connecticut estate deductions

Familiarizing with estate deductions is important in reducing the value of an estate for tax purposes. For example, if an estate is taxable when it reaches a value of $2 million dollars, lowering its value via deductions to below $2 million dollars would eliminate that particular tax. In Connecticut, estates are valued after the same deductions allowed by the U.S. Internal Revenue Service. These and other deductions are viewable at the following links:

Using gas as a tax reduction

Gas can be deducted from personal taxable income if it is work, medical, logistic or charity related. Gas used for leisure is not tax deductible according to IRS Revenue Procedure 2008-72. The four categories for which gas costs may be used as a tax reduction are from the IRS 2009 Standard Mileage Rates available at the Internal Revenue Service website, and include the following categories and allocations for the 2009 tax year. These tax deductions are sanctioned in Title 26 of the U.S. Code, specifically sections 213, 217, 162(a), and 170(i). These sections outline specific vehicular use for which tax deductions may apply. 

• Work -55 cents per mile ex: Travel to clients homes during workday
• Charity – 14 cents per mile ex: Travel to volunteer church choir
• Logistics -24 cents per mile ex: Travel to new city for new job
• Medical -24 cents per mile ex: Trips to hospital for medical treatment

What shows up on a locked credit report

The information that shows up on a locked or frozen credit report depends largely on the circumstances surrounding the request  and who is requesting the credit report from a credit agency. A locked credit report prevents creditor access to the information on your credit report which includes your payment history, term of accounts, creditors, available credit and personal information. 

By locking this credit information via a credit security freeze, credit data cannot be sold and distributed thereby preventing fraud, theft and distribution of personal information. A list of things that don't show up on locked credit reports is below.

1. Credit history

2. Existing creditors

3. Credit limits and use

4. Delinquent accounts if any

5. Personal information

How locked credit report data may still be viewed

What shows up on a locked credit report also depends on a number of criteria being fulfilled in addition to the circumstances in which those criteria take place. For example, the method by which a credit report is locked may vary from State to State. This information and the different State criteria to freeze credit reports is available on the Experian Credit Agency's 'Security Freeze' webpage . Some of the questions that may assist in determining what information on a locked credit report is available, if it is indeed locked and when the credit report will be locked.

Where to look to get the best mortgage rates

Looking for the best mortgage interest rate need not be complicated or difficult. To make it less difficult, first identify the type of loan you are looking and qualify for, then find out what companies or organizations service these types of loans. For example, if you are seeking affordable housing solutions and have a low to medium income, you may even qualify for a zero percent forgivable mortgage through programs such as Community Frameworks. Similar programs exist nationwide, but are subject to resource and application limitations.

For mortgage borrowers who only qualify for non-subsidized mortgages, good rates can still be found. The most recent edition of a national newspaper's business section should have basic average mortgage rates such as 30 year, 15 year and Adjustable Mortgage Rates. Sites like mortgageloan.com can help you look for and compare the best  average mortgage rates by region, loan type, loan amount and credit.  However, this does not mean you can't get a lower rate than the national average. This is because other factors can influence what your actual mortgage rate will be.

Regional differences

Different regions of the country may be experiencing different economic conditions which can also influence mortgage rates. For example, Nevada, California and Florida all experienced large home price depreciation and foreclosures in the years following the housing bubble burst in 2007-2008. These conditions may make mortgage rates in these areas lower than in other areas of the country. For example, on October 22, 2010, several of the 30 year fixed rate mortgages on Zillow.com were quoted at rates as much as 50 basis points or half a percent lower than the national average of 4.24 percent.

Selecting a financial institution

When looking to get the best mortgage rates, another thing to consider is the financial institution or mortgage lender. If you are purchasing a home directly from an owner via a rent to own type situation, the rate may be privately negotiable as the lending formula is probably not the same as a mortgage bank. Mortgage banks and banks that offer mortgage loans may differ due to competition. For this reason where you look for mortgage rates in your area could yield several different rates.

Type of mortgage loan

The type of mortgage product can also influence what you find in places that offer mortgage loan products. For example, the rate and terms of a 203(K) FHA mortgage rehab loan can differ from an REO mortgage on government owned property. Each loan may be subject to different housing regulations and therefore varying interest rate allowances, benchmarks and restrictions. This is especially the case with government and non-profit mortgage loans.

Mortgage rate variables

The best mortgage rates are dependent on a few financial variables that are ideally factored into the equation when looking for them. A mortgage loan officer should be able to inform you about some of these factors when applying for a mortgage. A basic rule of thumb is the less risk there is to the bank, the lower the rate will be. Risk is calculated using debt to income ratio, credit score, down payment amount, asset worth etc.

Lowering mortgage rates

After having looked for the best mortgage rates and found some ballpark estimates you then have a mortgage rate with which to improve upon. For example, if you are looking for a 15 year refinance for under $100,000.00 what can you do to lower the rate from the existing quote you are given by a broker, online rate quote, or mortgage lender?  For example, you may be able to purchase 'points', which is essentially an extra upfront cost that is entered into your good faith estimate and lowers your mortgage rate.

Sources: (Date of record, October 22, 2010)

1. http://bit.ly/a74Pny (Zillow.com)
2. http://bit.ly/agLURp (Community Frameworks)
3. http://bit.ly/c4SZMo (Mortgageloan.com)
4. http://bit.ly/2VAul8 (HUD)
5. http://bit.ly/anU2YX (Fannie Mae)

The top Morningstar rated funds

The top rated Morningstar funds are divided into categories including dividend, value, growth, large-capitalization, mid-capitalization and small-capitalization. Additionally, within these groups, Morningstar rates fund by classes; for example ABC Fund Class A and ABC Fund Class B. As of the date this article was produced, Morningstar’s top rated funds included 1) AIM Diversified Dividend Fund, 2) Allianz NFJ Small Cap Value Fund, 3) American Century Equity Fund, 4) American Century Mid Cap Fund, and 5) the American Century Small Cap Mutual Fund. Morningstar rates each of the funds within this category to come up with the highest rated funds. 

Before delving into the top rated Morningstar funds it is a good idea to understand what Morningstar is and why their ratings are considered by some to be useful assessments of mutual funds. Morningstar describes itself as an investment research firm that has been around since the 1980’s before mutual funds became the massive industry they are today. Over time the Morningstar product line, reputation and analysis grew with the market making it a leading investment information firms. Having said that, and without further ado, more about the top rated Morningstar funds as of the date of this article are as follows:

When refinancing a car loan is a good option

Refinancing a car loan is a good option if it serves to reduce cost and helps place the car buyer in an improved financial condition. As a functional finance instrument, refinancing doesn't necessarily have any fees associated with it. Sometimes refinancing a car loan might seem like a good option, but may cause more financial harm than good in terms of total cost, credit rating and budgeting. This could happen if the extra cash flow from the car loan refinancing is mishandled, or the loan adjustment rate and term isn't financially advantageous. However there are several circumstances in which  refinancing a car loan may be a good option.

Lower payments

Lower car loan payments can arise out of a refinanced car loan if either the interest rate is adjusted or the term of the loan lengthened.  If interest rate stays the same, but the term of the car loan is extended from 36 to 60 months, it can lower monthly payments but may simultaneously increase the cost of servicing the loan. However, if the refinanced car loan has a lower interest rate with a longer term the cost may stay the same while lowering monthly bills which could be helpful.

Higher credit

If the refinanced car loan is able to assist in making payments on other debts previously unpaid, this is a positive and can help improve credit score associated with the late or non-payment of debt. However, if the refinance increases discretionary income and that income is used as down payment for additional debt, then the affect on credit score may be negative. Also, with an extended payment schedule it can take longer to reduce debt to credit ratio, however having a debt to credit ratio of less than 40 percent on multiple types of credit can be better than having the same for just one type of credit.

Saved money

Ideally refinancing of car loans is a good option when it also saves money. This is accomplished most effectively with an interest rate, compounding terms and servicing costs that lower the cost of the loan and monthly payments. For example, suppose the original car loan was for $8,500 at a fixed rate of 6.4 percent interest compounded monthly with a term of 36 months; this would cost $260.13 per month. If the car loan were extended to 60 months at 5 percent would that be good?  It would cost $160.41 per month at a lower rate but the total cost would be $259.92 extra interest.

Better budget

Another benefit of refinancing a car loan can be with a budget. If too much of one's monthly budget goes toward car payments it can have a negative affect on other costs, savings, and retirement planning where the net affect can be a magnified loss of money due to misallocation of funds. In the above example, the refinanced car loan is more expensive but requires almost $100 per month less. Should that extra $99.51 be reallocated to a financial instrument yielding three percent, after five years of monthly payments with an initial deposit of just one dollar, the final amount would be $6,440.89.

Keep in mind, the original amount of $260.13 saved or invested after the 36th month would yield $6429.59 after 24 months. Thus, using these numbers it would be more cost effective to use the 5 year auto loan at five percent with monthly savings of $99.51 than the three year plan with deposits of $260.13. If an extra. .51 cents were added to the $99.51 monthly savings over five years a yield of $6,472 would be earned. The financial outcomes between the three year and five year plan are rather minimal in terms of total savings, however at a larger scale, for example with a $40,000 auto loan, the car refinancing provides larger scale affects on cash flow, savings, credit and financial planning.

The following video on how to refinance a car loan:

Sources:

1. http://bit.ly/5RQYy (Bankrate Auto loan)
2. http://bit.ly/aQNJul (Bankrate Savings)

Best small cap stocks that pay dividends

A 'Small-Cap' stock has a share price that after being multiplied by the share float amounts to between $300 million and $2 billion in value. Several small-cap stocks currently have dividend values in excess of 10 percent.(1)

Defining what the 'best' among these small-cap stocks is a little more subjective. This is because stock performance can be evaluated using a wide range of indicators and metrics making the evaluation as good as the tools used to make the assessment. Having said that, here is a list of 5 stocks that issue high dividends.

1. Administradora de Fondos de Pen (PVD) 11.10 percent

When assessing the performance of the above small-cap company, one can begin with annual revenue. For example, Administradorea de Fondos de Pen had a huge jump in revenue between 2008-2009; more specifically from $278.233 million to $213.609 billion.(1) This kind of revenue jump could be  a one time jump or an indicator of the company's capacity to generate growth. Annual revenue however, is just the tip of the iceberg when it comes ot performance evaluation.

What is an options spread?

An options spread is a technique used in stock options trading that makes use of two financial instruments known as 'options' orders so as to hedge risk and increase probability of profit by making use of different price movements by writing, selling, and/or buying options. An options spread can be used with any underlying market that allows trading via options.

The name option spread is no coincidence as the option is literally an option to use a financial instrument for a price. A spread represents two price points such as in a bid/ask spread, only in options, the spread is between two prices. When the words 'option' and 'spread' are brought together, so are the meanings of each word i.e. two options that represent a trading technique that involves financial contracts.

How an option spread works

Options are a derivative financial instrument meaning their value is derived from an underlying product. For example, with stock options, shares of a company are packaged into groups of 100 and bought and sold for a contract price or premium. The options can be either in the money, at the money or out of the money. This means the price of the underlying financial instrument can be either profitable, not profitable or even when exercised or used.

This contract, if bought, allows buyer to 'exercise' the options at a certain price before a specific date. If sold, the buyer of the option pays a premium to the seller and the seller pays the buyer if the option is exercised 'in the money' or beyond the 'strike' price i.e. the price after which the option becomes profitable. Some of the key elements of an options spread are listed below:

• Order type: ex: Limit order, market order, stop loss
• Risk: Potential to lose money via the spread
• Market: ex. Bull, bear, secular, cyclical
• Strategy: Option spread(s) used
• Broker: Trade facilitator
• Product: Stocks, commodities, currency

Types of option spreads

The type of option spread used reflects the strategy of the spread. For example, a calendar spread makes use of two different expiration dates for the same type of option. This type of spread may be used when the buyer or seller is convinced of a price movement but not the time when the price movement will occur. A number of different spread types exist, some of which are listed below:

• Bull Call Spread: Hedges cost of bullish options
• Bull Put Spread: Premium benefit if stock remains above strike price
• Bear Call Spread: Benefits flat price movement
• Bear Put Spread: Inverse of Bull Call Spread
• Calendar Spread: Makes use of different option expirations
• Backspread: Lowers risk for up and down price movements

Each of the above mentioned spreads makes use of different option types, techniques and predicted price movements. The variable element is the price movement which is it not guaranteed, and the details of each spread involve several variables and concepts, only a few of which are mentioned herein. In other words, when researching and making use of option spreads, it can be a good idea to pay close attention to 1) how the spread works, 2) when it is profitable, 3) the likelihood of it succeeding and 4) the monetary risk involved.

An options spread is trading mechanism that makes use of two financial instruments known as options. These are comprised of products from which the options' price is derived. Different types of options spreads are used to make use of 1) different price movement directions, 2) time of price movement, 3) extent of price movement and 4) combination of options used.

Options spreads are bought and sold using brokers and trade through markets such as the Chicago Board Options Exchange (CBOE). Options spreads are regulated by the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC). These regulatory bodies are further assisted by the participation of individual options exchanges in collaborative surveillance of their business through the Options Regulatory Surveillance Authority (ORSA)

Source: http://www.optionseducation.org/ (Options Industry Council)

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

Mutual Funds Review: Russell 200 Index funds

Russell 2000 index funds are mutual funds and exchange traded funds (ETFs)based on the Russell 2000 index (^RUT). The Russell 2000 index is an equity weighted price metric for small capitalization companies also known as small caps. The Russell 2000 is considered an important index for measuring the performance of smaller companies across various industries and has several key features.

• Measures performance of companies with less than $1 billion in equity
• Consists of 2000 U.S. Small Capitalization companies
• Diversified across a number of industrial and service sectors
• Weighted for capitalization

Funds that attempt to correlate either directly or inversely with the index are trying to provide investors with a basket of small cap businesses similar in size and performance to those companies within the Russell 2000 index, or in the case of inverse funds, financial instruments believed to perform contrary to that of the businesses within the Russell 2000. Some Russell 2000 Index funds are listed below.

The difference between marginal and weighted average cost of capital

As the names imply, both weighted average cost of capital (WACC) and marginal cost of capital measure cost of capital. Capital is any money used to finance a business and/or its operations and can include a number of sources and methods. These sources may include traditional debt or equity financing or owner financing. Other forms of financing include grants, gains on investment capital, retained earnings, accrual financing contracts and forward payment agreements on capital.

Marginal cost of capital

Different types of capital are used in different amounts and for different costs. It is the costs of capital that is marginal and may involve or include a basic interest rate cost structure. For example, if Company A acquires a loan for $100K at an interest rate of 7% for one year, compounded annually, that capital will cost $7K. 

A simple average cost of capital may not accurately represent the true cost of capital for a company. For example, if Company A is financed by$100K of debt at 7%, $50K of equity at 12% and  $75K of owner financing at 0%, the average cost of capital would be 7% + 12% + 0% divided by 3=19%/3=6.33%. However this cost is not accurate because it does not take into account the different amounts of money at the different rates. In order to amend this discrepancy in calculation, the weighted average cost of capital is used.

Weighted average cost of capital

Weighted average cost of capital multiplies the amount of capital by the percent rate of cost for that capital as a proportional percentage of total capital and then averages 2 or more costs that are calculated in the same way. This can be further understood by dividing the previous sentence into two concepts: average amount of total capital and percentage cost of capital type. Using the above example concept one is illustrated below:

Concept 1: Average amount of total capital

If 3 types of capital are used; one at 44.44% of total capital, two at 22.22% of capital, and 3 at 33.33% of total capital the three added together add up to 99.99% of total capital. These 3 percentages are the proportions by which each rate of capital cost must be multiplied by in order to obtain the weighted average cost of capital.

Concept 2: Percentage cost of capital

The percentage cost of capital takes the marginal cost of capital and multiplies that by the proportional cost of capital. To continue illustrating with the above example, Company A uses $7K at 7% of debt at 44.44% of total capital that equals a proportional rate of 3.11%. Using the same reasoning for the $50K of equity at 12% and $75K of owner financing at 0%, WACC becomes 3.11% + 2.66% + 0%=5.77%/3=1.9233%. So the weighted average cost of capital is 1.9233% and is a more accurate representation of Company A's cost. The video below further illustrates the cost of capital calculation.

Marginal cost of capital and weighted average cost of capital a cost values that help a company manage its capital budgeting and asset management operations. Without knowing cost of capital, a company is less able to determine what rate of return projects and investments are required in order to break even, or surpass initial cost to acquire a profit margin. Marginal Cost of Capital may involve less calculation than WACC, however marginal cost may be calculated by incorporating tax rates, overhead, insurance or any other cost associated with acquiring the particular capital.

Marginal cost of capital can be included in the weighted average cost of capital calculation because each type of capital when weighted itself has marginal cost. Thus, marginal cost of capital and weighted average cost of capital are not necessarily mutually exclusive. Moreover, weighted average cost of capital generally cannot be a component of marginal cost of capital whereas the inverse is true for marginal cost of capital. Marginal cost of capital and WACC are important cost variables used in finance, accounting, project management, strategic management in addition to non-corporate analysis of the company such as in auditing, investment analysis, tax regulation and external financing.