Mutual Fund Investment: An open end fund that is purchased and redeemed with an investment company is a mutual fund. These investments are issuing new shares and are normally bought paying a sales charge to the company or a selling group member firm.There are mutual funds invested in every sector of the market and every investment objective.
The type of fund you choose should reflect your income needs, risk tolerance and your current and projected future financial situation
Investment Grade
A bond judged likely enough to meet payment obligations that banks are allowed to invest in it.
Ratings by Moody's and Standard & Poor's are given below:
Moody's S & P
Investment Grade Ratings Aaa Aa A Baa (AAA AA A BBB)
Below Investment Grade ("Junk Bond") Ba B Caa Ca C (BB B CCC CC C)
In Default D
Good Investment Concepts
Intrinsic Value
Present value of the operating cash flow stream (Net Operating Profit After Tax minus change in Total Capital) discounted at the company’s Cost of Capital. Also known as Enterprise Value.
Current Enterprise Market Price
The aggregate market value of all of a company’s or sector’s securities outstanding, including debt, preferred and equity.
Current Equity Market Price
The market value of a company’s or sector’s Common Stock Outstanding.
Free Cash Flow
Net Operating Profit After Tax minus Year-to-Year change in Net Capital.
Net Capital
Net Working Capital plus Long Term Assets.
Valuation Drivers
Factors which determine the course of the company’s (or sector’s) profits for a long time into the future. These include Sales Growth, Profit Margin, Cost of Capital, Capital Turnover and other elements which determine operating cash flows. These are the major, but not the only valuation drivers:
Growth Rate
Growth in Sales or Revenue
Cost of Capital
The weighted-averaged cost of: common equity, preferred equity and debt (after tax) of the individual company or sector. The cost of debt is the average interest rate for all the company’s or sector’s debt instruments over the forecast period. The cost of equity is the average total return demanded by an equity investor to invest in the company or sector. The cost of equity is assumed to be the same for all companies and to be driven by personal income tax rates, inflation expectations and the long-run historical difference in real, after-tax returns between equities
and bonds.
Profit Margin
Net Operating Profit After Tax divided by Sales. This is different from EBIT Margin which is EBIT (Earnings Before Interest and Taxes) divided by Sales.
Capital Turnover
Sales divided by Average Net Capital
Current Stock Price per Share
Recent closing price of a share of a company’s or sector’s Common Stock
Current Debt per Share
Total reported debt plus the present value of non-capitalized operating leases divided by current shares of Common Stock outstanding
Current Enterprise Value per Share
The Enterprise or Intrinsic Value divided by current shares of Common Stock outstanding
Intrinsic Value of Equity per Share
The Intrinsic or Enterprise Value minus the market value of total debt, then divided by current shares of Common Stock outstanding.
Adjusted Intrinsic Value of Equity
The Intrinsic Value of Equity adjusted to reflect the impact of dividend payouts and of future stock buybacks presumed by the model to use excess operating cash. The adjusted intrinsic stock value is the net present value of thirty years of cash flows to the equity investor discounted at the cost of equity. The investor cash flows will consist of dividend payouts for the first twenty nine years and the sum of the dividend and warranted stock price per the-then-current number of shares. The adjusted intrinsic value is, therefore, equal to the maximum price an investor should be willing to pay for the stock today in order to receive a total return equal to the cost of equity.
Simple Return
The non-compounded interest rate which an equity purchaser would earn by holding the stock for a specified period of time assuming purchase at the current market price and ending with a future Intrinsic Value of Equity per Share.
Compound Total Return
The interest rate which an equity purchaser would earn by holding the stock for a specified period of time and re-investing dividends annually at the then Intrinsic Value of Equity per Share.
Equity Investor Internal Rate of Return
The return which an equity purchaser would earn by holding the stock for 30 years, collecting all dividends and selling the stock at the Terminal Q Ratio at the end of thirty years
Free Cash Flow Annuity
The Free Cash Flow Annuity is calculated by taking the most recent annual Free Cash Flow (defined as Net Operating Profit After Tax minus Year-to-Year change in Net Capital) and dividing it by the current Long Term US Treasury Yield. This measure says "Ok, so if I never grow my current Free Cash Flow another nickel for the rest of time, how much is my stock worth using the Treasury yield as the discount rate?" This is a very conservative measure of intrinsic value. Any time you find a stock selling below that price, pay attention.
1y Target Est
The 1-year target price estimate represents the median target price as forecast by analysts covering the stock. Data is provided by Thomsonfn.com. More detailed target estimate data can be found by clicking a company's "research" link.
Avg Vol
Average Daily Volume is the monthly average of the cumulative trading volume during the last 3 months divided by 22 days. It is updated weekly and is provided by Market Guide.
Bid / Ask
The Bid price is the price you get if you sell your stock, and the Ask price is the price you have to pay to buy a stock. Note that the New York Stock Exchange (NYSE) does not permit Bid and Ask prices to be reported for delayed quotes, so this field is always reported as "N/A" (Not Available) for NYSE stocks.
Bid Size / Ask Size
Represents the number of shares a buyer is willing to purchase for the bid or ask price.
Change
The change in price for the day. This is the difference between the last trade and the previous day's closing price (Prev Close). The change is reported as "0" if the stock hasn't traded today.
Div Date
Dividend Pay Date. The date on which the dividend was last paid, or the date on which the next one will be paid.
Dividend (ttm)
All dividends paid out in the last twelve months are added together to create a "Dividend(ttm)". The trailing dividend is then divided by the most recent closing price to derive the Yield (see Yield). Depending on the dividend history of a particular company, the dividend(ttm) and yield could produce different results compared to the company's forward dividend which is calculated by multiplying the payment frequency by the most recent dividend.
EPS Est
Current year analyst consensus EPS estimate from Thomson/First Call. More detailed analyst estimates and consensus data can be found by clicking the "research" link for a symbol.
EPS (ttm)
Earnings Per Share (EPS) is stated for the most recent 12 months (ttm, trailing 12 months). It represents primary earnings from continuing operations attributable to each share of common stock outstanding, and is calculated by dividing the income from continuing operations by the average number of shares outstanding during the period (in accordance with generally accepted accounting principles, GAAP). The income is the income or loss that remains after excluding income or loss from discontinued operations and extraordinary charges or credits that are reported separately (again, per GAAP). Earnings Per Share is adjusted for stock splits and stock dividends. If data is not available for 12 months or more, "N/A" is displayed for EPS.
Daily updates are received on quarterly EPS data. Most earnings information is received within 48 hours of the company's earnings announcement. Every time a company declares their earnings, a record is sent for that particular earning figure along with a 12-month rolling EPS.
Ex-Div
The Ex-Dividend Date (without dividend). You need to purchase the stock before this date to receive the current quarter's dividend or stock split.
Exchanges
With detailed quotes, the stock exchange is listed along with the stock, such as (Nasdaq:YHOO). These abbreviations are used for the exchanges:
NYSE - New York Stock Exchange
AMEX - American Stock Exchange
Nasdaq - National Association of Securities Dealers Automatic Quotation System
OTC BB - OTC (Over the Counter) Bulletin Board Market.
Toronto - Toronto Stock Exchange
Alberta - Alberta Stock Exchange
Vancouver - Vancouver Stock Exchange
Last Trade
The time and price of the last trade made for the stock. The date is reported in place of the time if the stock hasn't traded today.
Mkt Cap
The Market Capitalization is calculated by multiplying the Last Trade by the current number of shares outstanding. Shares outstanding is updated weekly and is provided by Market Guide.
Open
Opening price for the day; first trade of the day. This is not always close to the previous day's closing price, especially when company news is released after the stock market closed the previous day.
P/E
Price to Earnings Ratio. This number is the previous closing stock price (see Prev Close) divided by the earnings per share, and reflects the value the market has placed on a stock.
PEG
PEG stands for price/earnings growth and is calculated by dividing the trailing P/E by the projected earnings growth rate (in this case, the 5 year annualized growth rate). The idea behind the PEG Ratio is to relate price to growth.
P/S
Price to Sales Ratio. This number is the previous closing stock price (see Prev Close) divided by the revenue per share.
Prev Close
The closing price for the trading day prior to the last trade reported.
Yield
The dividend(ttm) per share divided by the previous closing stock price (see Prev Close), as a percentage (multiplied by 100).
Goodwill
A class of intangible assets such as a company's name and reputation.
Goodwill shows up on a company's books when it acquires another company, and naturally has to pay more for it than the listed book value of its assets. The excess paid is categorized as Goodwill, added to the acquiring company's balance sheet as an asset, and then depreciated over a period of years.
Depreciation: Method to account for assets whose value is considered to decrease over time.
The total amount that assets have depreciated by during a reporting period is shown on the cash flow statement, and also makes up part of the expenses shown on the income statement. The amount that assets have depreciated to by the end date of the period is shown on the balance sheet.
Gordon Growth Model
Valuation formula holding that the total return of a stock investment will equal its dividend yield plus its dividend growth rate:
R = D/P + G
where D is next year's annual dividend;
P is the current share price;
G is the growth rate.
Stock Valuation based on Earnings
Stock valuation based on earnings starts out with one giant logical leap: you assume that each dollar of earnings per share of a company is really worth one actual dollar of income to you as a stockholder. This is theoretically because you expect the company to use that dollar in a beneficial way: for example, they could use it to pay you a dividend; or they could invest it in their own growth, which would cause future earnings to be even greater.
You also generally assume that the company will go through several distinct phases, starting with a "growth" phase where earnings are increasing at a predictable rate, followed by a "mature" phase where earnings level off to a constant level.
To find the value of a stock, you need to calculate all of these future earnings (out to infinity!), and then use your own desired rate of return as a discount rate to find their present value. The infinite sum of these present values is the fair market value of the stock; or more accurately, it's the maximum price you should be willing to pay.
To get the formula, we'll define some variables:
E = this year's Earnings per Share
G = growth rate of earnings (written as a decimal)
N = number of years earnings will grow
We're assuming that earnings will start to grow for N years, and then level off:
Year Earnings
1 E(1 + G)
2 E(1 + G)2
N E(1 + G)N
N + 1 E(1 + G)N
N + 2 E(1 + G)N
Now we'll write R for our desired rate of return, and use it to find the present values of all of these earnings:
Year Present Value of Earnings
1 E(1 + G)/(1 + R)
2 E(1 + G)2/(1 + R)2
N E(1 + G)N/(1 + R)N
N + 1 E(1 + G)N/(1 + R)N+1
N + 2 E(1 + G)N/(1 + R)N+2
What we've got here is two geometric series; one going from 1 to N, and the other going from N + 1 to infinity. The result is basically too ugly to bother writing out; it's more sensible just to use the formula for the geometric series in a spreadsheet or computer program. When people do write it out, they usually write it this way:
P = E1Q + E2Q2 + ... + ENQN + ENQN x Q/(1 - Q)
where E2 is the earnings in year 2 (or whatever) and Q is the so-called "discount factor" 1/(1 + R).
Zero-Growth Case
One special case is actually interesting to write out though. If you assume that the stock is already in the "mature", zero-growth years -- ie, that N is zero -- the geometric series formula will simplify to:
P = E / R
or, equivalently,
P / E = 1 / R
So if you take a desired return of 11%, you find that the theoretical "fair" P/E ratio of the zero-growth stock is 1/.11 = 9.09, which sounds reasonable.
Constant-Growth Case
A second special case that people use is the "constant growth forever" case, meaning N is infinity. The formula in this case simplifies to
P = E1 / (R - G)
where E1 is earnings over the next 12 months.
This approach can be dangerous. Constant growth forever means the company is going to get infinitely big, which is a hard concept to fit into a common sense understanding of valuation. The
formula will give you a number as long as the growth rate G is less than the discount rate R; but you can force it to give you a ridiculously huge number if you make G very close to R. This
graph won't let you try that - the blue bars could blow through the top of your screen and hurt somebody - but you can see it happen in the discounted cash flows calculator in the stock
valuation article.
How much is a share of stock really worth? Not just in terms of analysts' opinions, but logically, based on facts?
In theory, the answer is simple: a company is worth the total amount of cash it will generate over its lifetime, discounted to its present value. (And don't panic if you don't really understand that
last sentence, because the next page explains it. You do not need any background to read this article.)
This is a simple discounted cash flows calculator, along with some popular variations and shortcuts, to make stock valuation make sense. But before we get started.... When you use any kind of
value formula, it's a good idea to remember Warren Buffett's advice, that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price". The idea is to find
a company whose prospects you really believe in, and then use a valuation technique as a reality check, to make sure the purchase price is acceptable. And try to make your valuation
estimates realistic and conservative: you're trying to protect yourself from overpaying, not justify your surplus of enthusiasm.
Gross Domestic Product (GDP)
Total annual output of the U.S. economy, measured by its final purchase price.
GDP is divided into four categories, according to the final purchaser:
GDP = Consumer Spending
+ Business and Residential Investment
+ Government Spending
- Trade Deficit.
(See the interactive GDP Diagram.)
The gross domestic product includes enough sub-components that just looking at trends in the bottom line GDP number can give you a misleading idea of what the economy is actually doing.
One example: if a retailer successfully sells a product, the sale will count toward "consumer spending" at its retail price; if the retailer fails and the product bloats its inventory, it will count
toward "business investment" at its wholesale price (i.e. the price the retailer paid for it). Later, when the retailer works off the bloat, the decline in inventory will contribute a negative number
toward business investment, officially lowering GDP. In other words, the GDP calculation can make the start of a recession look better, and the recovery stage look weaker, than they really are.
GDP data is available from the Bureau of Economic Analysis (www.bea.gov).
Also see the definition of Gross National Product.
Government Spending
Spending by the federal, state, and local governments, accounting for about 20% of the GDP. See fiscal policy, and the interactive GDP Diagram.
Fiscal Policy
All policy by the government involving the collection and spending of revenue; ie "tax and spend" policy. In particular, fiscal policy refers to efforts by the government to stimulate the
economy directly, through spending. Compare monetary policy.
Monetary Policy
Actions by the Federal Reserve to control the money supply.
In particular, monetary policy refers to efforts to fight inflation or otherwise control or stimulate the economy by controlling the availability of spending money to companies and consumers.
Compare fiscal policy.
Components of the Gross Domestic Product
If the word on the street during the late 1990s was that the business cycle was dead, the lesson of the early 2000s is that Economics Happens. So in the spirit of too little, too late, here is a "big
picture" overview of the entire U.S. economy.
Gross National Product (GNP)
Total output of the U.S. economy; see the definition of Gross Domestic Product for details. GNP and GDP tend to be used as synonyms, although GDP is definitely the preferred measure among
economists and is gaining popularity in general conversation as well; the two measures are fairly close numerically. The difference is that GDP measures all production within the U.S., by
whoever happens to be working here; GNP measures the production of all Americans, wherever they happen to be working. (Maybe you can remember the "N" in GNP stands for "anywhere").
Gross Margin
Ratio of gross profit to sales revenue. (Also sometimes used as a synonym for gross profit).
For a manufacturer, gross margin is a measure of a company's efficiency in turning raw materials into income; for a retailer it measures their markup over wholesale.
Most companies would like a gross margin that's as large as possible. An exception is the discount retailer; part of their game is to make their operations and financing so efficient that they can
afford to keep their markup tiny.
Gross Profit: Sales revenue minus sales costs. Also called "sales profit".
Gross Revenue
"Raw" sales income; the amount customers actually pay the company when they make their purchases.
When a company sells products, it has to make allowances for some portion of its sales for products expected to be returned, lost in delivery, or otherwise requiring the company to refund the
customers' money. The "official" revenue number, known as sales revenue, equals gross revenue minus these allowances.
Gross revenue is generally not an interesting number for investors. One case where it is interesting is when you're tracking the progress of a startup company. It's possible that at the very
beginning they'll be doing such a tiny amount of business that actual sales will be less than the allowances for refunds, meaning that sales revenue will technically be a negative number. In
this case the company will issue news releases about its gross revenue, so investors will at least know that a few customers have been showing up and laying out some cash.
Sales Revenue
Income from sales of goods and services, minus the cost associated with things like returned or undeliverable merchandise. Also called "Sales", "Net Sales", "Net Revenue", and just plain
"Revenue".
Income Fund Definition
The definition of an income fund is a
mutual or other fund that has it's core
investments in established dividend paying
stocks and fixed income. These funds and
the stocks within it pay regular dividends.
They are more predictable, but offer less of
a chance for high capital gains later on.
These funds normally perform within a
range in up and down years for the stock
market. An income fund can fit into any
portfolio, but it is best for people who would
like or need income and who do not want to
take on too much risk in the future.
Mutual Fund Investment.
An open end fund that
is purchased and
redeemed with an
investment company is
a mutual fund. These
investments are issuing
new shares and are
normally bought paying
a sales charge to the
company or a selling
group member firm.
There are mutual funds
invested in every sector
of the market and every
investment objective.
The type of fund you
choose should reflect
your income needs, risk
tolerance and your
current and projected
future financial situation
Trust Account. A type of account where a
custodian or investment advisor manages
and oversees an investment account for
someone else, usually a minor
GOLD AND THE DISINTEGRATION OF U.S. ECONOMIC INFLUENCE
During the 1970's the world watched closely as the Watergate scandal unfolded. As well as the element of human fascination with such high level intrigue, any event which could de-stabilise
the US presidency would necessarily have a major impact on world financial markets. The worldwide concern relating to the US political troubles at the time was accompanied by an upward
spike in the gold price. Although the price of gold is affected by a large number of variables, it is probable that the price movements which occurred at the height of the Watergate scandal
were not coincidental.
In recent years we have observed the U.S. political administration become increasingly tainted with allegations and evidence of corruption and deception, the most recent of which involve
foreign contributions to Democratic campaign funds. In addition to a presidency soaked in scandal, the U.S. is currently experiencing rates of money supply growth which are the highest in 10
years and a Federal debt which has burgeoned to $5.3 trillion.
Had the current US political and economic situation prevailed 20 years ago, then the resulting worldwide apprehension would almost certainly have caused the price of gold to soar. Such an
escalation in the relative value of gold would likely have occurred irrespective of events elsewhere in the world, due to the dominant position of the U.S. within the global economy. However,
what we have actually witnessed in recent years is a bear market in gold which has seen the gold price drop to its lowest level in over 20 years when measured in inflation adjusted terms. This,
I believe, is symptomatic of America's reduced economic status in the world.
It is my opinion that there are 2 primary reasons for the reduced ability of events in the U.S. to influence financial decisions made throughout the world. Firstly, enormous growth has occurred
across Asia, catapulting this region into a position of economic leadership. The world now watches Asia with the same intense interest it once reserved for the U.S. In fact, the two largest Asian
economies, Japan and China, are also the largest foreign holders of claims on the U.S. Treasury and Federal Reserve (by claims I mean dollars, which are a liability of the financial institutions
which create them, and U.S. Government debt). This gives these Asian nations substantial leverage in any dealings with the U.S. The shift in economic power towards Asia will likely continue
at an accelerating pace and will also be a major positive for gold due to the healthy distrust of government promises which many Asians demonstrate when it comes to personal wealth
protection.
U.S. economic influence has dwindled hand in hand with the debasement of its currency.
The emergence of the Asian region as the dominant force in the global economy is not a reflection of any U.S. short-comings, but a naturally occurring phenomenon based on population
dynamics and trade. However, the other primary reason for the reduction in U.S. influence results from America's own actions. From 1933 until 1971, the U.S. dollar was linked to gold at the
official rate of $35 per ounce, which means that during this period the U.S. government was prepared to provide one ounce of gold in exchange for 35 U.S. dollars, and vice versa (to
everyone except its own citizens, that is). This official link to gold, however, created a problem for the government. It meant that the supply of U.S. dollars could not be arbitrarily increased to
suit higher levels of debt and a short term political agenda. The consequences of fiscal irresponsibility would be the complete depletion of America's gold reserves as the rest of the world
rushed to convert their de-based dollars into gold.
In 1971, President Nixon removed the official link between the U.S. dollar and gold. The U.S. government, no longer restrained by the need to exchange gold for dollars at a certain rate,
embarked on a spending spree which has seen the dollar lose around 90% of its purchasing power in 25 years. It has also reduced to a small fraction of its former self when measured against
most other major currencies.
Continuation of the current U.S. fiscal policies will firstly lead to the loss the dollar's reserve status, and eventually to the complete demise of the dollar as a useful medium of exchange. (Note
that the removal of the official link to gold did not, in itself, cause the collapse of the dollar. The real causes are numerous and include expansionist-minded banks, a Federal Reserve
unwilling to assert its independence from its political masters, and politicians who were/are prepared to mortgage the future living standards of U.S. citizens to achieve short term political
objectives. Nixon's action simply removed the last major obstacle to the furtherment of financially irresponsible practices on a large scale).
U.S. economic influence has dwindled hand in hand with the debasement of its currency.
In conclusion, evidence of political wrong-doings within the U.S. Government continue to surface. However, for the reasons discussed above, anything short of a presidential impeachment or
resignation is unlikely to significantly affect investment decisions made outside the U.S., including the decision to buy or sell gold. (Source: Milhouse)
Gold
Gold (pronounced /ˈɡoʊld/) is a chemical element with the symbol Au (Latin: aurum) and atomic number 79. It is a highly sought-after precious metal, having been used as money, as a
store of value, in jewelry, in sculpture, and for ornamentation since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in alluvial deposits. Gold is
dense, soft, shiny and the most malleable and ductile pure metal known. Pure gold has a bright yellow color traditionally considered attractive. It is one of the coinage metals and formed the
basis for the gold standard used before the collapse of the Bretton Woods system in 1971. The ISO currency code of gold bullion is XAU.
Modern industrial uses include dentistry and electronics, where gold has traditionally found use because of its good resistance to oxidative corrosion. Chemically, gold is a transition metal
and can form trivalent and univalent cations upon solvation. At STP it is attacked by aqua regia, forming chloroauric acid and by alkaline solutions of cyanide but not by hydrochloric, nitric
or sulphuric acids. Gold dissolves in mercury, forming amalgam alloys, but does not react with it. Gold is insoluble in nitric acid, which will dissolve silver and base metals, and is the basis of
the gold refining technique known as "inquartation and parting". Nitric acid has long been used to confirm the presence of gold in items, and this is the origin of the colloquial term "acid
test", referring to a gold standard test for genuine value.
1 Characteristics 1.1 Color of gold 2 Applications 2.1 As the metal 2.1.1 Medium of monetary exchange 2.1.2 Jewelry 2.2 Medicine 2.3 Food and drink 2.4 Industry 2.5 Electronics
2.6 Other 2.7 As gold chemical compounds 3 History 4 Occurrence 5 Production 6 Price 6.1 Price records 6.2 Long term price trends 7 Compounds
7.1 Less common oxidation states: Au(-I), Au(II), and Au(V) 7.2 Mixed valence compounds 8 Isotopes 9 Symbolism 10 Toxicity
Characteristics
Electron shell diagram of gold.Gold is the most malleable and ductile of all metals; a single gram can be beaten into a sheet of one square meter, or an ounce into 300 square feet. Gold leaf
can be beaten thin enough to become translucent. The transmitted light appears greenish blue, because gold strongly reflects yellow and red.
Gold readily creates alloys with many other metals. These alloys can be produced to increase the hardness or to create exotic colors (see below). Gold is a good conductor of heat and
electricity, and is not affected by air and most reagents. Heat, moisture, oxygen, and most corrosive agents have very little chemical effect on gold, making it well-suited for use in coins and
jewelry; conversely, halogens will chemically alter gold, and aqua regia dissolves it via formation of the chloraurate ion.
Common oxidation states of gold include +1 (gold(I) or aurous compounds) and +3 (gold(III) or auric compounds). Gold ions in solution are readily reduced and precipitated out as gold metal
by adding any other metal as the reducing agent. The added metal is oxidized and dissolves allowing the gold to be displaced from solution and be recovered as a solid precipitate.
Doctoral research undertaken by Frank Reith at the Australian National University, and published in 2004, shows that microbes can play an important role in forming gold deposits, transporting
and precipitating gold to form grains and nuggets that collect in alluvial deposits.
High quality pure metallic gold is tasteless; in keeping with its resistance to corrosion (it is metal ions which confer taste to metals).
In addition, gold is very dense, a cubic meter weighing 19300 kg. By comparison, the density of lead is 11340 kg/m³, and that of the densest element, osmium, is 22610 kg/m³.
Color of gold
Mainly, Gold appears to be metallic yellow. Gold, caesium and copper are the only elemental metals with a natural color other than gray or white. The usual gray color of metals depends on
their "electron sea" that is capable of absorbing and re-emitting photons over a wide range of frequencies. Gold reacts differently, depending on subtle relativistic effects that affect the
orbitals around gold atoms.
Applications As the metal
Medium of monetary exchange
In various countries, gold is used as a standard for monetary exchange, in coinage and in jewelry. Pure gold is too soft for ordinary use and is typically hardened by alloying with copper or
other base metals. The gold content of gold alloys is measured in carats (k), pure gold being designated as 24k. Gold coins intended for circulation from 1526 into the 1930s were typically a
standard 22k alloy called crown gold, for hardness. Modern collector/investment bullion coins (which do not require good mechanical wear properties) are typically 24k, although the
American Gold Eagle and British gold sovereign continue to be made at 22k, on historical tradition. The special issue Canadian Gold Maple Leaf coin contains the highest purity gold of any
bullion coin, at 99.999% (.99999 fine). The popular issue Canadian Gold Maple Leaf coin has a purity of 99.99%. Several other 99.99% pure gold coins are currently available, including
Australia's Gold Kangaroos (first appearing in 1986 as the Australian Gold Nugget, with the kangaroo theme appearing in 1989), the several coins of the Australian Lunar Calendar series, and
the Austrian Philharmonic. In 2006, the U.S. Mint began production of the American Buffalo gold bullion coin also at 99.99% purity.
Since the abandonment of the gold standard and the confiscation of monetary gold in the 1930s by the United States Government, gold has not generally been used in daily commerce.
Many holders of gold coinage retain their gold in storage as a hedge against inflation or other economic disruptions.
Jewelry
Because of the softness of pure (24k) gold, it is usually alloyed with base metals for use in jewelry, altering its hardness and ductility, melting point, color and other properties. Alloys with lower
caratage, typically 22k, 18k, 14k or 10k, contain higher percentages of copper, or other base metals or silver or palladium in the alloy. Copper is the most commonly used base metal, yielding
a redder color. Eighteen carat gold containing 25% copper is found in antique and Russian jewellery and has a distinct, though not dominant, copper cast, creating rose gold. Fourteen carat
gold-copper alloy is nearly identical in color to certain bronze alloys, and both may be used to produce police and other badges. Blue gold can be made by alloying with iron and purple
gold can be made by alloying with aluminium, although rarely done except in specialized jewelry. Blue gold is more brittle and therefore more difficult to work with when making jewelry.
Fourteen and eighteen carat gold alloys with silver alone appear greenish-yellow and are referred to as green gold. White gold alloys can be made with palladium or nickel. White 18 carat
gold containing 17.3% nickel, 5.5% zinc and 2.2% copper is silver in appearance. Nickel is toxic, however, and its release from nickel white gold is controlled by legislation in Europe.
Alternative white gold alloys are available based on palladium, silver and other white metals (World Gold Council), but the palladium alloys are more expensive than those using nickel. High-
carat white gold alloys are far more resistant to corrosion than are either pure silver or sterling silver. The Japanese craft of Mokume-gane exploits the color contrasts between laminated
colored gold alloys to produce decorative wood-grain effects.
Medicine
In medieval times, gold was often seen as beneficial for the health, in the belief that something that rare and beautiful could not be anything but healthy.[citation needed] Even some modern
esotericists and forms of alternative medicine assign metallic gold a healing power.[citation needed] Some gold salts do have anti-inflammatory properties and are used as pharmaceuticals
in the treatment of arthritis and other similar conditions. However, only salts and radioisotopes of gold are of pharmacological value, as elemental (metallic) gold is inert to all chemicals it
encounters inside the body. In modern times injectable gold has been proven to help to reduce the pain and swelling of rheumatoid arthritis. Dentistry. Gold alloys are used in restorative
dentistry, especially in tooth restorations, such as crowns and permanent bridges. The gold alloys' slight malleability facilitates the creation of a superior molar mating surface with other teeth
and produces results that are generally more satisfactory than those produced by the creation of porcelain crowns. The use of gold crowns in more prominent teeth such as incisors is favored
in some cultures and discouraged in others. Colloidal gold (colloidal sols of gold nanoparticles) in water are intensely red-colored, and can be made with tightly-controlled particle sizes up to
a few tens of nm across by reduction of gold chloride with citrate or ascorbate ions. Colloidal gold is used in research applications in medicine, biology and materials science. The technique
of immunogold labeling exploits the ability of the gold particles to adsorb protein molecules onto their surfaces. Colloidal gold particles coated with specific antibodies can be used as probes
for the presence and position of antigens on the surfaces of cells (Faulk and Taylor 1979). In ultrathin sections of tissues viewed by electron microscopy, the immunogold labels appear as
extremely dense round spots at the position of the antigen (Roth et al. 1980). Colloidal gold is also the form of gold used as gold paint on ceramics prior to firing. Gold, or alloys of gold and
palladium, are applied as conductive coating to biological specimens and other non-conducting materials such as plastics and glass to be viewed in a scanning electron microscope. The
coating, which is usually applied by sputtering with an argon plasma, has a triple role in this application. Gold's very high electrical conductivity drains electrical charge to earth, and its very
high density provides stopping power for electrons in the SEM's electron beam, helping to limit the depth to which the electron beam penetrates the specimen. This improves definition of the
position and topography of the specimen surface and increases the spatial resolution of the image. Gold also produces a high output of secondary electrons when irradiated by an electron
beam, and these low-energy electrons are the most commonly-used signal source used in the scanning electron microscope. The isotope gold-198, (half-life: 2.7 days) is used in some cancer
treatments and for treating other diseases.
Food and drink
Gold can be used in food and has the E Number 175.
Gold leaf, flake or dust is used on and in some gourmet foodstuffs, notably sweets and drinks as decorative ingredient.[6] Gold flake was used by the nobility in Medieval Europe as a
decoration in foodstuffs and drinks, in the form of leaf, flakes or dust, either to demonstrate the host's wealth or in the belief that something that valuable and rare must be beneficial for one's
health. Goldwasser (English: Goldwater) is a traditional herbal liqueur produced in Gdańsk, Poland, and Schwabach, Germany, and contains flakes of gold leaf. There are also some
expensive (~$1000) cocktails which contain flakes of gold leaf[citation needed]. However, since metallic gold is inert to all body chemistry, it adds no taste nor has it any other nutritional
effect and leaves the body unaltered.
Industry
Gold solder is used for joining the components of gold jewelry by high-temperature hard soldering or brazing. If the work is to be of hallmarking quality, gold solder must match the carat
weight of the work, and alloy formulas are manufactured in most industry-standard carat weights to color match yellow and white gold. Gold solder is usually made in at least three melting-
point ranges referred to as Easy, Medium and Hard. By using the hard, high-melting point solder first, followed by solders with progressively lower melting points, goldsmiths can assemble
complex items with several separate soldered joints. Gold can be made into thread and used in embroidery. Gold is ductile and malleable, meaning it can be drawn into very thin wire and
can be beaten into very thin sheets known as gold leaf. Gold produces a deep, intense red color when used as a coloring agent in cranberry glass. In photography, gold toners are used to shift
the color of silver bromide black and white prints towards brown or blue tones, or to increase their stability. Used on sepia-toned prints, gold toners produce red tones. Kodak published formulas
for several types of gold toners, which use gold as the chloride (Kodak, 2006). As gold is a good reflector of electromagnetic radiation such as infrared and visible light as well as radio waves,
it is used for the protective coatings on many artificial satellites, in infrared protective faceplates in thermal protection suits and astronauts' helmets and in electronic warfare planes like the
EA-6B Prowler. Gold is used as the reflective layer on some high-end CDs. Automobiles may use gold for heat insulation. McLaren uses gold foil in the engine compartment of its F1 model.
Electronics
The concentration of free electrons in gold metal is 5.90×1022 cm-3. Gold is highly conductive to electricity, and has been used for electrical wiring in some high energy applications (silver
is even more conductive per volume, but gold has the advantage of corrosion resistance). For example, gold electrical wires were used during some of the Manhattan Project's atomic
experiments, but large high current silver wires were used in the calutron isotope separator magnets in the project. Though gold is attacked by free chlorine, its good conductivity and general
resistance to oxidation and corrosion in other environments (including resistance to non-chlorinated acids) has led to its widespread industrial use in the electronic era as a thin layer coating
electrical connectors of all kinds, thereby ensuring good connection. For example, gold is used in the connectors of the more expensive electronics cables, such as audio, video and USB
cables. The benefit of using gold over other connector metals such as tin in these applications is highly debated. Gold connectors are often criticized by audio-visual experts as unnecessary
for most consumers and seen as simply a marketing ploy. However, the use of gold in other applications in electronic sliding contacts in highly humid or corrosive atmospheres, and in use for
contacts with a very high failure cost (certain computers, communications equipment, spacecraft, jet aircraft engines) remains very common, and is unlikely to be replaced in the near future
by any other metal. Besides sliding electrical contacts, gold is also used in electrical contacts because of its resistance to corrosion, electrical conductivity, ductility and lack of toxicity.[8]
Switch contacts are generally subjected to more intense corrosion stress than are sliding contacts.
Other
Many competitions, and honors, such as the Olympics and the Nobel Prize, award a gold medal to the winner.
As gold chemical compounds
Gold is attacked by and dissolves in alkaline solutions of potassium or sodium cyanide, and gold cyanide is the electrolyte used in commercial electroplating of gold onto base metals and
electroforming. Gold chloride (chloroauric acid) solutions are used to make colloidal gold by reduction with citrate or ascorbate ions. Gold chloride and gold oxide are used to make highly-
valued cranberry or red-colored glass, which, like colloidal gold sols, contains evenly-sized spherical gold nanoparticles. Gold has been known and highly valued since prehistoric times. It
may have been the first metal used by humans and was valued for ornamentation and rituals. Egyptian hieroglyphs from as early as 2600 BC describe gold, which king Tushratta of the Mitanni
claimed was "more plentiful than dirt" in Egypt.[9] Egypt and especially Nubia had the resources to make them major gold-producing areas for much of history. The earliest known map is
known as the Turin papyrus and shows the plan of a gold mine in Nubia together with indications of the local geology. The primitive working methods are described by Strabo and included
fire-setting. Large mines also occurred across the Red Sea in what is now Saudi Arabia. The legend of the golden fleece may refer to the use of fleeces to trap gold dust from placer deposits
in the ancient world. Gold is mentioned frequently in the Old Testament, starting with Genesis 2:11 (at Havilah) and is included with the gifts of the magi in the first chapters of Matthew New
Testament. The Book of Revelation 21:21 describes the city of New Jerusalem as having streets "made of pure gold, clear as crystal". The south-east corner of the Black Sea was famed for its
gold. Exploitation is said to date from the time of Midas, and this gold was important in the establishment of what is probably the world's earliest coinage in Lydia between 643 and 630 BC.
From 6th or 5th century BCE, Chu (state) circulated Ying Yuan, one kind of square gold coin.
Jason returns with the golden fleece on an Apulian red-figure calyx krater, ca. 340–330 BC.The Romans developed new methods for extracting gold on a large scale using hydraulic mining
methods, especially in Spain from 25 BC onwards and in Romania from 150 AD onwards. One of their largest mines was at Las Medulas in León (Spain), where seven long aqueducts enabled
them to sluice most of a large alluvial deposit. The mines at Roşia Montană in Transylvania were also very large, and until very recently, still mined by opencast methods. They also exploited
smaller deposits in Britain, such as placer and hard-rock deposits at Dolaucothi. The various methods they used are well described by Pliny the Elder in his encyclopedia Naturalis Historia
written towards the end of the first century AD.
The Mali Empire in Africa was famed throughout the old world for its large amounts of gold. Mansa Musa, ruler of the empire (1312–1337) became famous throughout the old world for his
great hajj to Mecca in 1324. When he passed through Cairo in July of 1324, he was reportedly accompanied by a camel train that included thousands of people and nearly a hundred
camels. He gave away so much gold that it depressed the price in Egypt for over a decade.[10] A contemporary Arab historian remarked:
“ Gold was at a high price in Egypt until they came in that year. The mithqal did not go below 25 dirhams and was generally above, but from that time its value fell and it cheapened in price
and has remained cheap till now. The mithqal does not exceed 22 dirhams or less. This has been the state of affairs for about twelve years until this day by reason of the large amount of gold
which they brought into Egypt and spent there [...] ” —Chihab Al-Umari
The European exploration of the Americas was fueled in no small part by reports of the gold ornaments displayed in great profusion by Native American peoples, especially in Central
America, Peru, Ecuador and Colombia.
Although the price of some platinum group metals can be much higher, gold has long been considered the most desirable of precious metals, and its value has been used as the standard for
many currencies (known as the gold standard) in history. Gold has been used as a symbol for purity, value, royalty, and particularly roles that combine these properties. Gold as a sign of wealth
and prestige was made fun of by Thomas More in his treatise Utopia. On that imaginary island, gold is so abundant that it is used to make chains for slaves, tableware and lavatory-seats. When
ambassadors from other countries arrive, dressed in ostentatious gold jewels and badges, the Utopians mistake them for menial servants, paying homage instead to the most modestly-dressed
of their party.
There is an age-old tradition of biting gold in order to test its authenticity. Although this is certainly not a professional way of examining gold, the bite test should score the gold because gold
is a soft metal, as indicated by its score on the Mohs' scale of mineral hardness. The purer the gold the easier it should be to mark it. Painted lead can cheat this test because lead is softer
than gold (and may invite a small risk of lead poisoning if sufficient lead is absorbed by the biting).
This 156-ounce (4.85 kg) nugget was found by an individual prospector in the Southern California Desert using a metal detector.Gold in antiquity was relatively easy to obtain geologically;
however, 75% of all gold ever produced has been extracted since 1910. It has been estimated that all the gold in the world that has ever been refined would form a single cube 20 m (66 ft)
on a side (equivalent to 8000 m³).
One main goal of the alchemists was to produce gold from other substances, such as lead — presumably by the interaction with a mythical substance called the philosopher's stone. Although
they never succeeded in this attempt, the alchemists promoted an interest in what can be done with substances, and this laid a foundation for today's chemistry. Their symbol for gold was the
circle with a point at its center (☉), which was also the astrological symbol, and the ancient Chinese character, for the Sun. For modern creation of artificial gold by neutron capture, see gold
synthesis.
During the 19th century, gold rushes occurred whenever large gold deposits were discovered. The first documented discovery of gold in the United States was at the Reed Gold Mine near
Georgeville, North Carolina in 1803. The first major gold strike in the United States occurred in a small north Georgia town called Dahlonega.[14] Further gold rushes occurred in California,
Colorado, Otago, Australia, Witwatersrand, Black Hills, and Klondike.
Because of its historically high value, much of the gold mined throughout history is still in circulation in one form or another.
Occurrence
In nature, gold most often occurs in its native state (that is, as a metal), though usually alloyed with silver. Native gold contains usually eight to ten percent silver, but often much more —
alloys with a silver content over 20% are called electrum. As the amount of silver increases, the color becomes whiter and the specific gravity becomes lower.
Ores bearing native gold consist of grains or microscopic particles of metallic gold embedded in rock, often in association with veins of quartz or sulfide minerals like pyrite. These are called
"lode" deposits. Native gold is also found in the form of free flakes, grains or larger nuggets that have been eroded from rocks and end up in alluvial deposits (called placer deposits). Such free
gold is always richer at the surface of gold-bearing veins owing to the oxidation of accompanying minerals followed by weathering, and washing of the dust into streams and rivers, where it
collects and can be welded by water action to form nuggets.
Gold sometimes occurs combined with tellurium as the minerals calaverite, krennerite, nagyagite, petzite and sylvanite, and as the rare bismuthide maldonite (Au2Bi) and antimonide
aurostibite (AuSb2). Gold also occurs in rare alloys with copper, lead, and mercury: the minerals auricupride (Cu3Au), novodneprite (AuPb3) and weishanite ((Au,Ag)3Hg2).
Economic gold extraction can be achieved from ore grades as little as 0.5 g/1000 kg (0.5 parts per million, ppm) on average in large easily mined deposits. Typical ore grades in open-pit
mines are 1–5 g/1000 kg (1–5 ppm); ore grades in underground or hard rock mines are usually at least 3 g/1000 kg (3 ppm). Because ore grades of 30 g/1000 kg (30 ppm) are usually needed
before gold is visible to the naked eye, in most gold mines the gold is invisible.
Since the 1880s, South Africa has been the source for a large proportion of the world’s gold supply, with about 50% of all gold ever produced having come from South Africa. Production in
1970 accounted for 79% of the world supply, producing about 1,000 tonnes. However by 2007 production was just 272 tonnes. This sharp decline was due to the increasing difficulty of
extraction, changing economic factors affecting the industry, and tightened safety auditing. In 2007 China (with 276 tonnes) overtook South Africa as the world's largest gold producer, the first
time since 1905 that South Africa has not been the largest.
The city of Johannesburg located in South Africa was founded as a result of the Witwatersrand Gold Rush which resulted in the discovery of some of the largest gold deposits the world has
ever seen. Gold fields located within the basin in the Free State and Gauteng provinces are extensive in strike and dip requiring some of the world's deepest mines, with the Savuka and
TauTona mines being currently the world's deepest gold mine at 3,777 m. The Second Boer War of 1899–1901 between the British Empire and the Afrikaner Boers was at least partly over the
rights of miners and possession of the gold wealth in South Africa.
Other major producers are the United States, Australia, China, Russia and Peru. Mines in South Dakota and Nevada supply two-thirds of gold used in the United States. In South America, the
controversial project Pascua Lama aims at exploitation of rich fields in the high mountains of Atacama Desert, at the border between Chile and Argentina. Today about one-quarter of the
world gold output is estimated to originate from artisanal or small scale mining.
After initial production, gold is often subsequently refined industrially by the Wohlwill process or the Miller process. Other methods of assaying and purifying smaller amounts of gold include
parting and inquartation as well as cuppelation, or refining methods based on the dissolution of gold in aqua regia.
The world's oceans hold a vast amount of gold, but in very low concentrations (perhaps 1–2 parts per 10 billion). A number of people have claimed to be able to economically recover gold
from sea water, but so far they have all been either mistaken or crooks. Reverend Prescott Jernegan ran a gold-from-seawater swindle in America in the 1890s. A British fraudster ran the same
scam in England in the early 1900s.
Fritz Haber (the German inventor of the Haber process) attempted commercial extraction of gold from sea water in an effort to help pay Germany's reparations following World War I.
Unfortunately, his assessment of the concentration of gold in sea water was unduly high, probably due to sample contamination. The effort produced little gold and cost the German
government far more than the commercial value of the gold recovered.[citation needed] No commercially viable mechanism for performing gold extraction from sea water has yet been
identified. Gold synthesis is not economically viable and is unlikely to become so in the foreseeable future.
The average gold mining and extraction costs[when?] are $238 per troy ounce but these can vary widely depending on mining type and ore quality. In 2001, global mine production
amounted to 2,604 tonnes, or 67% of total gold demand in that year. At the end of 2006, it was estimated that all the gold ever mined totaled 158,000 tonnes. This can be represented by a
cube with an edge length of just 20.2 meters.
At current consumption rates, the supply of gold is believed to last 45 years.
Price: Gold as an investment and Gold standard
LBMA USD morning price fixings ($US per troy ounce) since 2001.
Gold price per ounce in USD since 1968, in actual US$ and 2006 US$.Like other precious metals, gold is measured by troy weight and by grams. When it is alloyed with other metals the term
carat or karat is used to indicate the amount of gold present, with 24 karats being pure gold and lower ratings proportionally less. The purity of a gold bar can also be expressed as a decimal
figure ranging from 0 to 1, known as the millesimal fineness, such as 0.995 being very pure.
The price of gold is determined on the open market, but a procedure known as the Gold Fixing in London, originating in September 1919, provides a daily benchmark figure to the industry.
The afternoon fixing appeared in 1968 to fix a price when US markets are open.
Historically gold coinage was widely used as currency; When paper money was introduced, it typically was a receipt redeemable for gold coin or bullion. In an economic system known as the
gold standard, a certain weight of gold was given the name of a unit of currency. For a long period, the United States government set the value of the US dollar so that one troy ounce was
equal to $20.67 ($664.56/kg), but in 1934 the dollar was devalued to $35.00 per troy ounce ($1125.27/kg). By 1961 it was becoming hard to maintain this price, and a pool of US and
European banks agreed to manipulate the market to prevent further currency devaluation against increased gold demand.
On March 17, 1968, economic circumstances caused the collapse of the gold pool, and a two-tiered pricing scheme was established whereby gold was still used to settle international
accounts at the old $35.00 per troy ounce ($1.13/g) but the price of gold on the private market was allowed to fluctuate; this two-tiered pricing system was abandoned in 1975 when the price
of gold was left to find its free-market level. Central banks still hold historical gold reserves as a store of value although the level has generally been declining. The largest gold depository in
the world is that of the U.S. Federal Reserve Bank in New York, which holds about 3%[citation needed] of the gold ever mined, as does the similarly-laden U.S. Bullion Depository at Fort Knox.
In 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes.
Price records
Since 1968 the price of gold on the open market has ranged widely, from a high of $850/oz ($27,300/kg) on January 21, 1980, to a low of $252.90/oz ($8,131/kg) on June 21, 1999 (London
Gold Fixing).[21] The 1980 high was not overtaken until January 3, 2008 when a new maximum of $865.35 per troy ounce was set (a.m. London Gold Fixing). The current annual record price
was set on March 17, 2008 at $1023.50/oz (am. London Gold Fixing).
Long term price trends
Since April 2001 the gold price has more than tripled in value against the US dollar, prompting speculation that this long secular bear market (or the Great Commodities Depression) has
ended and a bull market has returned. In March 2008, the gold price increased above $1000, which in real terms is still well below the $850/oz. peak on January 21, 1980. Indexed for
inflation, the 1980 high would equate to a price of around $2400 in 2007 US dollars.
In the last century, major economic crises (such as the Great Depression, World War II, the first and second oil crisis) lowered the Dow/Gold ratio (which is inherently inflation adjusted)
substantially, in most cases to a value well below 4. During these difficult times, investors tried to preserve their assets by investing in precious metals, most notably gold and silver.
Compounds
Although gold is a noble metal, it forms many and diverse compounds. The oxidation state of gold in its compound ranges from −1 to +5 but Au(I) and Au(III) dominate. Gold(I), referred to as
the aurous ion, is the most common oxidation state with “soft” ligands such as thioethers, thiolates, and tertiary phosphines. Au(I) compounds are typically linear. A good example is Au(CN)2−,
which is the soluble form of gold encountered in mining. Curiously, aurous complexes of water are rare. The binary gold halides, such as AuCl, form zig-zag polymeric chains, again featuring
linear coordination at Au. Most drugs based on gold are Au(I) derivatives.
Gold(III) (“auric”) is a common oxidation state and is illustrated by gold(III) chloride, AuCl3. Its derivative is chloroauric acid, HAuCl4, which forms when Au dissolves in aqua regia. Au(III)
complexes, like other d8 compounds, are typically square planar.
Less common oxidation states: Au(-I), Au(II), and Au(V)
Compounds containing the Au− anion are called aurides. Caesium auride, CsAu which crystallizes in the caesium chloride motif. Other aurides include those of Rb+, K+, and
tetramethylammonium (CH3)4N+. Gold(II) compounds are usually diamagnetic with Au-Au bonds such as [Au(CH2)2P(C6H5)2]2Cl2. A noteworthy, legitimate Au(II) complex contains xenon as
a ligand, [AuXe4](Sb2F11)2. Gold pentafluoride is the sole example of Au(V), the highest verified oxidation state.
Some gold compounds exhibit aurophilic bonding, which describes the tendency of gold ions to interact at distances that are too long to be a conventional Au-Au bond but shorter that van
der Waals bonding. The interaction is estimated to be comparable in strength to that of a hydrogen bond.
Mixed valence compounds
Well-defined cluster compounds are numerous. In such cases, gold has a fractional oxidation state. A representative example is the octahedral species {Au(P(C6H5)3)}62+. Gold
chalcogenides, e.g. "AuS" feature equal amounts of Au(I) and Au(III).
Isotopes: Isotopes of gold
Gold has only one stable isotope, 197Au, which is also its only naturally-occurring isotope. 36 radioisotopes have been synthesized ranging in atomic mass from 169 to 205. The most stable
of these is 195Au with a half-life of 186.1 days. 195Au is also the only isotope to decay by electron capture. The least stable is 171Au, which decays by proton emission with a half-life of 30
µs. Most of gold's radioisotopes with atomic masses below 197 decay by some combination of proton emission, α decay, and β+ decay. The exceptions are 195Au, which decays by electron
capture, and 196Au, which has a minor β- decay path. All of gold's radioisotopes with atomic masses above 197 decay by β- decay.
At least 32 nuclear isomers have also been characterized, ranging in atomic mass from 170 to 200. Within that range, only 178Au, 180Au, 181Au, 182Au, and 188Au do not have isomers.
Gold's most stable isomer is 198m2Au with a half-life of 2.27 days. Gold's least stable isomer is 177m2Au with a half-life of only 7 ns. 184m1Au has three decay paths: β+ decay, isomeric
transition, and alpha decay. No other isomer or isotope of gold has three decay paths.
Symbolism
Three Gold Sovereigns with a Krugerrand.
Swiss-cast 1 kg gold bar.Gold has been associated with the extremities of utmost evil and great sanctity throughout history. In the Book of Exodus, the Golden Calf is a symbol of idolatry and
rebellion against God. In popular culture, the golden pocket watch and its fastening golden chain were the characteristic accessories of the capitalists, the rich and the industrial tycoons.
Credit card companies associate their product with wealth by naming and coloring their top-of-the-range cards “gold” although, in an attempt to out-do each other, platinum has now
overtaken gold.
In the Book of Genesis, Abraham was said to be rich in gold and silver, and Moses was instructed to cover the Mercy Seat of the Ark of the Covenant with pure gold. Eminent orators such as
John Chrysostom were said to have a “mouth of gold with a silver tongue.” Gold is associated with notable anniversaries, particularly in a 50-year cycle, such as a golden wedding anniversary,
golden jubilee, etc.
Great human achievements are frequently rewarded with gold, in the form of medals and decorations. Winners of races and prizes are usually awarded the gold medal (such as the Olympic
Games and the Nobel Prize), while many award statues are depicted in gold (such as the Academy Awards, the Golden Globe Awards the Emmy Awards, the Palme d'Or, and the British
Academy Film Awards).
Medieval kings were inaugurated under the signs of sacred oil and a golden crown, the latter symbolizing the eternal shining light of heaven and thus a Christian king's divinely inspired
authority. Wedding rings are traditionally made of gold; since it is long-lasting and unaffected by the passage of time, it is considered a suitable material for everyday wear as well as a
metaphor for the relationship. In Orthodox Christianity, the wedded couple is adorned with a golden crown during the ceremony, an amalgamation of symbolic rites.
The symbolic value of gold varies greatly around the world, even within geographic regions. For example, gold is quite common in Turkey but considered a most valuable gift in Sicily.
Toxicity
Pure gold is non-toxic and non-irritating when ingested[33] and is sometimes used as a food decoration in the form of gold leaf. It is also a component of the alcoholic drinks Goldschläger,
Gold Strike, and Goldwasser. Gold is approved as a food additive in the EU (E175 in the Codex Alimentarius).
Soluble compounds (gold salts) such as potassium gold cyanide, used in gold electroplating, are toxic to the liver and kidneys. There are rare cases of lethal gold poisoning from potassium
gold cyanide.[34][35] Gold toxicity can be ameliorated with chelating agents such as British anti-Lewisite.
Carat (purity) ChipGold Colloidal gold White gold Rose gold Black gold Gold as an investment Gold coin Precious metal Digital gold currency Hallmark
Altay Mountains Commodity fetishism Fool's Gold Roman mining Roman engineering Gold fingerprinting Prospecting GPAA
Bibliography
Faulk W, Taylor G (1979) An Immunocolloid Method for the Electron Microscope Immunochemistry 8, 1081–1083.
Kodak (2006) Toning black-and-white materials. Technical Data/Reference sheet G-23, May 2006.
Roth J, Bendayan M, Orci L (1980) FITC-Protein A-Gold Complex for Light and Electron Microscopic Immunocytochemistry. Journal of Histochemistry and Cytochemistry 28, 55–57.
World Gold Council, Jewellery Technology, Jewellery Alloys
Los Alamos National Laboratory – Gold Gold Look up gold Getting Gold 1898 book
Technical Document on Extraction and Mining of Gold Picture in the Element collection from Heinrich Pniok WebElements.com — Gold . Source: Wikipedia
GOLD:
THE INTRINSIC VALUE
Intrinsic Value Investing
When it comes to books written about investing in the stock market, two of the classics are "Security Analysis" and "The Intelligent Investor", both of which were written by Benjamin Graham
and published in 1934 and 1949 respectively. Graham was a very successful investor in his own right, but is also well known as the mentor of Warren Buffett. Buffett built on the foundations
provided by Graham's investment philosophy by adding a qualitative dimension to the completely quantitative approach adopted by his teacher. However, the basis of the success of these
stock market legends was essentially the same - the realisation that the "intrinsic value" of a company was independent of its market price.
According to Graham, the market does not determine value. It is a "voting machine" in which countless people register choices that are the product partly of reason and partly of emotion. For
most stocks the market tells you every minute of every day what it thinks those stocks are worth. The price that the market assigns may be much higher, much lower, or approximately equal to
the intrinsic value. It is this difference between market price and intrinsic value which provides opportunities to investors astute enough to recognise it - the greater the difference the greater
the opportunity. However, an investor who allows himself to become so concerned by a falling market price that he sells out has blown any advantage he may have had. "You are neither right
nor wrong because the crowd disagrees with you".
The above thinking has been shown to work with phenomenal success when applied to stock market investment, but can it also be applied to investing in gold ? The intrinsic value of a stock
can be determined using quantitative measures such as profit, net working capital, cashflow, and net tangible assets, and qualitative considerations such as the strength of the company's
management. However, does gold have an intrinsic value which can be different from its market price and, if so, how could we go about calculating it ?
The Intrinsic Value of Gold
Supply Considerations
With such an enormous number of variables affecting its price, including the emotional response of individuals and the whims of politicians throughout the world, how can we possibly forecast
a future dollars per ounce gold price?
When there is an imbalance in supply versus demand, prices adjust to correct that imbalance. For example, if demand exceeds supply then prices will increase to the point where demand
reduces or supply increases, thus correcting the imbalance. Because the "load" is forever changing, prices are continually adjusting. Vronsky's essay on gold's supply/demand dynamics in the
"Analysis" section of the Gold Eagle website discusses the imbalance which has existed in the gold market for some time, with commercial demand greatly outstripping worldwide production.
Had a similar situation prevailed with any other commodity then soaring prices would undoubtedly result. However, the fundamental difference between gold and all other commodities is that
gold is not consumed, it is accumulated. Nearly 100% of all the gold mined in the history of the world forms part of today's aboveground gold stock. The total amount of this aboveground stock
(currently around 120,000 tonnes) is an available source of supply at any time. During the past few weeks we have had some news regarding gold supply which has supposedly caused some
fluctuations in the gold price. Firstly, Switzerland announced that it would sell some of its gold reserves (about 400 tonnes over a 10 year period). Secondly, the Busang gold deposit, which
had been reported to contain up to 200 million ounces of gold, is now thought to be worthless. One event added future gold supply to the market whilst the other removed it. In my opinion
both events were just "noise" as the amount of gold involved was trivial in comparison to the total aboveground supply of gold.
Another important point to note regarding the aboveground gold stock is that it increases at a fairly constant rate of around 1.7% per annum (during the last 50 years the largest annual
increase was 2.1% whilst the smallest was 1.4%). Irrespective of what technological and political changes occur in the future, or how many more Busangs (real or otherwise) are discovered, it
is reasonable to assume that the total supply of gold will continue to grow at an average rate of 1.7% per annum. In fact, technological improvements and vast new discoveries will be needed
to maintain this growth rate.
Estimating a Future Gold Price
In other words, confidence in US dollars is currently at a historic high or, put another way, gold is at its lowest levels in 25 years relative to the US dollar.
Further to the above we should be able to estimate, with a fair degree of accuracy, what the aboveground gold stock will be at some time in the future. It should also be possible to estimate
the future commercial (fashion jewelry, industry, etc.) demand for gold. However, these considerations are only a small part of the equation. Much of the aboveground gold stock is held for
monetary purposes and the willingness of the owners of this gold to sell at a particular price is dependent upon countless economic, political and psychological concerns. The willingness of
others to purchase gold for monetary reasons at a certain price is dependent upon similar considerations. With such an enormous number of variables affecting its price, including the
emotional response of individuals and the whims of politicians throughout the world, how can we possibly forecast a future dollars per ounce gold price? Yet another problem, in fact the very
heart of the problem in forecasting a future gold price, is that we measure the price in terms of something which is constantly changing, that is, the US dollar (or any other national currency).
Every day the US dollar changes its character due to changes in its quantity and quality, with its true value linked to something as fragile and fluctuating as faith in the financial and political
system.
Although we cannot reliably estimate a future gold price, what we can do is calculate the relative values of gold and US dollars using the Fear Index. The Fear Index was developed by James
Turk as a means of numerically expressing the competitive relationship between gold and dollars, and is calculated as follows :
Fear Index = (US Gold Reserve) X (Market Price of Gold)
M3
Currently, with the gold price around $350 per ounce, M3 (total US money supply) of $5024.5 billion as of weekend 3rd March 1997, and a US gold reserve of 261.8 million ounces, we can
calculate the Fear Index to be 1.82%.
The lower the Fear Index the higher the value of dollars relative to gold, that is, the higher the level of confidence (or the lower the level of fear) in paper currency. To put the above
calculated figure of 1.82% into perspective, this is the lowest value for the Fear Index since 1972. In fact, the last 3 months have seen the Fear Index move below 2% for the first time since
1972. In other words, confidence in US dollars is currently at a historic high or, put another way, gold is at its lowest levels in 25 years relative to the US dollar.
I would also be interested in calculating a modified Fear Index where the total above ground stock of gold is substituted for the US Gold Reserve. However, this will have to be the subject of a
separate discussion.
Gold Investment Based On Value
The above discussion suggests that although we cannot estimate a future gold price with any degree of accuracy, we can at least determine that gold is currently very cheap and should be
purchased by investors seeking value. However, I believe that many people who identify that gold currently represents excellent value will lose money in their attempts to profit from this
realisation. This is because they will attempt to profit from their well-founded conclusion via short term trading. The following quote from Benjamin Graham was written about stock
speculation, but it can be equally well applied to the short term trading of commodities : "....speculation is largely a matter of A trying to decide what B, C and D are likely to think - with B, C
and D trying to do the same". It is likely that many of the investors who purchase gold or gold related investments based on sound fundamental reasoning will sell out at a loss because they
were unable to predict what others would do in the short term.
Asset Management: Odit Investment Strategy for Asset Enhancement.
1- Odit uses Arbitrage, simultaneous buying and selling of securities in different markets
with the purpose of profiting from the price difference in the markets, under absolutely
controlled circumstances only.
2- Odit strongly avoids Derivatives, a volatile financial instrument whose value depends
on or is derived from the performance of a secondary source such as an underlying bond
or currency.
3- Odit hedges, making arrangements to safeguard against loss on an investment, by the
use of various techniques: avoiding overvalued securities and potential bubble bursts,
having in mind the intrinsic value of securities, watching historical lows of strong
fundamentals securities, etc.
4- Odit strongly avoids Leverage, the use of credit (such as margin) to improve one’s
speculative ability. Odit prefers to increase the rate of return on an investment, by the use
of less risky methods.
5- Odit strongly avoids Short Sale, a sale of a security that the seller does n’t own (if the
seller does own the security it is said to be in a “long position”), and that the seller must
borrow. The only exception is when a security is very obviously near of a bubble burst
situation. Usually, the technique is employed when prices are likely to drop. If the price of
the security does drop, the seller can make a profit on the price of the shares sold versus
the price of the shares bought to pay back the borrowed shares.
6- Odit can invest up to 3/10 of the assets in Aggressive Growth concerning exclusively
undervalued securities. Odit Invests in equities expected to experience acceleration in
growth of earnings per share. Odit hedges watching the best opportunity on undervalued
securities. However Odit avoids shorting of equities unless there are obvious and strong
expectation of earnings disappointment.
7- Odit can invest, alternatively, up to 1/10 of the assets in Distressed Securities, buying
equity, debt, or trade claims at deep discounts of companies in or facing bankruptcy or
reorganization, when there is strong indications that Odit can profit from the market’s lack
of understanding of the true value of the deeply discounted securities and because the
majority of institutional investors cannot own below investment grade securities.
8- Odit can invest, alternatively, up to 1/10 of the assets in Emerging Markets, investing in
equity or debt of emerging (less mature) markets which tend to have higher inflation and
volatile growth. Short selling is not permitted in many emerging markets, and, therefore,
such type of hedging is often not available.
9- Odit can invest, alternatively, up to 1/10 of the assets in Fund of Funds which could be
mixes and matches hedge funds and other pooled investment vehicles. This blending of
different strategies and asset classes aims to provide a more stable long-term
investment return than any of the individual funds. Volatility depends on the mix and ratio
of strategies employed.
10- Odit can invest up to 3/10 of the assets in Income. Investing with primary focus on
yield or current income rather than solely on capital gains. May utilize leverage to buy
bonds and sometimes fixed income like RE Notes in order to profit from discounted
purchase, principal appreciation and interest income under absolutely controlled
circumstances only.
11- Odit can invest, alternatively, up to 1/10 of the assets in Macro. Aims to profit from
changes in global economies, typically brought about by shifts in government policy which
impact interest rates, in turn affecting currency, stock, and bond markets. Participates in
all major markets -- equities, bonds, currencies and commodities -- though not always at
the same time. Uses leverage and derivatives to accentuate the impact of market moves,
under absolutely controlled circumstances only.
12- Odit can invest, alternatively, up to 1/10 of the assets in Market Neutral - Arbitrage.
Attempts to hedge out most market risk by taking offsetting positions, often in different
securities of the same issuer.
13- Odit can invest, alternatively, up to 1/10 of the assets in Market Neutral - Securities
Hedging. Invests equally in long and short equity portfolios generally in the same sectors
of the market. Market risk is greatly reduced, but effective stock analysis and stock picking
is essential to obtaining meaningful results. Leverage may be used to enhance returns,
under absolutely controlled circumstances only.
14- Odit can invest, alternatively, up to 1/10 of the assets in Market Timing, allocating
assets among different asset classes depending on the manager’s view of the economic
or market outlook.
15- Odit can invest, alternatively, up to 1/10 of the assets in Opportunistic. Investment
theme changes from strategy to strategy as opportunities arise to profit from events such
as IPOs, sudden price changes often caused by an interim earnings disappointment,
hostile bids, and other event-driven opportunities. May utilize several of these investing
styles at a given time and is not restricted to any particular investment approach or asset
class.
16- Odit strongly avoids Short Selling: Sells securities short in anticipation of being able to
re-buy them at a future date at a lower price due to the manager’s assessment that the
securities are overvalued, or the market, or in anticipation of earnings disappointments
often due to accounting irregularities, new competition, change of management, etc.
However, Odit can invest, alternatively, up to 1/10 of the assets in some opportunities,
under absolutely controlled circumstances.
17- Odit can invest up to 3/10 of the assets in Value, under certain circumstances. Usually
Odit Invests in securities perceived to be selling at deep discounts to their intrinsic value
or their potential worth. Such securities may be out of favor with analysts. Long-term
holding, patience, and strong discipline are often required until the ultimate value is
recognized by the market.
Should you decide to contact us for any business opportunity CLICK HERE
Asset Management For Accredited Investors Only. Minimum Amount Per
Account: One Million USD. Unless otherwise agreed the standard holding period is 18 months.
Odit Asset Management is the only global group who charge no management fees
(usually 2 % or larger fee, based on the amount of assets under management).
Odit Asset Management is the only global group who create a Limited Liability Company
for the asset management of each Accredited Investor, as well as the only who appoint the
Accredited Investor as Supervisor for the financial operation, treasury, investment accounts
and accountability control of such Limited Liability Company.
Odit Asset Management is the only global group whose income rely solely on the success
of the Client, the Accredited Investor, regarding the investment made. Odit considers
extremely trustworthy the quality of the investment decisions made by Odit's experts, so,
should Odit is not able to provide to the Accredited Investor an Annual Return, the income
(contingent fee: performance fee or incentive fee) of Odit will be ZERO.
Odit Asset Management Annual FEE will be contingent, based solely on the performance
of investments. The only incentive of Odit comes from the creation of wealth for the
Accredited Investor. That is to say that if there is no Annual Return, Success, Profit, to the
benefit of the Accredited Investor, there will not be any FEE paid to the order of Odit.
Contingent FEE Structure:
-- Annual Profit up to 20 % >>>>>>>>>>>>>>>>>>> Contingent FEE: 20% of Annual Profit
-- Annual Profit larger than 20 % >>>>>>>>>>>>>>> Contingent FEE: 25 % of Annual Profit
-- Annual Profit larger than 35 % >>>>>>>>>>>>>>> Contingent FEE: 30 % of Annual Profit
-- Annual Profit larger than 50 % >>>>>>>>>>>>>>> Contingent FEE: 35 % of Annual Profit
-- Annual Profit larger than 65 % >>>>>>>>>>>>>>> Contingent FEE: 40 % of Annual Profit
-- Annual Profit larger than 80 % >>>>>>>>>>>>>>> Contingent FEE: 45 % of Annual Profit
-- Annual Profit larger than 100 % >>>>>>>>>>>>>> Contingent FEE: 50 % of Annual Profit
Note: This is neither an offer nor an advertisement. See disclaimer at left column.
Should you decide to contact us for any business opportunity CLICK HERE
Asset Management For Accredited Investor. Minimum $1 Million USD. No FEE On Assets. Top Security And Secrecy. We Manage Accredited Investors' s Assets. Minimum Investment 1 Million
USD. No Fee, Profit Share Only. Secrecy. We Manage Assets Of Accredited Investors. Minimum 1 Million USD. No Fees. Profit Share Only. Top Secrecy. Safe. High Potential Profit. No
Management Fee. Potential Profit Above 300%. Minimum $1 Million USD. Secret & Safety. High Profit For Latin American Investors. Management of Assets From $1 Million USD. No
Management Fee. Secrecy. Safe Global Asset Management Service. Minimum $1 Million USD. Profit of 300 %. No Management Fee. Secrecy. Global Money Manager Provide High Profit.
No Management Fee. Minimum $1 Million USD. Secret, Safe, High Profit. The Highest Profit At The Lowest Risk. Minimum $1 Million USD. No Management Fee. Secret. You Control Money.
We Provide Wisdom, You Control The Money. No Management Fee. Minimum $1 Million USD. High Profit, Secrecy, Safe. Potential Profit Of 300 % At Lower Risk. Invesment Wisdom, No
Management Fee. Minimum $1 Million USD. Secrecy. Our Only Incentive Is Investor's Success. No Management Fee. Minimum 1 Million USD. High Potential Profit. Safe. No Management
Fee For Global Investors. Minimum 1 Million USD. The Highest Profit At The Lowest Risk. Secrecy. Separate Accounts For H.N.W. Investors. No Management Fee. Minimum 1 Million USD.
Very High Potential Profit. A Limited Liability Company Per Account. High Net Worth Investors. No Management Fee. Minimum 1 Million USD. Up To 300 % Profit In The Holding Period.
Minimum 1 Million USD. No Management Fee. High Net Worth Investors. Investor Controls The Investment Task. We Provide The Wisdom. No Management Fee. Minimum 1 Million USD.
Safe. Manejo De Activos Para Inversionistas. Alta Ganancia Y Al Menor Riesgo. No Cobro Por Manejo. Secreto Total. Ganancia Potencial Muy Alta, Bajo Riesgo. No Cobro Por El Manejo De
Las Inversiones. Total Secreto Y Seguridad. Alta Ganancia Para Inversionista Latino. Operaciones Seguras Y Secretas. No Cobro Por Manejo De Inversiones. Hasta 300 % De Ganancia
Durante Tenencia. Absoluto Secreto Y Menor Riesgo. No Cobro Por Manejo De Inversiones.
Obtenga La Mayor Ganancia En Inversiones. No Cargo Por Manejo Experto, Seguro y Secreto.
Get The Highest Profit From Investment. Expert Asset Management. No FEE. Secret, Safe. You Control The Funds.
Usted Controla Fondos.
Market Timing Strategies
Market timing sounds easy. These strategies involve moving between risky assets, such as stocks or
bonds, and less risky short term securities like Treasury Bills based on "technical", "fundamental" or
"quantitative" analyses. Reduced to its core proposition, market timing means "buying low and selling
high." Identifying high or "overvalued" versus low or "undervalued" is the complicated thing. Since
riskier assets usually have higher returns over longer periods, staying "out of the market" or invested in
less-risky short term securities can mean a considerable sacrifice of overall return.
It was Issac Newton who in 1768, after being wiped out in one of the many stock market crashes of his
era, said:
"I can calculate the motions of the heavenly bodies but not the movements of the stock market".
His lesson has been learned by most active investors since then. The pricing of long term financial
assets like stocks or bonds involves all components of the human condition; fear, greed, optimism,
pessimism, crowd psychology. Politics, economics, revolution, natural disaster, technology also have
impact.
Asset Management: Odit Investment Strategy for Asset Enhancement.
1- Odit uses Arbitrage, simultaneous buying and selling of securities in different markets with the purpose of profiting from the price difference in the markets, under absolutely controlled circumstances only.
2- Odit strongly avoids Derivatives, a volatile financial instrument whose value depends
on or is derived from the performance of a secondary source such as an underlying bond
or currency.
3- Odit hedges, making arrangements to safeguard against loss on an investment, by the
use of various techniques: avoiding overvalued securities and potential bubble bursts,
having in mind the intrinsic value of securities, watching historical lows of strong
fundamentals securities, etc.
4- Odit strongly avoids Leverage, the use of credit (such as margin) to improve one’s
speculative ability. Odit prefers to increase the rate of return on an investment, by the use
of less risky methods.
5- Odit strongly avoids Short Sale, a sale of a security that the seller does n’t own (if the
seller does own the security it is said to be in a “long position”), and that the seller must
borrow. The only exception is when a security is very obviously near of a bubble burst
situation. Usually, the technique is employed when prices are likely to drop. If the price of
the security does drop, the seller can make a profit on the price of the shares sold versus
the price of the shares bought to pay back the borrowed shares.
6- Odit can invest up to 3/10 of the assets in Aggressive Growth concerning exclusively
undervalued securities. Odit Invests in equities expected to experience acceleration in
growth of earnings per share. Odit hedges watching the best opportunity on undervalued
securities. However Odit avoids shorting of equities unless there are obvious and strong
expectation of earnings disappointment.
7- Odit can invest, alternatively, up to 1/10 of the assets in Distressed Securities, buying
equity, debt, or trade claims at deep discounts of companies in or facing bankruptcy or
reorganization, when there is strong indications that Odit can profit from the market’s lack
of understanding of the true value of the deeply discounted securities and because the
majority of institutional investors cannot own below investment grade securities.
8- Odit can invest, alternatively, up to 1/10 of the assets in Emerging Markets, investing in
equity or debt of emerging (less mature) markets which tend to have higher inflation and
volatile growth. Short selling is not permitted in many emerging markets, and, therefore,
such type of hedging is often not available.
9- Odit can invest, alternatively, up to 1/10 of the assets in Fund of Funds which could be
mixes and matches hedge funds and other pooled investment vehicles. This blending of
different strategies and asset classes aims to provide a more stable long-term
investment return than any of the individual funds. Volatility depends on the mix and ratio
of strategies employed.
10- Odit can invest up to 3/10 of the assets in Income. Investing with primary focus on
yield or current income rather than solely on capital gains. May utilize leverage to buy
bonds and sometimes fixed income like RE Notes in order to profit from discounted
purchase, principal appreciation and interest income under absolutely controlled
circumstances only.
11- Odit can invest, alternatively, up to 1/10 of the assets in Macro. Aims to profit from
changes in global economies, typically brought about by shifts in government policy which
impact interest rates, in turn affecting currency, stock, and bond markets. Participates in
all major markets -- equities, bonds, currencies and commodities -- though not always at
the same time. Uses leverage and derivatives to accentuate the impact of market moves,
under absolutely controlled circumstances only.
12- Odit can invest, alternatively, up to 1/10 of the assets in Market Neutral - Arbitrage.
Attempts to hedge out most market risk by taking offsetting positions, often in different
securities of the same issuer.
13- Odit can invest, alternatively, up to 1/10 of the assets in Market Neutral - Securities
Hedging. Invests equally in long and short equity portfolios generally in the same sectors
of the market. Market risk is greatly reduced, but effective stock analysis and stock picking
is essential to obtaining meaningful results. Leverage may be used to enhance returns,
under absolutely controlled circumstances only.
14- Odit can invest, alternatively, up to 1/10 of the assets in Market Timing, allocating
assets among different asset classes depending on the manager’s view of the economic
or market outlook.
15- Odit can invest, alternatively, up to 1/10 of the assets in Opportunistic. Investment
theme changes from strategy to strategy as opportunities arise to profit from events such
as IPOs, sudden price changes often caused by an interim earnings disappointment,
hostile bids, and other event-driven opportunities. May utilize several of these investing
styles at a given time and is not restricted to any particular investment approach or asset
class.
16- Odit strongly avoids Short Selling: Sells securities short in anticipation of being able to
re-buy them at a future date at a lower price due to the manager’s assessment that the
securities are overvalued, or the market, or in anticipation of earnings disappointments
often due to accounting irregularities, new competition, change of management, etc.
However, Odit can invest, alternatively, up to 1/10 of the assets in some opportunities,
under absolutely controlled circumstances.
17- Odit can invest up to 3/10 of the assets in Value, under certain circumstances. Usually
Odit Invests in securities perceived to be selling at deep discounts to their intrinsic value
or their potential worth. Such securities may be out of favor with analysts. Long-term
holding, patience, and strong discipline are often required until the ultimate value is
recognized by the market.
Should you decide to contact us for any business opportunity CLICK HERE
Asset Management For Accredited Investors Only. Minimum Amount Per
Account: One Million USD. Unless otherwise agreed the standard holding period is 18 months.
Odit Asset Management is the only global group who charge no management fees
(usually 2 % or larger fee, based on the amount of assets under management).
Odit Asset Management is the only global group who create a Limited Liability Company
for the asset management of each Accredited Investor, as well as the only who appoint the
Accredited Investor as Supervisor for the financial operation, treasury, investment accounts
and accountability control of such Limited Liability Company.
Odit Asset Management is the only global group whose income rely solely on the success
of the Client, the Accredited Investor, regarding the investment made. Odit considers
extremely trustworthy the quality of the investment decisions made by Odit's experts, so,
should Odit is not able to provide to the Accredited Investor an Annual Return, the income
(contingent fee: performance fee or incentive fee) of Odit will be ZERO.
Odit Asset Management Annual FEE will be contingent, based solely on the performance
of investments. The only incentive of Odit comes from the creation of wealth for the
Accredited Investor. That is to say that if there is no Annual Return, Success, Profit, to the
benefit of the Accredited Investor, there will not be any FEE paid to the order of Odit.
Contingent FEE Structure:
-- Annual Profit up to 20 % >>>>>>>>>>>>>>>>>>> Contingent FEE: 20% of Annual Profit
-- Annual Profit larger than 20 % >>>>>>>>>>>>>>> Contingent FEE: 25 % of Annual Profit
-- Annual Profit larger than 35 % >>>>>>>>>>>>>>> Contingent FEE: 30 % of Annual Profit
-- Annual Profit larger than 50 % >>>>>>>>>>>>>>> Contingent FEE: 35 % of Annual Profit
-- Annual Profit larger than 65 % >>>>>>>>>>>>>>> Contingent FEE: 40 % of Annual Profit
-- Annual Profit larger than 80 % >>>>>>>>>>>>>>> Contingent FEE: 45 % of Annual Profit
-- Annual Profit larger than 100 % >>>>>>>>>>>>>> Contingent FEE: 50 % of Annual Profit
Note: This is neither an offer nor an advertisement. See disclaimer at left column.
Should you decide to contact us for any business opportunity CLICK HERE
Asset Management For Accredited Investor. Minimum $1 Million USD. No FEE On Assets. Top Security And Secrecy. We Manage Accredited Investors' s Assets. Minimum Investment 1 Million
USD. No Fee, Profit Share Only. Secrecy. We Manage Assets Of Accredited Investors. Minimum 1 Million USD. No Fees. Profit Share Only. Top Secrecy. Safe. High Potential Profit. No
Management Fee. Potential Profit Above 300%. Minimum $1 Million USD. Secret & Safety. High Profit For Latin American Investors. Management of Assets From $1 Million USD. No
Management Fee. Secrecy. Safe Global Asset Management Service. Minimum $1 Million USD. Profit of 300 %. No Management Fee. Secrecy. Global Money Manager Provide High Profit.
No Management Fee. Minimum $1 Million USD. Secret, Safe, High Profit. The Highest Profit At The Lowest Risk. Minimum $1 Million USD. No Management Fee. Secret. You Control Money.
We Provide Wisdom, You Control The Money. No Management Fee. Minimum $1 Million USD. High Profit, Secrecy, Safe. Potential Profit Of 300 % At Lower Risk. Invesment Wisdom, No
Management Fee. Minimum $1 Million USD. Secrecy. Our Only Incentive Is Investor's Success. No Management Fee. Minimum 1 Million USD. High Potential Profit. Safe. No Management
Fee For Global Investors. Minimum 1 Million USD. The Highest Profit At The Lowest Risk. Secrecy. Separate Accounts For H.N.W. Investors. No Management Fee. Minimum 1 Million USD.
Very High Potential Profit. A Limited Liability Company Per Account. High Net Worth Investors. No Management Fee. Minimum 1 Million USD. Up To 300 % Profit In The Holding Period.
Minimum 1 Million USD. No Management Fee. High Net Worth Investors. Investor Controls The Investment Task. We Provide The Wisdom. No Management Fee. Minimum 1 Million USD.
Safe. Manejo De Activos Para Inversionistas. Alta Ganancia Y Al Menor Riesgo. No Cobro Por Manejo. Secreto Total. Ganancia Potencial Muy Alta, Bajo Riesgo. No Cobro Por El Manejo De
Las Inversiones. Total Secreto Y Seguridad. Alta Ganancia Para Inversionista Latino. Operaciones Seguras Y Secretas. No Cobro Por Manejo De Inversiones. Hasta 300 % De Ganancia
Durante Tenencia. Absoluto Secreto Y Menor Riesgo. No Cobro Por Manejo De Inversiones.
Obtenga La Mayor Ganancia En Inversiones. No Cargo Por Manejo Experto, Seguro y Secreto.
Get The Highest Profit From Investment. Expert Asset Management. No FEE. Secret, Safe. You Control The Funds.
Usted Controla Fondos.
Market Timing Strategies
Market timing sounds easy. These strategies involve moving between risky assets, such as stocks or
bonds, and less risky short term securities like Treasury Bills based on "technical", "fundamental" or
"quantitative" analyses. Reduced to its core proposition, market timing means "buying low and selling
high." Identifying high or "overvalued" versus low or "undervalued" is the complicated thing. Since
riskier assets usually have higher returns over longer periods, staying "out of the market" or invested in
less-risky short term securities can mean a considerable sacrifice of overall return.
It was Issac Newton who in 1768, after being wiped out in one of the many stock market crashes of his
era, said:
"I can calculate the motions of the heavenly bodies but not the movements of the stock market".
His lesson has been learned by most active investors since then. The pricing of long term financial
assets like stocks or bonds involves all components of the human condition; fear, greed, optimism,
pessimism, crowd psychology. Politics, economics, revolution, natural disaster, technology also have
impact.
Growth Stock
A stock that appears attractive because of potential earnings growth by its company.
A stock may be considered a "buy" as a growth stock if it's P.E.G. ratio is relatively low among companies in its industry.
Compare value stock.
High Net Worth Individual - HNWI
A classification used by the financial services industry to denote an individual or a family with high net worth. Although there is no precise definition of how rich somebody must be to fit into
this category, high net worth is generally quoted in terms of liquid assets over a certain figure. The exact amount differs by financial institution and region. The categorization is relevant
because high net worth individuals generally qualify for separately managed investment accounts instead of regular mutual funds.
The most commonly quoted figure for membership in the high net worth "club" is $1 million in liquid financial assets. An investor with less than $1 million but more than $100,000 is
considered to be "affluent", or perhaps even "sub-HNWI". The upper end of HNWI is around $5 million, at which point the client is then referred to as "very HNWI". More than $50 million in
wealth classifies a person as "ultra HNWI".
HNWIs are in high demand by private wealth managers. The more money a person has, the more work it takes to maintain and preserve those assets. These individuals generally demand (and
can justify) personalized services in investment management, estate planning, tax planning, and so on. High net worth individual
In private banking, a high-net-worth individual (HNWI) is a person with a high net worth. Typically these individuals are defined as having investable assets (financial assets not including
primary residence) in excess of US$1 million. [1][2] The number of high net worth individuals worldwide is estimated at 9.5 million. HNWI wealth totals US$37.2 trillion, representing an 11.4%
gain since 2005.[1]
UHNWI
Banking and Finance
Retail
UHNWI refers to Ultra-High-Net-Worth Individuals, individuals or families who have at least US$30 million[1][2] in investable assets. The number of ultra high net worth individuals worldwide is
estimated at about 95,000.[1] The exact dividing lines depend on how a bank wishes to segment its market; for example, the term Very High Net Worth Individuals [3] can refer to those with
assets between $5 million and $50 million, with Ultra High Net Worth Individuals only those with above $50 million.
Banking and Finance
Most global banks, such as Credit Suisse, Deutsche Bank or UBS, have a separate Business Unit with designated teams consisting of client advisors and product specialists exclusively for
UHNWI. Because of their extreme high net worth and the way their assets were generated, these clients are often considered to have semi-institutional or institutional like characteristics.
Retail
Brands in various sectors, such as Bentley, Maybach and Rolls-Royce in motoring, actively target UHNWI and HNWI to sell their products. Figures gathered by Rolls-Royce suggest there are
80,000 people in the UHNWI category around the world.[4] They have, on average, eight cars and three or four homes. Three-quarters own a jet aircraft and most have a yacht.
Source: Wikipedia . High Net Worth Investors. Due Diligence For High Net Worth Investors
I just found a resource on conducting hedge fund due diligence for high net worth portfolios. It is not a complete guide to conducting this type of due diligence but I think they brought up
many good points within this article. A hedge fund investment should be utilized to improve the efficient frontier of an accredited investor’s portfolio and protect against downside risk by the
allocation of a segment of the portfolio appropriate to the client’s risk tolerance. Both quantitative and qualitative due diligence are essential to protect a client’s investment against fraud,
divergence from stated strategy, and/or poor investing.
A fund of hedge funds investment can offer diversification, and innate due diligence, within the hedge fund investment by limiting the allocation that any single fund can hold. A fund of funds
downside comes from the layering of fees and the more apparent lack of transparency that’s prevalent with many funds. In addition, the preeminent hedge funds are often hard to locate
because they are often available by referral only.
The correlation of a hedge fund with traditional benchmarks is a vital component in due diligence. One must also be aware that although stated pre-tax returns of a fund may be appealing,
short-term trading can destroy the tax efficiency which is critical to high net worth investors. Research into the operation of the hedge fund manager and their performance in varying markets
and well as tactical ongoing analysis of the fund’s performance are imperative to quality due diligence. Hedge Fund Due Diligence. Hedge Fund Due Diligence Guide
New hedge funds are launched daily, which is constantly increasing the importance of conducting formal hedge fund due diligence and determining which hedge funds are appropriate for
you or your firm to invest in becomes increasingly important. Every person or company is going to have different investment horizons, risk tolerances, strategy preferences, etc. so it is usually
more valuable to know the basics of how to evaluate a hedge fund then it is to hear someone say which hedge funds are "the best." I think giving hedge fund recommendations even to the
degree of suggesting exactly how to evaluate a hedge fund is too close to finance advice to put online but the SEC website does provide this advice in conducting a minimum level of hedge
fund due diligence before investing:
Read a fund's prospectus or offering memorandum and related materials
Understand how a fund's assets are valued
Ask questions about fees
Understand any limitations on your right to redeem your shares
Research the backgrounds of hedge fund managers
Don't be afraid to ask questions
Hedge Funds Due Diligence Articles, Guides & Tools
I have been collecting the hedge fund due diligence resources below over the past 18 months and I'm posting them here in hopes that they will a few people construct a relatively holistic view
of what hedge fund due diligence is about along with provide a few example RFPs and tools to use while conducting due diligence on hedge fund managers. This is not an exhaustive list and
the information anywhere on this blog or within the linked sites should not be treated as investment advice or a substitute for financial advice of any type. This is simply an aggregation of
online hedge fund due diligence resources. I have only listed 21 resources here so far, I hope to make this more robust, if you have something you think should be added here please email me
at Richard@RichardCWilson.com.
Hedge Fund Due Diligence Articles
Hedge Fund Regulation Corner | Compliance & Law Notes
SEC on Hedge Fund Regulation
Hedge Fund Risk Analysis
Hedge Fund Fraud | SEC & Hedge Funds Fraud Case
Hedge Fund Due Diligence Tips
The Importance of RFPs in conducting hedge fund due diligence
Hedge Fund Manager Due Diligence
Due Diligence for High Net Worth Clients
Investment Due Diligence
Risks of hedge fund investing & portfolio management
How long should hedge fund due diligence take?
Institutional Hedge Fund Risk Controls
Hedge Fund Due Diligence Questions
Importance of transparency and hedge fund due diligence
Hedge Fund Due Diligence Whitepapers & PowerPoints
Whitepaper on Hedge Fund Operational Risk & Transparency
Alpha through rigorous hedge fund due diligence
In-depth hedge fund risk & due diligence PowerPoint
White Paper on Mitigating Operational Risk During Hedge Fund Due Diligence
Hedge Fund Due Diligence Tools
FINRA Broker Check
Hedge Fund of Fund RFP Example - Used in Institutional Due Diligence Processes
HFN's Guide to Hedge Fund Due Diligence
Book on Hedge Fund Due Diligence
Fund of Fund Due Diligence
Additional Hedge Fund Guide Sections
Hedge Fund Strategy
Hedge Fund Marketing
Hedge Fund Terms
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1. Guide to Investing
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Questionnaire
Link to This Resource: Hedge Fund Due Diligence http://richard-wilson.blogspot.com/2008/03/hedge-fund-due-diligence.html
Hedge Fund Strategy
Hedge Funds Strategy Guide
The 10-15,000 hedge funds now being managed throughout the world use between 200-400 different hedge fund strategies. How can you keep these all straight? The short answer is you can't,
but I have started compilining a list of hedge fund strategy definitions here below. Let me know if you are looking for something and can't find it here.
Hedge Fund Strategy Explanations
Emerging Markets
Equity Long Short
Fixed Income Arbitrage Investment Strategy | 1 Page Guide
130/30 Hedge Fund Resources
Global Macro
Global Macro Hedge Funds
Multi Strategy Hedge Fund
Sustainable Investing
Event Driven Hedge Funds
Green Hedge Funds
Art Investment Strategy
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Litigation Funding Hedge Fund Strategy
Short Selling
Emerging Markets Hedge Funds
Risk Arbitrage Hedge Fund Strategy
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Warrant Arbitrage
Arbitrage Investment Strategy
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Hedge Fund Terms
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Hedge Fund Due Diligence
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4. Hedge Fund Jobs
5. Hedge Fund Managers
6. Hedge Fund Research
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strategies, hedge fund manager strategy, hedge fund investing strategy, information on hedge fund strategy, hedge fund strategy research, hedge fund strategy due diligence
Link to This Resource: Hedge Fund Strategy
Fund of Hedge Funds Fund of Hedge Funds Update
There has been a lot of talk over the last 2 years and 2 quarters particularly about the death of fund of hedge funds (fofs). Like much other doomsday discussions regarding the hedge funds I
don't see these fund of fund groups going anywhere. In fact, I still think there is room for further growth in the fund of fund arena as demand from internationally-based investors is increasing as
most fund of funds are still currently designed for U.S or EU investors.
The main reason why I think hedge fund of funds will be always be around is that many investors have just enough assets to play around in hedge funds. This requires them to either allocate
their funds to a friend or close business partner who runs a single strategy fund or diversify their entry to the hedge fund market by investing in 3-12 hedge funds at one time. Some of the most
popular retail products these days are all in one portfolios whether they be lifestyle portfolios, all cap separate managed account products, or retirement focussed growth & income mutual
funds. Many investors would rather pay an extra layer of 1% fees in return for a no hassles lower risk exposure to the hedge fund industry.
Another reason why fund of hedge funds will be around for a long time is that 55% of all fof assets are from institutions. The percentage of fund of funds used in a institutions total portfolio is on
the rise, not the decline. This class of investors generally takes a longer view than high net worth individuals or family offices. It would take several catastrophic events in consecutive quarters
or years to stall or create a small decline in the institutional use of hedge fund of funds.
Read dozens of additional articles like this within the guide to Hedge Fund Terms and Definitions.
- Fund of Hedge Funds
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Hedge Funds
Related Terms: Fund of Hedge Funds, FoF, Hedge Fund of Fund, Hedge Fund of Funds, Fund of Hedge Funds, Hedge Fund Portfolio, Portfolio of Hedge Funds, fund of funds hedge funds, fund
of funds hedge fund, a hedge fund of funds, funds of hedge funds portfolio, top hedge fund of funds, best fund of hedge funds, top fund of hedge funds, best hedge fund of funds, fof, fund of
hedge fund managers, fund of hedge funds
Below are a collection of useful and interesting news pieces, articles and videos related to hedge funds:
Link 1: Assets of a Brazilian hedge fund sharply drops: Ciano Investimentos Gestao de Recursos Ltda.‘s flagship hedge fund lost 95 percent of its assets to withdrawals after founder Ilan
Goldfajn, a former central bank director, left the company.
Investors withdrew 197.4 million reais ($85 million) Ciano 60 Hedge Fundo de Investimento Multimercado since Nov. 11, a day after Goldfajn departed. The fund’s value plunged to 10.3
million reais as of Nov. 21, according to the Web site of Brazil’s securities regulator, CVM.
“Some investors withdrew funds because of my decision to leave Ciano,” Goldfajn, 42, said in a telephone interview from Rio de Janeiro. “Because of my departure, we waived a 10 percent
redemption fee.” Source
Link 2: Hedge Funds Search for Assets in Japan. Japan's Ashiya city has been home to the nation's industrial titans since samurai ruled the land more than a century ago. Now it's a feeding
ground for hedge funds tapping the wealth of new multi-millionaires like Kunihisa Sagami.
Sagami, founder of mail-order cosmetics and jewelry supplier Epix, is one of the residents of the gated enclave overlooking the port city of Kobe who are among the highest taxpayers in
Japan. They're the elite in a nation where households hold a combined $15 trillion in financial assets -- more than the annual gross domestic product of the U.S. Source
Link 3: Texas Hedge Fund Being Liquidated. Parkcentral Capital Management, an investment firm that manages money for the family of Ross Perot, is liquidating a fixed-income hedge fund
because it is “no longer viable.”
This year through October, Parkcentral Global Hub’s assets fell as much as 40 percent, to $1.5 billion. The fund is selling its remaining holdings to pay creditors, Eddie Reeves, a spokesman,
said Tuesday. Mr. Perot and members of his family were the fund’s biggest investors.
“Parkcentral Global has been impacted dramatically by the unprecedented upheaval of the capital markets in general and the freezing of credit markets in particular,” Mr. Reeves said. ”The
fund is no longer viable.” Source
Link 4: Spitzer's wife to join a hedge fund. The wife of former New York Gov. (and Sheriff of Wall Street) Eliot Spitzer is going to work on Wall Street.
Silda Wall Spitzer, who endured the humiliation of her husband’s resignation amidst a prostitution scandal in March, has joined hedge fund Metropolitan Capital Advisors (which is technically
on Madison Avenue), New York Magazine reports. The $300 million firm is run by CNBC personality Karen Finerman, whose husband, Lawrence Golub, is a longtime friend of Eliot Spitzer and
contributor to his campaigns.
Silda Spitzer will help “recruit new investors” in her new job, which she started last month. Source
Link 5: Hedge Fund Pacificor Sued. Pacificor has been sued by the former owners of a mortgage lender the California hedge fund bought.
John and Kitty Gaiser have sued the Santa Barbara-based firm and the estate of its former manager, Michael Klein, seeking $30 million. The Gaisers’ lawsuit says that Pacificor “misused a
position of trust and control in order to attempt to take control of and acquire—without compensation—John and Kitty Gaiser’s ownership of Quality Home Loans,” the Gaisers’ law firm said in a
statement. Source
Link 6: Hedge fund assets stuck within Lehman. Several companies reliant on four US hedge funds face collapse because the funds cannot access shares and loans held at the London arm of
Lehman Brothers, the collapsed bank.
The four funds – whose names were kept secret in a High Court ruling this week – claimed that they were likely to close in mid-December if they failed to get access to information about their
assets frozen at Lehman. The funds made an unsuccessful effort to force the administrators of Lehman, four PwC partners, to give them details of their assets and how much they owe to
Lehman.
Source
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GLG Partners Hedge Fund Update
GLG Partners Fund
GLG Partners Hedge Fund Update
Just a quick note to let you know that our team has updated the Hedge Fund Tracker notes for GLG Partners.
To read the updated profiles see this link: GLG Partners Hedge Fund Tracker Profile Notes
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Link to This Resource: GLG Partners Hedge Fund Update
Top 4 Hedge Fund Industry Fears | Market Insights
Hedge Fund Fears
The Top 4 Hedge Fund Fears
Over the last 3 months and a series of conversations with hedge fund managers, prime brokerage professionals, administrators and marketers it seems there are 4 big fears in the industry right
now.
Top 4 Hedge Fund Fears
A flat or highly volatile market for a period of more than 18-24 months - effectively wiping out those hedge funds which were hanging on for those greener pastures of another bull market.
Long-term deterioration of leverage of almost any type. While many hedge funds already use no or close to no leverage many others use large amounts of it and many funds would be
hampered if new regulations are put into place which severely limit their access to it. Read an article on this topic here.
Desperate hedge fund managers committing enough fraud to scare off a large percentage of the High net worth and ultra high net worth investor base. There is article on my site on ethics
located here.
Overbearing regulation which pushes hedge fund activity into Canada, over to London and across the world away from New York. The industry is already suffering large redemption losses and
regulation done the wrong way could stifle further innovation or at least push even more of it offshore. As the recently hedge fund testimony showed, many hedge funds are open to some forms
of regulation or over-sight but these must be done in ways which are sensitive to the intellectual knowledge and security disclosure concerns specific to this industry. Listen to the recent
congressional testimony by hedge fund managers by clicking here.
Other interesting points that have come out of talking to hedge funds - most expect the markets to stay flat or negative for an additional 6-9 months and the majority see this to be a huge
opportunity for positioning their fund for explosive growth in 2010 and 2011.
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Link to This Resource: Top 4 Hedge Fund Industry Fears | Market Insights
Managers | Hedging Skills
Japanese Hedge Funds
Japanese Hedge Fund Managers| Notes
It would seem that choppy markets in Japan over the past several years is now helping hedge funds in this region navigate the current financial crisis. Most of the funds I know which run funds
focusing on Japanese securities also run diversified Asia or China funds which have done very poorly, I would be curious to see if those managers who run both Japan-specific funds as well as
China funds faired better than the average fund in China. Here is the article excerpt:
Japan's hedge fund industry, dominated by so-called long-short funds that bet on rising and falling stock prices, will attract capital on signs they are starting to outperform peers, Credit Suisse
Group AG said.
The 81-fund Eurekahedge Japan Long-Short Equities Index fell 11 percent this year through October, compared with a 21 percent drop for an index that tracks more than 1,000 global long-
short hedge funds and a 40 percent slide by the MSCI World Index, a global benchmark.
``Japanese long-short strategies have weathered reasonably well the market turmoil,'' Boris Arabadjiev, head of alpha strategies at Zurich-based Credit Suisse's asset management unit, said in
an interview in Tokyo yesterday. ``That relative performance has already started to attract capital, and we believe that it will continue to attract capital. We continue to be favorably disposed to
managers investing in Japan.''
This year has been the worst on record for hedge funds, an estimated $1.56 trillion industry, with the average fund losing 16 percent through October, according to data compiled by Chicago-
based Hedge Fund Research Inc. The industry saw net withdrawals of $62.7 billion in October, according to Eurekahedge Pte., a Singapore-based industry data provider. Read more...
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Tags: Japanese hedge Funds, Japanese Hedge Fund Managers, Japan Hedge Fund Industry, Japanese Managers, Japanese funds, Money management japan, long short funds in Japan
Link
Hedge Fund Marketing Tools Tools for Hedge Fund Marketers & 3PMs
I have created this page to list a collection of online hedge fund marketing tools available to professionals within the hedge fund marketing space. If you have a favorite tool or run a firm
which offers a tool for third party marketers please email me at Richard@HedgeFundGroup.org to discuss having it posted here.
Master Contact Database: The industry's leading master contact database containing details on over 20,700 alternative investment funds, CTAs fund of funds, etc.
Fund of Hedge Fund Database Fund of Hedge Funds Database which profiles 2,585 funds and is the most comprehensive database of its kind
Fund of Hedge Fund Directory: Directory of Funds of Hedge Funds
profiles 1,032 carefully selected funds of hedge funds and funds of CTAs
Preqin Hedge Fund Investor Databases: A complete investor database solution for hedge funds looking to raise capital across several distribution channels.
Capital Hedge Investor Databases: A complete investor database solution for hedge funds looking to raise capital across several distribution channels.
Email Newsletter Creation Tool: Aweber is the #1 provider of email newsletter creation and management services. Creating an email newsletter keeps you in front of your prospects and loyal
customers. Aweber offers a suite of low cost professional email newsletter templates and their how-to guides, quick online support and email tips make them a favorite of thousands of firms.
Click here now to see what Aweber offers.
Hedge Fund Database: Thorough database which contains comprehensive information on 3,169 single manager hedge funds.
Hedge Fund Directory: A less expensive and lighter collection of single hedge fund manager contact details.
CTA Database A source for managed futures data for the past 20 years and contains comprehensive data on 864 CTA programs.
CTA Directory A less expensive lighter version of the database above
Hedge Fund Asset Flow Reports Order reports to dig into where asset flows are coming and going within the hedge fund industry. Monthly reports available.
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2. Marketing to Institutional Investors
3. Financial Public Relations
4. Email Newsletter Creation Tool
5. Sales Details
6. Third Party Marketing
7. Capital Introductions
8. Hedge Fund Seed Capital
9. Hedge Fund Media Exposure
10. Financial Advisor Marketing
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Hound Dog
See the main articles on continuously compounded interest and dollar cost averaging.
Periodically and Continuously Compounded Interest
Back when Elvis was King and computers were scarce (and could that really be just a coincidence?) banks used to compound interest quarterly. That meant that four times a year they would
have an "interest day", when everybody's balance got bumped up by one fourth of the going interest rate... and bank employees would have to work late, going home all sweaty and covered
with ink. If you held an account in those days, every year your balance would increase by a factor of (1 + r/4)4.
Today it's possible to compound interest monthly, daily, and in the limiting case, continuously, meaning that your balance grows by a small amount every instant.
To get the formula we'll start out with interest compounded n times per year:
FVn = P(1 + r/n)Yn
where P is the starting principal and FV is the future value after Y years.
To get to the continuous case we take the limit as the time slices get tiny:
FV =
limit P(1 + r/n)Yn
n
We can simplify the right side by introducing a new variable, defining m = n/r
FV =
limit P(1 + 1/m)Ymr
m
=
P
[limit (1 + 1/m)m]Yr
m
The limit in the square brackets converges to the number e = 2.71828.... (In fact, Leonhard Euler may have thought of this limit as the definition of e, right around the time he named it "e"
after himself). So the formula becomes
FV = PeYr
This calculator lets you see how fast the formula converges.
Inputs
Starting Principal: $
Interest Rate: %
Years:
Future Value
Periodic compounding: P(1 + r/n)Yn for n equal to...
1 $
$
12 $
365 $
365 x 24 $
Continuous compounding:
PeYr $
Incidentally, if you know calculus then the continuous compounding formula has a natural interpretation. First let's replace the clunky "FV" notation, and write f(t) for the balance at time t (with
t measured in years). So
f(t) = Petr
Taking the derivative
d
dt
f(t) = d
dt
(Petr)
= rPetr
= r f(t)
In words, this is saying that
"at any instant the balance is changing at a rate that equals r times the current balance"
which of course is the definition of continuous compounding.
Does Dollar Cost Averaging Work?
Dollar cost averaging means investing a fixed amount at fixed intervals of time. That's a sensible approach, for example, if it means committing yourself to investing a fixed amount of your
salary every month toward your retirement.
However, some people also think you should dollar cost average a lump sum. For example, if you had $12,000 that you wanted to invest in a stock index fund, they would tell you to invest
$1000 per month over a year, rather than investing the whole amount immediately. The rationale is that market volatility should then work in your favor, because you will automatically be
purchasing more shares when the price is low, and fewer shares when the price is high.
As appealing as that theory is, its advantage looks like a myth, as this calculator shows. It uses market data to let you compare dollar cost averaging with lump sum investing for the start date
you specify.
Assumptions
$10,000 will be invested in a market investment, following two different strategies:
(a) the whole amount will be invested on the start date; and
(b) equal amounts will be invested at the start of every month for a year, during which the remaining cash will stay invested in a bank account at a guaranteed interest rate.
The market investment is an S&P 500 index fund with annual fees of 0.2%.
The bank account interest rate is %
Select Start Date
January
February
March
April
May
June
July
August
September
October
November
December
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976
1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950
Results
Investment Value After 12 Months
(a) Using Lump Sum Method: $
(b) Using Dollar Cost Averaging: $
Each strategy wins at least some of the time, but after a few runs you'll see that DCA is the statistical "dog", losing about two times out of three.
Of course, dollar cost averaging will win if your start date falls right before a dramatic crash (like October 1987) or at the start of an overall 12 month slump (like most of 2000). But unless you
can predict these downturns ahead of time, you have no scientific reason to believe that dollar cost averaging will give you an advantage.
So why do so many people persist in believing that this old dog really knows how to hunt? Maybe because it has a psychological appeal: if the market dips, people will be happy because DCA
will be saving them money; and if the market goes up, people will be happy regardless.
IRA
Individual Retirement Account. One of several specific retirement accounts allowed by the IRS to provide tax-deferral or other tax advantage. The three types of IRAs available are:
Deductible IRA Tax-deferred contributions and growth
Non-deductible IRA Tax-deferred growth only
Roth IRA Tax-free growth
Income Statement
Financial document showing a company's income and expenses over a given period (like one fiscal year). Also known as the Earnings Statement or Statement of Operations.
The "bottom line" of the income statement is the company's earnings for the period.
See the main article for a sample income statement.
Income Statement
Stock investors like to look at the income statement (a.k.a. "earnings statement" or "statement of operations") because it shows the company's "bottom line": its earnings, or profit. Most of the
income statement details the company's operations: the yellow zone back in the diagram.
Consolidated Financial Statements
Income Statement
(click on highlighted text for more information)
(dollar figures are in thousands) 1997 1996
Sales Revenue
Widget Sales $ 12,347 $ 9,746
Services 6,912 5,688
Total Sales Revenue 19,259 15,434
Sales Costs
Widget Sales 5,649 4,688
Services 3,166 2,712
Total Sales Costs 8,815 7,400
Gross Profit 10,444 8,034
Gross Margin 54 % 52 %
Operating Expenses
Sales & Marketing 4,078 3,132
General & Administrative 916 705
Research & Development 2,364 1,831
Total Operating Expenses 7,358 5,668
Operating Income 3,086 2,366
Operating Margin 16 % 15 %
Interest Payments to Bondholders 147 253
Earnings Before Taxes 2,939 2,113
Provision for Taxes 1,028 739
Earnings ("net income") 1,911 1,374
Profit Margin 10 % 9 %
Dividends paid to Shareholders 10 -
Earnings available to Shareholders 1,901 1,374
Introduction / Diagram
Income Statement
Cash Flow Statement
Balance Sheet
Books & Links
Notes
This company is showing positive earnings. In fact, if you compare the earnings between the two years shown, you'll find that earnings "grew" by 39%. As you might expect, the figures for sales
costs and operating expenses are also higher, so the company is probably growing physically as well: in order to make more money, it's increasing its capacity to produce more of whatever it
sells.
One important thing that the income statement doesn't show is how the company is paying for this growth. To find that, you need to look at the cash flow statement. Another shortcoming of the
income statement is that expense items are only shown "by department" and not "by type". For example, employee salaries make up part of sales cost and part of all items listed under
operating expenses; but you can't tell from here how big a part.
Index Fund
Mutual fund holding a portfolio of securities that closely matches an established index (like the S&P 500). Index funds offer diversification and low management fees (since the decision of
which securities to invest in is mainly automatic, being predetermined by the index itself). See the index funds overview and the page on index funds and optimal portfolios.
Index funds allow average people to participate intelligently in the stock market, by offering diversification and low fees. The "why" of index investing is widely available. (In a nutshell,
actively managed mutual funds only do about as well as index funds but charge higher fees; and individual stock investors can do even worse, mainly because they keep stumbling over bum
advice - which is also widely available.) So this article covers the basics on the "what" of index investing: exactly what indexes and index funds are, how they select and weight stocks, and
how different index families divide up the market. That's followed with some simple suggestions on building portfolios with index funds and ETFs.
Index Basics
A stock index is a hypothetical portfolio of stocks - a list of names and numbers of shares - selected according to some established criteria. An index fund is a real mutual fund that buys stocks
and holds them in a portfolio that approximates the index.
The most widely followed index is the S&P 500, consisting of 500 hand picked large companies selected by Standard & Poor's. The best known index fund is the Vanguard 500 from The
Vanguard Group, which tracks the S&P 500.
The performance of an index fund won't exactly match that of the index, for at least two reasons. First, the fund needs to charge a management fee to cover the expenses of running a "real"
mutual fund, including salaries of brokers and admin people who keep the customers' accounts straight. Second, the fund has some flexibility in exactly how closely they track the index. (That
can actually be a good thing: some well-known funds consistently show some skill and frequently manage to beat their index, even after fees.)
Most modern indexes weight stocks according to their market capitalization. That means that if A and B are two companies in the S&P 500 and the market capitalization of A is twice that of
B, then if you invest in an S&P 500 index fund your proportional ownership of A will be twice that of B, dollar-wise. That's the same as saying that you'll be allocating your money in the same
proportions as the whole market is. That's a good thing if you believe in market efficiency, because you'll be passively benefiting from whatever logic the market used to make its allocation
decisions. If you don't particularly believe in market efficiency, that's still okay - the index is still a diversified bunch of stocks.
(The Dow Jones Industrial Average doesn't weight its companies this way, because it's a throwback to olden times. It really is just "a bunch of stocks", where the weighting of each stock within
the index has no particular significance.)
Index Funds and Optimal Portfolios
The portfolio demo was easy to use because it assumes that the investment universe consists only of two market securities, plus riskless cash. But of course the real investment universe is a lot
bigger than that, with thousands of choices among U.S. stocks alone. In theory you could find the optimal point on the efficient frontier generated by this many securities, but doing that
wouldn't be practical. For one thing, you'd have to calculate the covariance between every pair of securities: thousands of securities means millions of covariance calculations. But even if
you could do all those calculations, you wouldn't really want to. That's because the efficient frontier is based on an idealized model of the way investments work; and when you apply a huge
number of calculations to a model you tend to amplify the error between the model and reality, leaving you with more "noise" than anything else.
So as a practical matter, putting portfolio theory to work means reducing the problem to something about as simple as the portfolio demo, and investing in a small number of index funds
rather than a huge number of individual stocks and bonds.
Index investing is where portfolio theory starts to rely on the efficient market hypothesis. When you buy an index you're allocating your money the same way the whole market is - which is a
good thing if you believe the market has a plan. This is why portfolio theory really is a branch of economics rather than finance: instead of studying financial statements you study the
aggregate behavior of investors, some of whom presumably have studied financial statements so that market valuations will reflect their due diligence.
(This viewpoint also gives rise to some bad blood that's pretty entertaining if you aren't involved. The economists see business analysts as necessary to market efficiency, but otherwise rather
beneath them as a life form, like the bacteria that make yogurt: they're useful, but they're basically germs. The "germs" respond that the economists are delusional eggheads whose theories
collapse whenever real money is involved.)
Tobin Separation Theorem
The pioneering result that helped popularize index investing was Tobin's "separation theorem", which Bill Sharpe summarized this way in an interview:
James Tobin ... in a 1958 paper said if you hold risky securities and are able to borrow - buying stocks on margin - or lend - buying risk-free assets - and you do so at the same rate, then the
efficient frontier is a single portfolio of risky securities plus borrowing and lending....
Tobin's Separation Theorem says you can separate the problem into first finding that optimal combination of risky securities and then deciding whether to lend or borrow, depending on your
attitude toward risk. It then showed that if there's only one portfolio plus borrowing and lending, it's got to be the market.
The reasoning behind this is easy to understand from the same kind of diagram we have already been looking at:
As usual you're trying to build an optimal portfolio for your risk tolerance; and as before, it will lie somewhere on the straight line joining the cash rate Rf to some optimal mix on the efficient
frontier. We're specifically assuming what Sharpe said, that high risk investors can and will buy on margin, with money borrowed at the low rate Rf. That's why there is just one straight line in
the picture, and one unique optimal mix on the efficient frontier; so the problem of building an optimal portfolio is "separated" into somehow finding the optimal mix and then combining it
with cash to give you your desired risk tolerance.
Now for the part that's really interesting. Assume that everybody is facing the same efficient frontier that you are, and that the market is efficient in the specific sense that it behaves in the
aggregate as if everybody is trying to build an efficient portfolio this way. That means it behaves as if everybody is on your straight line, with the same optimal mix as you. So the mix that the
market is holding - the index - is guaranteed to be your own personal optimal mix.
That's an incredibly elegant result... but it requires you to accept some really strong hypotheses. (Two quick jabs: real investors can't afford to be so cavalier about the special risks of margin
buying; and different tax brackets mean different people face different efficient frontiers. Goodbye single straight line; so long universal optimal mix.)
Probably due to problems like those, results about index investing have trended away from proofs that index funds are optimal toward statistical models confirming that index funds are hard to
beat. That's a trend we'll be following on the next three pages, with CAPM (a theoretical model that looks like a statistical model) and the three factor model (a pure statistical model with a
little theory suggested as an afterthought).
Next: how CAPM relates individual securities to the index.
Inflation
The tendency for prices and wages to become more expensive.
Investors tend to pay attention to inflation mainly out of fear that the Federal Reserve will try to fight it by tightening the money supply.
See the inflation calculator; also the Bureau of Labor Statistics (www.bls.gov) for a monthly report on changes in the Consumer Price Index and Producer Price Index, along with another
inflation calculator.
Inflation
Inflation is usually calculated as the annual change in the Consumer Price Index, available from the Bureau of Labor Statistics. This first calculator uses CPI data to show how things have
been going.
Date Range
January 1 through December 31
Results
Annualized Inflation Rate: %
$1.00 at the beginning of 1900 had the same purchasing power as $26.61 at the end of 2008.
Data: BLS Pre 1913: Robert Shiller
Inflation averaged about 3% annually during the 20th century. It was briefly much higher than that right after both world wars (probably due to pent-up demand versus used-up supply) and
also during the late 1970s (probably due to the government's policy of "printing press financing" - see the government spending diagram for details). Inflation remained low during the boom
of the 1990s, which is very encouraging: it shows how a hot economy can create growth in both demand and supply, so that the price level remains stable.
(Note that the early 1890s had very sharp deflation - it was a great time to have money, but a disaster for farmers and anyone else in debt. 1896 is when William Jennings Bryan made his
famous "cross of gold" speech, pleading for a looser monetary policy.)
What the Fed Does
People expect that, by regulating the money supply, the Federal Reserve will be able to keep consumer prices stable... and also to keep the economy growing at a reasonable rate and to
keep unemployment low. That's already more "goals" than "controls", which would result in some pretty schizophrenic marching orders. For example, if OPEC announces that they plan to cut
oil output in order to drive prices up, should the Fed raise interest rates to fight inflation... or see the higher oil prices as a recessionary factor, and maybe even think about lowering interest
rates?
To see the answer, just notice that this isn't really a monetary problem: the higher oil prices aren't the result of too much easy money. That means that restricting the money supply wouldn't
be a fix, so the Fed won't raise interest rates.
This example shows why energy prices are one of the special indices that get excluded from the Core CPI numbers: energy prices are volatile enough that when they change it doesn't tell
you very much about the rate of inflation overall.
Food and beverages
Housing
Apparel
Transportation
Medical care
Recreation
Education and communication
Other goods and services Total CPI
- Energy
- Food Special Indexes
Total CPI minus Special Indexes Core CPI
(Oh by the way: Irving Fisher, who developed the monetary theory that forms the basis of the Fed's operations, is the same person who predicted that the stock market had reached a
permanently high plateau... just weeks before the Crash of 1929. These guys are very good, but they aren't wizards.)
Inflation Calculator
One place most people will feel the effects of inflation is in their retirement accounts; so this calculator shows what inflation does to the buying power of an investment.
Inputs
Current Principal: $
Years to grow:
Growth Rate: %
Inflation Rate: %
Results
Future Value: $
Buying Power in Today's Dollars: $
(Also see the portfolio guidelines page in the index funds article, for some calculators that combine inflation with historical stock market returns.)
Inventory
Finished product that's ready for sale, but hasn't been sold yet.
Inventory is considered a current asset, and shown on the balance sheet, generally at cost.
On the scale of the national economy, changes in inventory levels can have confusing effects on the GDP.
Investment
On the cash flow statement and in economics, investment means spending that results in an increase in assets. This includes capital spending on plant and equipment, i.e. a real increase in
the means of production; but it also includes any swelling of unsold inventory, which can indicate a problem with consumer demand.
Residential investment mainly refers to the purchase of homes.
Annual business and residential investment respectively make up about 12% and 4% of the GDP; see the interactive GDP Diagram.
Investment Strategy
1-The most important tales of success have been related with great business opportunities: Bill Gates and Paul Allen ( Microsoft ), Warren Buffet "The Oracle of Omaha" (Berkshire Hathaway ),
the Walton Family ( Wal-Mart ), etc. Someone with knowledge enough and business's sense, who, with the required timing, acquired a piece of such potential success, today is a member of
the limited Billionaire's Club. Unfortunately, the best time for success on Microsoft, Berkshire Hathaway, Wal-Mart, etc, has gone. However, never is too late. There are present opportunities for
new tales of success. Less than one percent, among the thousands of companies which try to prevail in the competitive present global market, are ranked among such that have an important
opportunity for success. Part of DHC' wealth is the acquired knowledge, during the last ten years, and the creation of a system to first detect and after fully investigate, coals with potential
enough to be transformed to diamonds, together with the use of all available, legal, and safe tools.
2- Many companies which half a century ago were among the most important, among the strongest, today are almost insignificant when compared with leaders. The U.S. automotive and
steel companies, all together, are far from the market capitalization of Microsoft, a postindustrial enterprise. Some of such postindustrial enterprises began in a room of the founder's house.
Many individuals who half a century ago were among the wealthiest, today are almost insignificant when compared with Bill Gates. Thus, DHC' system seek a multiplying effect, using all
available tools at the same time, to first surpass the wealthiest, and after continue being ahead. The key to detect potential diamonds is to seek for companies with strong fundamentals and
fuel enough to substantially accelerate present growth trends, together with the required timing, strength progression, and market conditions.
3- DHC' strategy is supported by fundamental analysis seeking quality, combined with technical analysis seeking timing. The market conditions are continuously observed, seeking all
available information concerning macros, and watching S&P 500 Index, NYSE Composite Index, NASDAQ Composite Index, Nikkei, DAX, FTSE, etc. DHC' proprietary test includes: (A)
Liquidity progression enough to build the holding or to sell positions under average conditions; (B) Intrinsic Value progression enough to avoid a "bubble's burst"; (C) Strength progression
enough to provide a performance of at least 1000 % on a long term basis. (D) Confidence Level enough to minimize investment risk on a long term basis; (E) Uniqueness to provide
specialties; (F) Avoidance of companies which rely solely on a commodity or a regulated service.
4- DHC' bonds are issued, on a private basis, in a jurisdiction where government charges no tax on interest earned, with a face value of ONE MILLION U.S.D., and a coupon of 14 %, payable
on an annual basis ( one year maturity, 14 % APR ). A legally defensible operation of bond's buyer, in a more favorable business environment, could be beneficiary of a DHC' loan up to half a
million U.S.D. Bond's buyer will have the benefit of a tax free income from interest ( ? ), and additionally, the opportunity to start over again. Using such proceeds bond's buyer could have the
opportunity to joint DHC in a legally defensible high return joint venture.
5- DHC invest, on a long term and global basis, in equity of the companies of the world with the highest earnings growth for the next five to ten years, which previously pass DHC' proprietary
tests. Companies provide the highest quality and a predictable value improvement of at least 1000 % for the next five to ten years. Companies provide the strongest return on equity, income
per employee, profit margin, financial health and earnings growth for the next five to ten years. Likewise companies provide high confidence level and mean recommendation of buy or
strong buy by all renowned analysts, as well as low risk expectation, no risk of bubble's burst, very high return expectation, low volatility, high liquidity progression, very high strength
progression and uniqueness.
Investment strategy
In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Usually the strategy will be designed around
the investor's risk-return tradeoff: some investors will prefer to maximize expected returns by investing in risky assets, others will prefer to minimize risk, but most will select a strategy somewhere
in between.
Passive strategies are often used to minimize transaction costs, and active strategies such as market timing are an attempt to maximize returns.
One of the better known investment strategies is buy and hold. Buy and hold is a long term investment strategy, based on the concept that in the long run equity markets give a good rate of
return despite periods of volatility or decline. A purely passive variant of this strategy is indexing where an investor buys a small proportion of all the shares in a market index such as the S&P
500, or more likely, in a mutual fund called an index fund.
This viewpoint also holds that market timing, that one can enter the market on the lows and sell on the highs, does not work or does not work for small investors, so it is better to simply buy and
hold. The smaller, retail investor more typically uses the buy and hold investment strategy in real estate investment where the holding period is typically the lifespan of their mortgage.
Algorithmic trading
Buy and hold
CANSLIM
Contrarian
Liability driven investment strategy
Market timing
Trading strategy
Trend following
MoneyWeek Investment Advice
Wheel of fortune Design and test your investment strategy for a virtual wheel of fortune, optimize your strategies using different utility functions.
Virtual stock market Design and test your investment strategy for a virtual stock market, where three stocks and a bank account are available for investing.
Category: Investment (Source: Wikipedia)
Investment or investing[1] is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption.
Investment is the choice by the individual to risk his savings with the hope of gain. Rather than store the good produced, or its money equivalent, the investor chooses to use that good either to
create a durable consumer or producer good, or to lend the original saved good to another in exchange for either interest or a share of the profits.
In the first case, the individual creates durable consumer goods, hoping the services from the good will make his life better. In the second, the individual becomes an entrepreneur using the
resource to produce goods and services for others in the hope of a profitable sale. The third case describes a lender, and the fourth describes an investor in a share of the business.
In each case, the consumer obtains a durable asset or investment, and accounts for that asset by recording an equivalent liability. As time passes, and both prices and interest rates change,
the value of the asset and liability also change.
An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin "vestis", meaning garment, and
refers to the act of putting things (money or other claims to resources) into others' pockets. See Invest. The basic meaning of the term being an asset held to have some recurring or capital
gains. It is an asset that is expected to give returns without any work on the asset per se.
Types of investments
The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial
asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.
Business management
The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: Managers determine the investment value of the assets that a
business enterprise has within its control or possession. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (see below).
Assets are used to produce streams of revenue that often are associated with particular costs or outflows. All together, the manager must determine whether the net present value of the
investment to the enterprise is positive using the marginal cost of capital that is associated with the particular area of business.
In terms of financial assets, these are often marketable securities such as a company stock (an equity investment) or bonds (a debt investment). At times the goal of the investment is for
producing future cash flows, while at others it may be for purposes of gaining access to more assets by establishing control or influence over the operation of a second company (the investee).
Economics
In economics, investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or
factory) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and output, gross investment (represented by the variable I) is also a component of
Gross domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is consumption, G is government spending, and NX is net exports. Thus investment is everything that
remains of production after consumption, government spending, and exports are subtracted.
Both non-residential investment (such as factories) and residential investment (new houses) combine to make up I. Net investment deducts depreciation from gross investment. It is the value of
the net increase in the capital stock per year.
Investment, as production over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock, that is, an accumulation
measurable at a point in time (say December 31st).
Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate
may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing
those funds rather than loaning them out for interest.
Finance
In finance, investment=cost of capital, like buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold,
real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Returns on investments will follow the risk-return spectrum.
Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide
income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments.
Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.
Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs.
Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.
Personal finance
Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment.
Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important, as investment risk can cause a capital loss when an investment is realized,
unlike saving(s) where the more limited risk is cash devaluing due to inflation.
In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit accounts are labeled as investment accounts by
banks for marketing purposes. Whether an asset is a saving(s) or an investment depends on where the money is invested: if it is cash then it is savings, if its value can fluctuate then it is
investment.
Real estate
In real estate, investment is money used to purchase property for the sole purpose of holding or leasing for income and where there is an element of capital risk. Unlike other economic or
financial investment, real estate is purchased. The seller is also called a Vendor and normally the purchaser is called a Buyer.
Residential real estate
The most common form of real estate investment as it includes the property purchased as other people's houses. In many cases the Buyer does not have the full purchase price for a property
and must engage a lender such as a Bank, Finance company or Private Lender. Herein the lender is the investor as only the lender stands to gain returns from it. Different countries have their
individual normal lending levels, but usually they will fall into the range of 70-90% of the purchase price. Against other types of real estate, residential real estate is the least risky.
Commercial real estate
Commercial real estate is the owning of a small building or large warehouse a company rents from so that it can conduct its business. Due to the higher risk of Commercial real estate, lending
rates of banks and other lenders are lower and often fall in the range of 50-70%.
Junk Bond
A bond with a credit rating below investment grade. These bonds typically offer a higher interest rate than investment grade corporate bonds.
Keogh Plan
A retirement account offering tax-deferred growth, designed for people who are self-employed or employees of non-incorporated businesses.
Liability
An obligation to pay. These include accounts payable, and bond and bank debt.
Liabilities are shown on the balance sheet.
Note that a liability is not necessarily an evil thing for a company. Technically it's just an asset that they have temporary control over but don't own. If it's a useful asset and if the cost of
"borrowing" it is cheap, then a liability can be a positive thing.
One example: if a retailer sells a gift certificate, they have to show a liability for the value of the merchandise they will be obligated to hand over when the giftee shows up to redeem it; but in
the meantime they already have the cash the gifter paid, and they can use it any way they want -- this liability is really an interest-free loan.
LIBOR
LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London money market offer each other for
short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. Due to London's importance as a global
financial center, LIBOR applies not only to the Pound Sterling, but also to major currencies such as the US Dollar, Swiss Franc, Japanese Yen and Canadian Dollar.
LIBOR is determined every morning at 11:00am London time. A department of the British Bankers Association averages the inter-bank interest rates being offered by its membership. LIBOR is
calculated for periods as short as overnight and as long as one year. While the rates banks offer each other vary continuously throughout the day, LIBOR is fixed for the 24 hour period.
Generally, the difference between the instantaneous rate and LIBOR is very small, especially for short durations.
The most important financial derivatives related to LIBOR are Eurodollar futures. Traded at the Chicago Mercantile Exchange (CME), Eurodollars are US dollars deposited at banks outside the
United States, primarily in Europe. By holding the deposits outside the country, US depositors are not subject to Federal Reserve margin requirements, allowing higher leverage of the funds.
The interest rate paid on Eurodollars is largely determined by LIBOR, and Eurodollar futures provide a way of betting on or hedging against future interest rate changes.
Interest rate swaps are another significant financial derivative dependent on LIBOR. In an interest rate swap, two parties exchange sets of interest payments on a given amount of capital.
Generally, one party will have a fixed interest payment, while the other will have a variable rate. The variable rate payment stream is often defined in terms of LIBOR. Interest rate swaps, and
by extension LIBOR, are extremely important in providing a liquid secondary market for residential mortgages, which in turn allows lower interest rates on US mortgages.
While LIBOR does have implications for transactions conducted in Euros, the advent of the Euro has brought with it the creation of the Euribor. Conceptually similar to the LIBOR, the Euribor
benchmark is defined and maintained by the European Banking Federation. Source: Wisegeek
The London Interbank Offered Rate (or LIBOR, pronounced /ˈlaɪbɔr/) is a daily reference rate based on the interest rates at which banks borrow unsecured funds from banks in the London
wholesale money market (or interbank market). It is roughly comparable to the U.S. Federal funds rate.
Introduction
During 1984 it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably interest rate swaps, foreign currency options
and forward rate agreements. Whilst recognizing that such instruments brought more business and greater depth to the London Interbank market, it was felt that future growth could be inhibited
unless a measure of uniformity was introduced. In October 1984 the British Bankers' Association working with other parties such as the Bank of England established various working parties,
which eventually culminated in the production of the BBAIRS terms – the BBA standard for interest swap rates. Part of this standard included the fixing of BBA interest settlement rates, the
predecessor of BBA LIBOR. From 2 September 1985 the BBAIRS terms became standard market practice.
BBA LIBOR fixings did not commence officially before 1 January 1986, although before that some rates have been fixed for a trial period commencing in December 1984.
It should be noted that member banks are international in scope, with more than sixty nations represented among its 223 members and 37 associated professional firms (as of 2008).
Scope
LIBOR rates are widely used as a reference rate for financial instruments such as:
forward rate agreements
short-term interest rate futures contracts
interest rate swaps
inflation swaps
floating rate notes
syndicated loans
variable rate mortgages[1]
currencies, especially the US dollar (see also Eurodollar).
They thus provide the basis for some of the world's most liquid and active interest rate markets.
For the Euro, however, the usual reference rates are the Euribor rates compiled by the European Banking Federation, from a larger bank panel. A Euro LIBOR does exist, but mainly for
continuity purposes in swap contracts dating back to pre-EMU times.
Technical features
LIBOR is published by the British Bankers' Association (BBA) after 11:00 am (and generally around 11:45 am) each day (London time). It is a trimmed average of inter-bank deposit rates
offered by designated contributor banks, for maturities ranging from overnight to one year. LIBOR is calculated for 10 currencies. There are either eight, twelve or sixteen contributor banks on
each currency panel and the reported interest is the mean of the middle values (the interquartile mean). The rates are a benchmark rather than a tradable rate, the actual rate at which banks
will lend to one another continues to vary throughout the day.
LIBOR is often used as a rate of reference for Pound Sterling and other currencies, including US dollar, Euro, Japanese Yen, Swiss Franc, Canadian dollar, Australian Dollar, Swedish Krona,
Danish Krone and New Zealand dollar.[2]
In the 1990s, Yen LIBOR rates were influenced by credit problems affecting some of the contributor banks.
For a precise definition of BBA LIBOR, see: The BBA LIBOR fixing & definition.
Six-month LIBOR is used as an index for some US mortgages. In the UK, the three-month LIBOR is used for some mortgages—especially for those with adverse credit history.
Definition of LIBOR. LIBOR is defined as:
“The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00
London time.”
This definition is amplified as follows:-
• The rate at which each bank submits must be formed from that bank’s perception of its cost of funds in the interbank market.
• Contributions must represent rates formed in London and not elsewhere.
• Contributions must be for the currency concerned, not the cost of producing one currency by borrowing in another currency and accessing the required currency via the foreign exchange
markets.
• The rates must be submitted by members of staff at a bank with primary responsibility for management of a bank’s cash, rather than a bank’s derivative book.
• The definition of “funds” is: unsecured interbank cash or cash raised through primary issuance of interbank Certificates of Deposit.
LIBOR-based derivatives
Eurodollar contracts
The Chicago Mercantile Exchange's Eurodollar contracts are based on three-month US dollar LIBOR rates. They are the world's most heavily traded short term interest rate futures contracts
and extend up to ten years. Shorter maturities trade on the Singapore Exchange in Asian time.
Interest rate swaps
Interest rate swaps based on short LIBOR rates currently trade on the interbank market for maturities up to 50 years. A "five year LIBOR" rate refers to the 5 year swap rate vs 3 or 6 month LIBOR.
"LIBOR + x basis points", when talking about a bond, means that the bond's cash flows have to be discounted on the swaps' zero-coupon yield curve shifted by x basis points in order to equal
the bond's actual market price. The day count convention for LIBOR rates in interest rate swaps is Actual/360.
Reliability
On Thursday, 29 May 2008 the Wall Street Journal released a controversial study suggesting that banks may have understated borrowing costs they reported for LIBOR during the 2008 credit
crunch.[3] Such underreporting could have created an impression that banks could borrow from other banks more cheaply than they could in reality. It could also have made the banking
system appear healthier than it was during the 2008 credit crunch.
For example, the study found that rates at which one major bank "said it could borrow dollars for three months were about 0.87 percentage point lower than the rate calculated using default-
insurance data."
In response to the study released by the WSJ, the British Bankers' Association announced that LIBOR continues to be reliable even in times of financial crisis. According to the British Bankers'
Association, other proxies for financial health such as the default credit insurance market, are not necessarily more sound than LIBOR at times of financial crisis, though more widely used in
Latin America, especially the Ecuadorian and Bolivian markets.
Additionally, other authorities have contradicted the Wall Street Journal article. In their March 2008 Quarterly Review The Bank for International Settlements have stated that "available data
do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings". Further, In October 2008 the International Monetary Fund published
their regular Global Financial Stability Review which also found that "Although the integrity of the U.S. dollar LIBOR fixing process has been questioned by some market participants and the
financial press, it appears that U.S. dollar LIBOR remains an accurate measure of a typical creditworthy bank’s marginal cost of unsecured U.S. dollar term funding"
Euribor
TIBOR
Leverage (finance)
Margin (finance)
Prime rate
British Bankers' Association Source: Wikipedia. What is LIBOR?
Libor stands for the London Interbank Offered Rate and is the rate of interest at which banks borrow funds from each other, in marketable size, in the London interbank market.
What is BBA LIBOR?
BBA LIBOR is the most widely used "benchmark" or reference rate for short term interest rates. It is compiled by the BBA in conjunction with Reuters and released to the market shortly after
11.00 am London time each day.
Where is the BBA LIBOR standard used?
BBA LIBOR is the primary benchmark for short term interest rates globally. It is used as the basis for settlement of interest rate contracts on many of the world’s major futures and options
exchanges (including LIFFE, Deutsche Term Börse, Euronext, SIMEX and TIFFE) as well as most Over the Counter (OTC) and lending transactions.
How is BBA LIBOR produced? And published?
The British Bankers' Association (BBA), advised by senior market practitioners, maintains a reference panel of at least 8 contributor banks. For a full current list of which banks are contributing
to each panel please see link at the bottom of the page.
The aim is to produce a reference panel of banks which reflects the balance of the market – by country and by type of institution. Individual banks are selected within this guiding principle on
the basis of reputation, scale of market activity and perceived expertise in the currency concerned.
The BBA surveys the panel’s market activity and publishes their market quotes on–screen. The top quartile and bottom quartile market quotes are disregarded and the middle two quartiles are
averaged: the resulting "spot fixing" is the BBA LIBOR rate.
The quotes from all panel banks are published on–screen to ensure transparency. For a full description of the process please see the link at the bottom of the page.
BBA LIBOR fixings are provided in ten currencies:
BBA Libor fixing currencies table Currency Name ISO 4217 currency code (* see note)
Pound Sterling GBP
US Dollar USD
Japanese Yen JPY
Swiss Franc CHF
Canadian Dollar CAD
Australian Dollar AUD
Euro (** see note) EUR
Danish Kroner DKK
Swedish Krona SEK
New Zealand Dollar NZD
Note:
(*) This is an international standard describing three letter codes to define the names of currencies established by the International Organization for Standardization (ISO).
(**) BBA EUR LIBOR is the successor BBA LIBOR fixing for the eurozone legacy currencies, which ceased to be fixed at the beginning of 1999.
Where can I find BBA LIBOR data?
BBA LIBOR is compiled each London Business day by Reuters and distributed live via a number of data vendors including Reuters, Thomson Financial, Bloomberg, Quick, Infotec, Class
Editori, IDC, Proquote and Telekurs.
Many websites operated by financial services and media outlets are licensed to display BBA LIBOR data at the end of the day (that is, after 5pm London Time). Additionally, the financial
press, including the Wall Street Journal and Financial Times publish BBA LIBOR data from the previous day.
All BBA LIBOR is posted on our website, with a rolling 7 day delay, please see link at the bottom of the page.
Why is the BBA LIBOR standard important?
BBA LIBOR is important because:
it is long established
it offers the largest range of international rates
it is a truly international reference rate
it has a wide commercial use
it enjoys wide international dissemination
its mechanism is transparent
it provides a robust settlement rate
the banks represented on the panels are the most active in the cash markets and have the highest credit ratings
BBA LIBOR’s London base is significant: well over 20% of all international bank lending and more than 30% of all foreign exchange transactions take place through the offices of banks in
London and represents a unique snapshot of competitive funding costs.
London has representation from close to 500 banks, and many other major financial institutions actively trade in the euromarkets which are based primarily in London. In addition, no reserve
requirements are applied in London.
Can you provide a forecast on what BBA LIBOR rates will be in the future?
BBA LIBOR is extremely market sensitive and affected by a number of factors such as liquidity in the London cash markets, constitution of the contributor panels and local interest rate policy.
The BBA therefore is not able to provide any forecasts for the future.
Long-term BBA LIBOR
BBA LIBOR is a short–term interest rate deposit rate and is only calculated up to a maturity of 12 months. We have never calculated BBA LIBOR rates beyond this nor do we have any
intention of doing so as the liquidity in the London interbank cash market dries up after a one year maturity.
Some people use interest rates swap rates as approximation for longer periods but please be aware that the methodology is likely to be quite different for BBA LIBOR.
What do the abbreviations s/n, o/n and 1 w, 1 month mean?
These abbreviations stand for the maturities for which BBA LIBOR is fixed. There are 15 different maturities for each currency and day of fixing. The shortest maturity is overnight (O/N) for
Euro, US Dollar, Pound Sterling, and Canadian Dollar and spot/next (s/n) for all other currencies. 1 w stands for 1 week and 1m stands for 1 month. The longest maturity for which BBA LIBOR is
fixed is 12 months.
An "overnight" rate that you see quoted today will value today and mature tomorrow.
A "spot / next" rate that you see quoted today will value in 2 days (i.e. the day after tomorrow) and mature the day after that.
BBA LIBOR Historic rates
The BBA have posted all rates we hold on our website. Please see a link to the historic BBA LIBOR at the bottom of the page. BBA LIBOR fixings did not commence officially before 1 January
1986, although before that some rates have been fixed for a trial period commencing in December 1984.
Due to the specific methodology of calculating BBA LIBOR it is not possible to reconstruct rates before the official fixings commenced.
There are a few websites that purport to be showing BBA LIBOR rates before the mid-80s but these are in no way affiliated with the BBA, who is the sole supplier of BBA LIBOR, and so we
would not vouch for their accuracy.
Is there was any specific reason for why BBA LIBOR started in 1984. What was the historical impetus?
During 1984 it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably Interest Rate Swaps, Foreign Currency
Options and Forward Rate Agreements.
Whilst recognizing that such instruments brought more business and greater depth to the London Interbank market, it was felt that future growth could be inhibited unless a measure of
uniformity was introduced.
In October 1984 the BBA working with other parties such as the Bank of England established various working parties, which eventually culminated in the production of the BBAIRS terms – the
BBA standard for Interest Swap rates.
Part of this standard included the fixing of BBA Interest Settlement rates, the predecessor of BBA LIBOR. From 2 September 1985 the BBAIRS terms became standard market practice.
Factors that influence BBA LIBOR rates
BBA LIBOR rates are dependent on a number of factors, including local interest rates, banks expectations of future rate movements, the profile of contributor banks (contributor panels are
changed annually), liquidity in the London markets in the currency concerned etc.
Does BBA EUR LIBOR follow Target or London business days?
BBA Euro LIBOR follows the Target calendar – as set by the European Central Bank. So on days in which Target is open but London is closed, only the EUR BBA LIBOR rate will be fixed. If
Target is closed but London is trading we will fix EUR BBA LIBOR with the exception of the s/n maturity.
BBA LIBOR calculation basis
BBA LIBOR is not a compounded rate but is calculated on the basis of actual days in funding period/360. Therefore the formula is as follows: interest due = principal x (libor rate/100) x (actual
no of days in interest period/360). Please note that for GBP) the calculation basis is 365 days.
It is also important to work out the exact/actual number of days in the funding period which is not always 90 days for a 3 month deposit but could e.g. be 89 or 91 days.
If you have a funding period of, for example, 45 days you could extrapolate between the 1 and the 2 month rate to arrive at the correct BBA LIBOR rate.
Relationship between different currencies
BBA LIBOR is set entirely independently for each currency by a different panel of banks and the rates are not interrelated via a currency conversion or any other means. In fact BBA LIBOR
gives an idea at which interest rates banks can borrow funds in the currency concerned in the London cash market.
For instance, borrowings in USD are sometimes referred to as Eurodollar interest rates. The factor that has most impact on each of the rates is the domestic interest, which for USD rates will be
the Fed fund rates.
How can I obtain BBA LIBOR rates on the day of calculation?
In order to receive this data you must get a licence from the BBA, for which there may be a charge. Please contact BBA LIBOR Manager John Ewan for more details.
What Is Libor ?
Libor is short for the London InterBank Offered Rate, the interest rate offered for U.S. dollar deposits by a group of large London banks. There are actually several Libors corresponding to
different deposit maturities. Rates are quoted for 1-month, 3-month, 6-month and 12-month deposits.
What Is a Libor Mortgage?
A Libor mortgage is an adjustable rate mortgage (ARM) on which the interest rate is tied to a specified Libor. After an initial period during which the rate is fixed, it is adjusted to equal the
most recent value of the Libor plus a margin, subject to any adjustment cap.
For example, on April 26, 2004, one lender was offering a 6-month Libor ARM at 3%, zero points, and a margin of 1.625%. The new rate 6 months later will be 1.625% plus the 6-month Libor
at that time. If that is (say) 2.625%, the new rate will be 1.625% + 2.625% = 4.25%. If the adjustment cap that limits the size of rate changes is 1%, however, the new rate will be only
3% + 1% = 4%.
Special Features of Libor Mortgages
Low Margins for A-Quality Borrowers: Libor ARMs were developed to meet the needs of foreign investors looking to minimize their interest rate risk on dollar-denominated investments. A foreign
bank that buys the 6-month Libor ARM containing a 1.625% margin can borrow the funds it needs in the inter-bank market for 6 months at the 6-month Libor. The bank pays the depositor Libor,
and it earns Libor + 1.625% on the ARM. The margin is locked in, except to the extent that changes in Libor are not fully matched by changes in the ARM rate because of rate caps.
Because of the reduced risk, investors in Libor ARMs are willing to accept a smaller margin than is common on other ARMs. On April 26, 2004, for example, the Libor margin available to A-
quality borrowers was as low as 1.50%, compared to 2.25 – 2.75% on ARMs indexed to other series.
But not everyone can benefit from the low margin. On the same day that the lender cited above was offering a 6-month Libor ARM at 3% with a 1.625% margin, a sub-prime lender was
offering a 6-month Libor ARM to borrowers with D-credit at 10% with a 7% margin!
Attractive Buydowns: On 30-year fixed-rate mortgages, borrowers can usually "buy down" the rate by ¼% by paying about 1.5 points. I have seen 30-year Libor ARMs that allow the borrower to
buy down the rate and margin by ¼% for only 3/8 of a point. This is an incredible bargain, but the Libors that offer it may have an unusually high maximum rate.
No Negative Amortization: Libor ARMs don’t offer the payment flexibility, nor the associated risks, of negative amortization ARMs.
High Index Volatility: Libor is about as volatile as rates on short-term US Government securities, and more volatile than the COFI, CODI and MTA indexes.
Common Features of Libor Mortgages
The remaining features of Libor ARMs are very similar to those of other ARMs.
Initial rate period. This is the period during which the initial rate holds. Initial rate periods on Libor ARMs range from 6 months to 10 years.
Subsequent adjustment period. This is period between rate adjustments after the first adjustment. For example, an ARM on which the initial rate holds for 3 years and is then adjusted every
year is a "3/1". Most Libor ARMs adjust every 6 or 12 months.
Rate Adjustment Caps: Rate adjustment caps that limit the size of a rate change are generally 1% on 6-month Libors, and 2% on 1-year and 3-year Libors. On 7 and 10-year Libors, the cap is
usually 5% on the first adjustment and 2% on subsequent (annual) adjustments. On some 5-year Libors, however, the adjustment cap is the same as that on 1-year and 3-year Libors, while on
others it is the same as on 7-year and 10-year Libors.
Maximum Interest Rate: This is the highest interest rate allowed on the ARM over its life. The maximum rate on some Libor ARMs is set at 5% or 6% above the initial rate. On others it is set at
an absolute level – 11%, for example, regardless of the initial rate.
Why Select a Libor Mortgage?
You select a Libor loan not because it uses Libor but because it has a combination of other features that in combination add up to an attractive ARM for you. An ARM is attractive if, during
the period you expect to have the mortgage, the interest savings early in that period (relative to a FRM or an ARM with a longer initial rate period) outweigh the risk of interest rate and
payment increases later on.
The best way to make such a judgment is by using interest rate scenario analysis. An interest rate scenario is an assumption about what will happen to rates in the future. Usually, we focus on
rising rate scenarios, because those are the ones we worry about.
For any given scenario, we can calculate exactly how high the rate and payment will go, and when it will get there. Using the same scenario, we can compare different ARMs, as well as ARMs
against an FRM. We can also calculate the cost of an ARM or FRM over any period specified by the borrower.
Because their margins can be small, borrowers who take Libor ARMs may find it attractive to reduce the risk of future rate increases by adopting the FRM payment strategy. This involves
making the payment they would have had to make had they chosen an FRM, for as long as the FRM payment remains above the Libor ARM payment.
To see a sample of rates/payments and costs on an ARM and an FRM under different scenarios, including results for an FRM payment strategy, click on Sample Rates/Payments and Costs .
Information Needed to Assess a Libor Mortgage
You get it in two steps. In step 1, you have your loan officer or mortgage broker provide the essential data on the features of each loan you are considering. To make it as easy as possible for
them, print out and give them Worksheet of ARM Features. In Step 2, you transfer the data on ARM features into the ARM Tables calculator which will generate your tables. Have your data in
hand before clicking on ARM Tables calculator above or selecting the ARM Tables calculator on the Tutorials Menu.
Load
Sales charge on a mutual fund, usually paid at time of purchase. The NASD allows loads up to 8.5% of the value of the investment.
Load Funds up to 8.5%
Low-Load Funds 3% or below
No-Load Funds 0
No-load funds can still charge 12b-1 fees.
Long-term Debt
Debt due to be paid at a date more than one year in the future.
Market Capitalization
Total value of a company's stock; equal to the number of shares times the price per share.
Modern Portfolio Theory
Investment approach that tries to construct a portfolio offering maximum expected returns for a given level of risk tolerance.
See beta and Sharpe Ratio; also the article on modern portfolio theory.
Beta
A measure of an investment's volatility, relative to an appropriate asset class. For stocks, the asset class is usually taken to be the S&P 500 index.
The formula is:
beta = [ Cov(r, Km) ] / [ StdDev(Km) ]2
where
r is the return rate of the investment;
Km is the return rate of the asset class.
If the asset class is well chosen so that the return fluctuations of the investment and the class are highly correlated, then the formula approximates "the volatility of the investment divided by
the volatility of the class."
Beta is used in modern portfolio theory as a measure of risk; it's specifically used in the Capital Asset Pricing Model. See the main pages on CAPM and CAPM regression.
Sharpe Ratio
A number measuring the reward-to-risk efficiency of an investment, used to create risk-efficient portfolios.
The definition of the Sharpe Ratio is:
S(x) = (rx - Rf) / StdDev(x)
where
x is some investment
rx is the average annual rate of return of x
Rf is the best available rate of return of a "riskless" security (ie cash)
StdDev(x) is the standard deviation of rx
See the main article on the Sharpe Ratio for more information.
Modern Portfolio Theory - Introduction
Modern portfolio theory is the philosophical opposite of traditional stock picking. It is the creation of economists, who try to understand the market as a whole, rather than business analysts, who
look for what makes each investment opportunity unique. Investments are described statistically, in terms of their expected long-term return rate and their expected short-term volatility. The
volatility is equated with "risk", measuring how much worse than average an investment's bad years are likely to be. The goal is to identify your acceptable level of risk tolerance, and then to
find a portfolio with the maximum expected return for that level of risk.
This article covers the highlights of modern portfolio theory, describing how risk and its effects are measured, and how planning and asset allocation can help you do something about it.
Momentum
Property that allows moving things to overcome resistance and keep moving in the same direction. Works well with physical objects like cars and bowling balls. But does it work with stock prices
...? . See technical analysis.
Monetary Policy
Actions by the Federal Reserve to control the money supply.
In particular, monetary policy refers to efforts to fight inflation or otherwise control or stimulate the economy by controlling the availability of spending money to companies and consumers.
Compare fiscal policy.
Monte Carlo Simulation
A computer simulation with a built-in random process, allowing you to see the probabilities of different possible outcomes of an investment strategy.
See the main article on Monte Carlo retirement planning.
Monte Carlo Retirement Planning
All simple retirement calculators work like the chart below. They divide your life into an "accumulation phase" when you're working and making contributions, and a "distribution phase" which
begins when you retire and lasts as long as you think you will. The idea is to see how much annual income your investments will yield when you're retired.
What's missing here is volatility: fluctuations in the return rates that raise the risk that your account won't peak as high, or last as long, as this "smooth" picture suggests.
This article is an introduction to investment volatility: how to understand its effects, and how to use an improved style of retirement calculator to include volatility in your planning.
(Note: if you prefer, you can skip ahead to the Monte Carlo retirement calculator and then read the "theory" pages later.)
Mortgage
A mortgage is the transfer of an interest in property (or in law the equivalent - a charge) to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it
is lender's security for a debt. It is a transfer of an interest in land (or the equivalent), from the owner to the mortgage lender, on the condition that this interest will be returned to the owner of
the real estate when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.
The term comes from the Old French "dead pledge," apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.[1]
In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) and in some jurisdictions only land may be mortgaged.
Arranging a mortgage is seen as the standard method by which individuals and businesses can purchase residential and commercial real estate without the need to pay the full value
immediately. See mortgage loan for residential mortgage lending, and commercial mortgage for lending against commercial property.
The measurement of a mortgage with regards to cost to the borrower can be measured by Annual Percentage Rate (APR) or many other formulas for true cost such as Lender Police Effective
Annual Rate (LPEAR).
In many countries it is normal for home purchases to be funded by a mortgage. In countries where the demand for home ownership is highest, strong domestic markets have developed,
notably in Spain, the United Kingdom, Australia and the United States.
1 Participants and variant terminology
2 Mortgage lender
3 Borrower
3.1 Borrowing for investment purposes
4 Other participants
5 Default on Subdivided Property
6 Legal aspects
6.1 Mortgage by demise
6.2 Mortgage by legal charge
6.3 Equitable mortgage
7 History
8 Foreclosure and non-recourse lending
9 Mortgages in the United States
9.1 Types of mortgage instruments
9.1.1 The mortgage
9.1.2 Security Deed
9.1.3 The deed of trust
9.2 Mortgage lien priority
10 Further reading
11 See also
12 Notes and references
Participants and variant terminology
Legal systems, while having some concepts in common, employ different terminology. However, in general, a mortgage of property involves the following parties.
Mortgage lender
Mortgagee is the legal term for the mortgage lender. The main function of the mortgage is to provide security to the lender. Given the large sum of money involved in financing a property, a
mortgage lender will usually want security for the loan that will provide a claim upon that security and will take precedence over other creditors. A mortgage accomplishes this security.
The lender loans the money and registers the mortgage against the title to the property. The borrower gives the lender the mortgage as security for the loan, receives the funds, makes the
required payments and maintains possession of the property. The borrower has the right to have the mortgage discharged from the title once the debt is paid. If the mortgagor fails to repay the
loan according to the conditions set forth by the lender, then the mortgagee reserves the right to foreclose on the property.
Borrower
Mortgagor is the legal term for the borrower, who owes the obligation secured by the mortgage, and may be multiple parties. Generally, the debtor must meet the conditions of the underlying
loan or other obligation and the conditions of the mortgage. Otherwise, the debtor usually runs the risk of foreclosure of the mortgage by the creditor to recover the debt. Typically the debtors
will be the individual home-owners, landlords or businesses who are purchasing their property by way of a loan.
Most buyers of real property would have difficulty saving enough money to make an outright purchase of real estate. The use of debt increases a buyer's ability to buy through a combination
of down payment and debt. As a result a real estate transaction seldom occurs without borrowers relying on borrowed funds.
Borrowing for investment purposes
Aside from the absence of large amount of available money, there are several reasons why an investor (including a buyer of real estate) might borrow funds. Some of these include:
To diversify investments and reduce overall risk by using only part of the available funds for any one investment
To invest the borrowed funds at a higher rate of interest (yield) than the borrowing rate; for example, a sum is borrowed at an annual interest rate of 7% and used to invest in a project that
returns 10%
To free up equity for other purposes; for example, a commercial enterprise may prefer to use funds to purchase inventory or equipment instead of investing only in land and buildings.
To obtain a tax benefit. In some countries (such as Canada), mortgage interest is not tax deductible, but loans made for investment purposes are.
Other participants
Because of the complicated legal exchange, or conveyance, of the property, one or both of the main participants are likely to require legal representation. The terminology varies with legal
jurisdiction; see lawyer, solicitor and conveyancer.
Because of the complex nature of many markets the debtor may approach a mortgage broker or financial adviser to help them source an appropriate creditor, typically by finding the most
competitive loan.
The debt is, in civil law jurisdictions, referred to as hypothecation, which may make use of the services of a hypothecary to assist in the hypothecation.
Default on Subdivided Property
When a tract of land is purchased with a mortgage and then split up and sold off, then the "inverse order of alienation rule" applies to find out who will be liable for the default.
Basically, when a mortgaged tract of land is split up and sold off, then upon default, the mortgagee forecloses and proceeds against lands still owned by the mortgagor, then liability attaches
in a backward fashion, or in an 'inverse order' as they were sold. So if A acquires a 3-acre (12,000 m2) lot by mortgage then splits up the lot into three 1 acre lots (A, B, and C), and sells lot B
to X, and then lot C to Y, retaining lot A for himself then, upon default, the mortgagee will go after lot A, the mortgagor, and if that sale does not satisfy the default, then the owner of lot C will
be liable, then the owner of lot B. The idea is that the first purchaser should have more equity and subsequent purchasers receive a diluted share.
Legal aspects
Mortgages may be legal or equitable. Furthermore, a mortgage may take one of a number of different legal structures, the availability of which will depend on the jurisdiction under which the
mortgage is made. Common law jurisdictions have evolved two main forms of mortgage: the mortgage by demise and the mortgage by legal charge.
Mortgage by demise
In a mortgage by demise, the mortgagee (the lender) becomes the owner of the mortgaged property until the loan is repaid or other mortgage obligation fulfilled in full, a process known as
"redemption". This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption.
Mortgages by demise were the original form of mortgage, and continue to be used in many jurisdictions, and in a small minority of states in the United States. Many other common law
jurisdictions have either abolished or minimised the use of the mortgage by demise. For example, in England and Wales this type of mortgage is no longer available, by virtue of the Land
Registration Act 2002.
Mortgage by legal charge
In a mortgage by legal charge or technically "a charge by deed expressed to be by way of legal mortgage",[2] the debtor remains the legal owner of the property, but the creditor gains
sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.
To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders
run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority. Tax liens, in some cases, will
come ahead of mortgages. For this reason, if a borrower has delinquent property taxes, the bank will often pay them to prevent the lienholder from foreclosing and wiping out the mortgage.
This type of mortgage is most common in the United States and, since the Law of Property Act 1925,[2] it has been the usual form of mortgage in England and Wales (it is now the only form –
see above).
In Scotland, the mortgage by legal charge is also known as standard security.[citation needed]
In Pakistan, the mortgage by legal charge is most common way used by banks to secure the financing.[citation needed] It is also known as registered mortgage. After registration of legal
charge, the bank's lien is recorded in the land register stating that the property is under mortgage and cannot be sold without obtaining an NOC (No Objection Certificate) from the bank.
Equitable mortgage
See also: Security interest#Types of security
In an equitable mortgage the lender is secured by taking possession of all the original title documents of the property and by borrower's signing a Memorandum of Deposit of Title Deed
(MODTD). This document is an undertaking by the borrower that he/she has deposited the title documents with the bank with his own wish and will, in order to secure the financing obtained
from the bank.
History
At common law, a mortgage was a conveyance of land that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain
conditions were met – usually, but not necessarily, the repayment of a debt to the original landowner. Hence the word "mortgage" (a legal term in French meaning "dead pledge"). The debt
was absolute in form, and unlike a "live pledge" was not conditionally dependent on its repayment solely from raising and selling crops or livestock or simply giving the crops and livestock
raised on the mortgaged land. The mortgage debt remained in effect whether or not the land could successfully produce enough income to repay the debt. In theory, a mortgage required no
further steps to be taken by the creditor, such as acceptance of crops and livestock in repayment.
The difficulty with this arrangement was that the lender was absolute owner of the property and could sell it or refuse to reconvey it to the borrower, who was in a weak position. Increasingly
the courts of equity began to protect the borrower's interests, so that a borrower came to have an absolute right to insist on reconveyance on redemption. This right of the borrower is known as
the "equity of redemption".
This arrangement, whereby the lender was in theory the absolute owner, but in practice had few of the practical rights of ownership, was seen in many jurisdictions as being awkwardly
artificial. By statute the common law's position was altered so that the mortgagor would retain ownership, but the mortgagee's rights, such as foreclosure, the power of sale, and the right to
take possession, would be protected.
In the United States, those states that have reformed the nature of mortgages in this way are known as lien states. A similar effect was achieved in England and Wales by the Law of Property
Act 1925, which abolished mortgages by the conveyance of a fee simple.
Foreclosure and non-recourse lending
In most jurisdictions, a lender may foreclose on the mortgaged property if certain conditions – principally, non-payment of the mortgage loan – apply. Subject to local legal requirements, the
property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt.
In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have
recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt, through a deficiency judgment.
Specific procedures for foreclosure and sale of the mortgaged property almost always apply, and may be tightly regulated by the relevant government. In some jurisdictions, foreclosure and
sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market
development has been notably slower.
At the start of 2008, 5.6% of all mortgages in the United States were delinquent.[3] By the end of the first quarter that rate had risen, encompassing 6.4% of residential properties. This number
did not include the 2.5% of homes in foreclosure.[4]
Mortgages in the United States
Types of mortgage instruments
Two types of mortgage instruments are commonly used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.[5]
The mortgage
In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and
in default and ordering a sale of the property to pay the debt.[citation needed]
Security Deed
The deed to secure debt is a mortgage instrument used in the state of Georgia. Unlike a mortgage, however, a security deed is an actual conveyance of real property in security of a debt.
Upon the execution if such a deed, title passes to the grantee or beneficiary (usually lender), however the grantor (debtor) maintains equitable title to use and enjoy the conveyed land subject
to compliance with debt obligations.
Security deeds must be recorded in the county where the land is located. Although there is no specific time within which such deeds must be filed, the failure to timely record the deed to
secure debt may affect priority and therefore the ability to enforce the debt against the subject property.[6]
The deed of trust
The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a title transfer, regardless of its terms.
It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee.[7] It is also possible to foreclose them through a judicial proceeding.[citation
needed]
Most "mortgages" in California are actually deeds of trust.[8] The effective difference is that the foreclosure process can be much faster for a deed of trust than for a mortgage, on the order of
3 months rather than a year. Because the foreclosure does not require actions by the court the transaction costs can be quite a bit less.[citation needed]
Deeds of trust to secure repayments of debts should not be confused with trust instruments that are sometimes called deeds of trust but that are used to create trusts for other purposes, such as
estate planning. Though there are superficial similarities in the form, many states hold deeds of trust to secure repayment of debts do not create true trust arrangements.[citation needed]
Mortgage lien priority
Except in those few states in the United States that adhere to the title theory of mortgages,[9] either a mortgage or a deed of trust will create a mortgage lien upon the title to the real property
being mortgaged. The lien is said to "attach" to the title when the mortgage is signed by the mortgagor and delivered to the mortgagee and the mortgagor receives the funds whose
repayment the mortgage secures. Subject to the requirements of the recording laws of the state in which the land is located, this attachment establishes the priority of the mortgage lien with
respect to most other liens[10] on the property's title.[11] Liens that have attached to the title before the mortgage lien are said to be senior to, or prior to, the mortgage lien. Those attaching
afterward are said to be junior or subordinate.[12] The purpose of this priority is to establish the order in which lien holders are entitled to foreclose their liens in an attempt to recover their
debts. If there are multiple mortgage liens on the title to a property and the loan secured by a first mortgage is paid off, the second mortgage lien will move up in priority and become the new
first mortgage lien on the title. Documenting this new priority arrangement will require the release of the mortgage securing the paid off loan.
Further reading
Rhodes, Trevor. American Mortgage: Everything U Need to Know... about Financing a Home. 444 pages. McGraw-Hill, June, 2008. ISBN 0-07-159054-4
Look up Mortgage in
Wiktionary, the free dictionary.Trust deed
Bridge financing
Financing
Fixed rate mortgage
Promissory note
Loan origination
Subprime lending
Mortgage calculator
Refinancing
Foreign currency mortgage
Americans for Fairness in Lending
National Mortgage News
Mortgage insurance
collateralized mortgage obligation - CMO
Subprime mortgage crisis
Notes and references
^ Coke, Edward. Commentaries on the Laws of England. "[I]f he doth not pay, then the Land which is put in pledge upon condition for the payment of the money, is taken from him for ever,
and so dead to him upon condition, &c. And if he doth pay the money, then the pledge is dead as to the Tenant"
^ a b "Law of Property Act 1925 (c.20) Part III Mortgages, Rentcharges, and Powers of Attorney". Ministry of Justice. Retrieved on 2008-01-30.
^ Can the World Stop the Slide?, TIME, February 4, 2008, page 27.
^ Kemp, Carolyn. Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey. MortgageBankers.org. 5 June 2008. Mortgage Bankers Association. 19 June 2008
^ Kratovil, Robert; Werner, R. (1988). Real Estate Law, 9th, Prentice-Hall, Inc., Sec 20.09. ISBN 0-13-763343-2.
^ Security Interests in Georgia, By Steven M. Mills of Steven M. Mills, P.C.[1] (1999).
^ Kratovil, Robert; Werner, R. (1988). Real Estate Law, 9th, Prentice-Hall, Inc., Sec 20.09(b). ISBN 0-13-763343-2.
^ See the discussion of background principles of California real property law in Alliance Mortgage Co. v. Rothwell, 10 Cal. 4th 1226, 1235-1238 (1995).
^ Kratovil, Robert; Werner, R. (1981). Modern Mortgage Law and Practice, 2nd, Prentice-Hall, Inc., Sec 1.6. ISBN 9780135957448.
^ Exceptions include real estate tax liens and, in most states, mechanic's liens.
^ The failure to record a previously made mortgage may, under some circumstances, allow a subsequent mortgagee's mortgage to be recognized as prior in right to the otherwise prior
mortgage.
^ Of course, the lienholders can agree among themselves to a different priority arrangement through subordination arrangements. See, R. Kratovil and R. Werner Modern Mortgage Law and
Practice Chs. 30 & 38 (2nd Ed. Prentice-Hall, Inc.)
Retrieved from "http://en.wikipedia.org/wiki/Mortgage"
Category: Mortgage
Hidden categories: All articles with unsourced statements | Articles with unsourced statements since August 2008 | Articles with unsourced statements since August 2007. Source: Wikipedia
Mortgage and real estate Glossary
Abstract of Title
A summary of public records relating to the title of a particular parcel of land.
Acceleration
The right of the mortgage (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgager (borrower), or by using the right vested in the
Due-on-Sale Clause.
Acknowledgement
A formal declaration, usually before a notary, that the person has executed a document.
Adjustable Rate Mortgage (ARM)
Is a mortgage in which the interest rate is adjusted periodically based on a pre selected index. Also sometimes known as the renegotiable rate mortgage, the variable mortgage or the
Canadian roll over mortgage.
Adjustment Interval
On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index.
Administrator
Person appointed by the court to take possession of a person who died intestate, without leaving a will, pay their debts and distribute the balance of the property to those entitled to it by law.
Adverse Possession
Physical possession of real estate inconsistent with the rights of the true owner. In many states, a party in adverse possession, after satisfying the requirements of the statutes, can then acquire
the title to the land. These requirements may include the payment of property taxes on the real estate as well as the passing of a number of years.
Affiant
One who swears to or affirms the statement in an affidavit.
Affirmative Coverage
Provision in title policy where the title insurer insures against risks and losses not usually covered. For example: insurance against loss caused by violation of truth in lending laws. As you may
imagine, title insurers very rarely offer this coverage.
All Inclusive Rate
A quote for title insurance that includes the cost of title search, title examination and the policy.
ALTA
American Land Title Association.
Amortization
Means loan payment by equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. Comes from the French
word, "mort", literally to kill the loan owing.
Annual Percentage Rate (APR)
Is a interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account
points and other credit cost. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan.
Appraisal
An estimate of the value of property, made by a qualified professional called an "appraiser". There are different types of qualified appraisers. The highest qualification is considered to be the
MAI.
Approved Attorney
An attorney approved by a title insurance company as one whose opinion of title will be accepted and relied upon by the company for the issuance of title insurance policies.
Appurtenances
Rights that pass with the title to the land. These rights may affect other, usually adjoining lands, such as a access easement.
Assessment
A local tax levied the County usually against a property for a specific purpose, such as a sewer or street lights. Also can mean the assessed value of the property. Similar, but not the same as
an "appraisal" see above. Typically the property tax assessment amount is less than the fair market value.
Assignment
A transfer of a right and/or interest in land. Often used for transferring the rights of a lender, buyer or tenant. The person who assigns rights is the Assignor, the person who acquires those rights
is the Assignee.
Assumption
The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an
existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market-rate interest charges will apply. Most mortgages today are unassumable as Lenders have
found that assumed loans tend to have a far higher rate of default.
FHA loans closed before 12/15/89 and VA loans closed before 3/1/88 are freely assumable with no qualifying.
Note that the original borrower is still just as liable for the loan as the new home buyer unless the previous borrower gets a release from the Lender. This is called "novation".
Attorney in Fact
A person who holds a power of attorney from another to execute documents on behalf of the giver (or grantor) of that power. A power of attorney can be restricted or unrestricted. All powers of
attorney can be withdrawn by notice in writing.
Balloon payment
A balloon mortgage is one where a lump sum, the balance of the loan principal, becomes payable at the end of the term. A mortgage can be interest only with the whole principal due at the
end of the term or it may be calculated to amortize over a longer period, say 30 years, but with the outstanding principal balance payable at the end of, say, 10 years.
Base Title or Basic Title
Title to an area or tract of land out of which other parts are later conveyed or a subdivision is made.
Binder or commitment
An enforacable agreement from a title company that states that if the requirements outlined are satisfied, the title company will issue title insurance subject to any named exceptions.
Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for the same mortgage. This provides greater security for the Lender. It may be possible to get a "partial" release so the
Borrower can sell one of the properties provided a suitable principal reduction is made.
Bond
An insurance agreement under which the insurer agrees to pay, subject to agreed limits, compensation for financial loss caused to another by specified acts or defaults of a third party OR a
long term interest bearing security instrument, issued by a goverment or corporation.
Borrower (Mortgagor)
One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full. The mortgage is not actually the loan, it just creates the security interest in
the property. It is the promissory note that spells out the repayment terms and interest.
Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client buy who does not loan the money himself. Brokers usually charge a fee or receive a
commission for their services.
Building setback
An invisible line from the front, sides and rear of the outside boundaries of the property beyond which no permanent structure may extend. This could be found in city zoning ordinances, the
subdivision deed or other restrictive covenants.
Caps (interest)
A limit on the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan. For example a 4/1 cap would mean a maximum interest increase of
4% over the life of the loan and no more than 1% each year.
Caps (payments)
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change. Mortgage may change per year and/or the life of the loan.
Certificate of title
A written opinion by an attorney that ownership of a parcel of property is as stated in the certificate OR a deed issued by the court as a result of a foreclosure.
Chain of title
The successive transfers of ownership over the history of a parcel of land. Each deed that transfers ownership is a link in the chain.
Chain and links
An old method of land measurement. Surveyors used to use a chain of a length of 66 feet = 22 yards.
Closing
The meeting between the buyer, seller and lender or their agents where the property and funds legally changes hands. Also called settlement. Closing costs usually include an origination fee,
discount points, appraisal fee, title search and insurance, survey, taxes, deed recording, credit report charge and other costs assessed at settlement. The cost of closing usually are about three
to six percent of the mortgage amount. Commitment and agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork
or compliance with stated conditions.
Cloud on title
An outstanding claim or encumbrance revealed by a title search that adversely affects the marketability of the property. For example: a mechanic's lien, lis pendens recorded option to
purchase etc.
Coinsurance
An insurance agreement where more than one company shares a part of a single risk. This applies only to large risks and each fractional part is covered by a separate insurance contract.
Collateral
Security for a loan. In the case of a mortgage this would be the real property. But stocks and personal property can also be used as collateral for a loan.
Commitment
A promise by a lender to make a loan on specific terms or conditions to a borrower or builder. A promise by an investor to purchase mortgages from a lender with specific terms or conditions.
Construction loan (interim loan) - A loan to provide the funds necessary to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the
builder as it progresses.
Community property. A category of property, existing in some states, in which all property (except property specifically acquired by husband or wife as separate property) acquired by a
husband and wife, or either, during marriage, is owned in common by the husband and wife.
Condemnation. (1) The lawful taking of private land for public use by a government under its right of eminent domain. (2) A declaration by a governmental agency that a building is unfit for
use.
Condominium. A system of real estate ownership wherein there is separate ownership of units in a multi-unit project with each separate unit ownership being coupled with an undivided share
in the entire project less all of the units.
Condominium declaration. The document which establishes a condominium and describes the most important property rights of the unit owners. Special statutes in each state prescribe the
contents of this document, known in some states as a "master deed."
Construction disbursement service. A direct payment plan for disbursement of construction loan and equity funds through the title company as an independent escrow agent to
subcontractors and suppliers upon approval of the owner, general contractor, and lender.
Construction loan. A loan which is made to finance the actual construction or improvement on land. It is often the practice to make disbursements in increments as the construction
progresses.
Contract for deed (Agreement for deed, land contract)
A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale. It may be recordable or non-recordable. It
creates a legal interest in real estate however the buyer cannot obtain secondary financing.
Contract of sale. Agreement by one person to buy and another person to sell a specified parcel of land at a specified price.
Conventional Loan
A mortgage not insured by FHA or guaranteed by the VA.
Conveyance. (1) A document which transfers an interest in real property from one person to another; e.g., a deed. (2) The act of executing and delivering a deed or mortgage.
Cooperative (apartment). An apartment building which is owned by a corporation and in which tenancy in an apartment unit is obtained by purchase of the pertinent number of shares of the
stock of the corporation and where the owner of such shares is entitled to occupy a specific apartment in the building.
Cotenancy. Ownership of the same interest in a particular parcel of land by more than one person; e.g., tenancy in common, joint tenancy, tenancy by the entireties.
Covenant. An agreement between the parties in a deed whereby one party promises either (1) the performance or non-performance of certain acts with respect to the land or (2) that a given
state of things with respect to the land are so; e.g., covenant that the land will be used only for residential purposes.
Credit Report
A report documenting the credit history and current status of a borrower's credit standing. Credit is rated for mortgage purposes from A, excellent, down to D, very poor. To obtain a conforming
loan that can be resold to Fannie Mae, the Borrower usually needs A grade credit.
Cross Default
Language often in a second mortgage that states that a failure to pay or a default on the first mortgage is a default on the second mortgage.
Also that if the borrower has more than one mortgage with the same lender, then a default on just one of the mortgages puts ALL the other mortgages into default.
Curtesy.
A husband's life estate in the property of his deceased wife. By statute in most states, it is a life estate in one third of the land she owned during their marriage. Curtesy has been abolished by
statute in some states.
Debt-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA) or gross monthly
income (conventional). See Housing expenses-to-income ratio.
Dedication. The granting of land by the owner for some public use and its acceptance for such use by authorized public officials.
Deed. A written instrument duly executed and de-livered by which the title to land is transferred from one person to another.
Deed of Trust
In many states, this document is used in place of a mortgage to secure the payment of a note. It involves a third party, the trustee, who holds the deed to the property.
Default
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage. This can also mean failure to pay property taxes, maintain insurance on the
property or even to maintain the interior and exterior of the property.
Deferred Interest
see Negative Amortization
Deficiency judgment. A judgment against a person liable for the debt secured by a mortgage in an amount by which the funds derived from a foreclosure or trustee's sale are less than the
amount due on the debt. Not legal in every state, for example California.
Delinquency
Failure to make payments on time. This can lead to foreclosure. See default.
Devise. A gift of land by will or to give land by will. A devisee is the person to whom property is given by a will.
Discount Point
see Point
Dower. An estate for life to which a married woman by statute is entitled on the death of her husband. In most states it is a life estate of one third of the value of all land which the husband
owned during their marriage. Dower has been abolished by statute in some states. The reason for requiring a wife's joining in the deed of any land by her husband is the release of her dower
right.
Down Payment
Money paid to make up the difference between the purchase price and the mortgage amount. Down payments usually are 10 to 20 percent of the sales price on a conventional loan. VA
loans have no downpayment but are only available to Veterans who have not used up their VA entitlement. FHA loans are often as low as 3% downpayment.
When the down payment is less than 20% the Lender will usually require PMI (Private Mortgage Insurance) on a conventional loan, or MIP (Mortgage Insurance Premium) on an FHA loan.
Draw. Disbursement of a portion of the mortgage loan. Usually applies to construction loans when partial advances are made as improvements to the property progress.
Due-on-Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
Earnest Money
Money given by a buyer when making an offer to a seller as part of the purchase price to bind a transaction or assure payment. It should be held in escrow by the real estate company, a title
company or an attorney. This is usually returnable if the contract does not go through for valid reasons. It may not be returnable if the buyer just changes his mind.
Easement. A privilege or right of use or enjoyment which one person may have in the lands of another; for example, a right of way to install, operate, and maintain utility lines.
Eminent domain. The right of a government to appropriate private property for a public use by making reasonable payment to the owner of such property.
Encroachment. The intrusion of any improvement partly or entirely on the land of another.
Encumbrance. Any right or interest in land held by persons other than the fee owner which right or interest lessens the value of the fee title. Examples are judgment liens, easements,
mortgages, restrictions.
Endorsement. A form issued by the insurer at the request of the insured which changes term(s) or item(s) in an issued policy or commitment.
Equity. (1) The interest or value which an owner has in real estate over and above the debts against it. (2) A type of court of record.
Equity participation. A type of mortgage transaction in which the lender, in addition to receiving a fixed rate of interest on the loan, acquires an interest in the borrower's land and shares in
the profits derived from the land.
Escheat. The transfer of title of property to the state if the owner dies intestate and without heirs.
Escrow
Refers to a neutral third party who carries out the instruction of both the buyer and seller to handle all the paperwork of settlement or closing. Escrow may also refer to an account held by the
lender into which the home buyer pays money for tax or insurance payments.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex, marital status, handicap
status or receipt income from public assistance programs.
Equity
The difference between the fair market value and current indebtedness, also referred to as the owner's interest.
Estate. The degree, quantity, nature, and extent of interest which a person has in land.
Et ux. And wife.
Examination of title. The review of the chain of tide as revealed by an abstract of the tide or public records.
Exceptions. Those matters affecting title to the particular parcel of realty which matters are excluded from coverage of the particular title insurance policy.
Exclusion. Those general matters affecting title to real property excluded from coverage of a title insurance policy.
Executor. A person named in a will to administer the estate. Executrix is the feminine form.
FHLMC
The federal Home Loan Mortgage Corporation provides a secondary market for saving and loans by purchasing their conventional loans. Also known as "Freddie Mac."
Fee simple. An estate in which the owner is entitled to the entire property, with unconditional power of disposition during the owner's life, and which descends to the heirs upon the owner's
death if the owner dies without a will.
Fixed Rate Mortgage
The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
FNMA
The Federal National Mortgage Association is a secondary mortgage institution which is the largest single holder of home mortgages in the United States. FHMA buys VA, FHA and
conventional mortgages from primary lenders. Also known as "Fannie Mae."
Foreclosure
A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.
Fannie Mae
see FNMA.
Federal Home Loan Bank Board (FHLBB)
A regulatory and supervisory agency for federally chartered savings institutions.
Federal Home Loan Mortgage Corporation (FHLMC)
also referred to as "Freddie Mac", is a quasi-government agency that purchases conventional mortgages from insured depository institutions and HUD approved mortgage bankers.
Federal National Mortgage Association (FNMA)
also know as "Fannie Mae" a taxpaying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA.
This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
FHA. Federal Housing Administration, an agency of the federal government which insures private loans for financing of new and existing housing and for home repairs under government
approved programs.
Fixture. Personal property that by state law becomes real property upon being attached to real estate.
Foreclosure. Legal process by which a mortgagor of real property is deprived of interest in that property due to failure to comply with terms and conditions of the mortgage.
Freddie Mac
see Federal Home Loan Mortgage Corporation
Ginnie Mae
see Government National Mortgage Association
General warranty deed. A deed containing a covenant whereby the seller agrees to protect the buyer against being dispossessed because of any adverse claim against the land.
Government National Mortgage Association (GNMA)
also known as "Ginnie Mae", provides sources of funds for residential mortgage, insured or guaranteed by FHA or VA.
Graduated Payment Mortgage (GPM)
A type of flexible-payment where the payments increase for a specified period of time and then level off. This type of mortgage may have negative amortization built into it.
Grantee. In a deed, the person to whom the land is transferred.
Grantor. In a deed, the person who transfers the land.
Guaranty
A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
Hard Money Lender
Equity lenders who base their funding decisions on the unencumbered property value and its salability. They do not calculate debt ratio and usually do not take into account the borrower's
credit and income. The combined loan-to-value ratio is usually less than 65%. Funding can be very fast. Sometime in 2 days or less.
Hazard Insurance
A form of insurance in which the insurance company protects the insured from specified losses, such as fire windstorm and the like.
Heir. The person who, at the death of the owner of land, is entitled to the land if the owner has died with-out a will.
Homestead (exemption). A person's dwelling and that part of the land which is about and contiguous to the dwelling. Many states by statute give special privileges to such lands, such as
exemptions from remedies of creditors.
Housing Expenses-to-Income Ratio
The ratio expressed as a percentage, which results when a borrower's housing expenses are divided by his and/or her net effective income (FHA / VA loans) or gross monthly income
(conventional loans). Also see Debt-to-Income Ratio.
HUD. The Department of Housing and Urban Development. It is responsible for the implementation and administration of U.S. government housing and urban development programs.
Impound
That portion of a borrower's monthly payment held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also
known as Reserves.
Index
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one,
three and five year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs of funds incurred by savings
and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down. The rate must be one that is outside the influence of the lender.
Indemnity agreement. An agreement by the maker of the document to repay the addressee of the agreement up to the limit stated for any loss due to the contingency stated on the
agreement.
Insurable title. A land title which a title insurance company is willing to insure.
Insured closing service. An agreement by the insurer to indemnify the insured for any loss in settlement funds caused by (1) the failure of the company's policy issuing agents or approved
attorneys to conform to closing instructions of the insured, or (2) fraud or dishonesty of the issuing agent or approved attorney. This service is offered by the insurer to certain large lenders,
developers, etc.
Interval ownership. A form of time share owner-ship. See Time share ownership.
Intestate. Without having made a valid will or one who dies without having made a will.
Investor
A money source for a lender. Or someone who purchases real estate as a short or long term investment.
Interim Financing
A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.
Jumbo Loan
A loan which is larger (more than $203,250) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans can
not be funded by these two agencies, they usually carry a higher interest rate.
Joint protection policy. A title insurance policy in form suitable to insure the owner and/or lender.
Joint tenants. Persons who are co-owners of interests in the same land. At common law and in some states today, upon the death of a joint tenant, interest automatically passes to the
surviving joint tenant(s). This survivorship feature, when it exists, is the principal distinction between a joint tenancy and a tenancy in common.
Judgment. The formal expression and evidence of the decision of a court in a specific lawsuit. Where the judgment decrees that one party (the judgment debtor) pay another party (the
judgment creditor) a certain sum of money, the recording of that judgment creates a lien upon all land of the judgment debtor in that jurisdiction.
Junior mortgage. A mortgage, the lien of which is subordinate to that of another mortgage. Second and third mortgages are both junior mortgages.
Lien
A claim upon a piece of property for the payment of a debt or obligation.
Leasehold. The right to possession and use of land for a fixed period of time. The lease is the agreement which creates the right. The person who has the lease-hold is the tenant or lessee.
The person who grants the leasehold is the lessor or landlord.
Legal description. A property description which by law is sufficient to locate and identify the parcel of real property.
Lien. A claim or charge on property of another for payment of some debt, obligation, or duty.
Lien waiver or waiver of liens. A document signed by the general contractor, each subcontractor, and each materialman of a construction project whereby the signators waive their right to
mechanics' liens on the land involved in that particular project.
Life estate. An individual's right to the use and occupancy of real property for life.
Link. See Chain of title.
Links. See Chains and links.
Lis Pendens. A legal notice that there is litigation pending relating to the land and a warning that anyone obtaining an interest subsequent to the date of the notice may be bound by the
judgment.
Loan policy or mortgage policy or mortgagee policy. A title insurance policy in which the insurer insures the mortgagee against loss it may suffer because the tide is not vested as stated in the
policy and insures the validity and priority of the mortgage lien over any other lien not excepted to in the policy.
Loan-to-Value Ratio
The relationship between the amount of the mortgage loan and appraised value of the property expressed as a percentage.
Margin
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Marketable title. A title which a reasonable purchaser, well informed as to the facts and their legal meaning, would be willing to accept.
Market Value
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a
given time.
Master deed. See Condominium declaration.
Mechanics' and materialmen's lien or mechanics' lien or M&M lien. The lien which by statute a laborer or materialman may have against the land by reason of furnishing labor or material for
the improvement of the property. The priority of such lien varies among the states; in some states M&M liens take priority over prerecorded mortgages.
Mechanics' liens surety bond. A bond in which an approved surety company agrees to indemnify the title insurance company for any loss it may suffer due to the insurer's issuing a specific
policy without mechanics' lien exception.
Metes and bounds. A description of a parcel of land by describing the boundary lines in length and direction.
MIP: Mortgage Insurance Premium
MIP is the one-half percent borrowers pay each month on FHA insured mortgage loans. It is insurance from FHA to the lender against incurring a loss due to the borrower's default. On
September 1, 1983 the MIP was changed to a one time charge to the borrowers.
Mortgage. An instrument whereby an owner conditionally transfers title of property to another as security for payment of a debt. The owner retains possession and use of the land and, upon the
payment of the debt, the mortgage becomes void.
Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent. see Private Mortgage Insurance, FHA Mortgage Insurance.
Mortgagee
The lender.
Mortgagor
The borrower or home owner.
Mortgage policy. See Loan policy.
Negative Amortization
Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid principal balance of the loan. The danger of
negative amortization is that the home buyer ends up owing more than the original amount of the loan.
Net Effective Income
The borrower's gross income minus federal tax.
Non Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. Note: The signed obligation to pay a debt, as a mortgage note.
Negotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically. see Adjustable Rate Mortgage.
Note. A written promise to pay a certain amount of money, at a certain time, or in a certain number of installments. It usually provides for payment of interest and its payment is at times
secured by a mortgage.
Open-end mortgage. A mortgage or deed of trust written so as to secure and permit advancing of funds in addition to the amount originally loaned.
Origination Fee
The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.
Option. The right, acquired for a consideration, to buy, sell, or lease land at a fixed price within a specified time.
Oversize policies.
Policies in which the amount (limit of risk) exceeds that which the agent is authorized to write without specific approval.
Owner's policy.
A title insurance policy insuring the owner against loss due to any defect of title not excepted to or excluded from the policy.
Partition.
Division of land, usually by a legal proceeding, among the parties who were formerly co-owners.
Payment Constant
The total annual payments divided by the mortgage balance expressed as a percentage.
Permanent Loan
A long term mortgage, usually ten years or more.
PITI
Principal, Interest, Taxes and Insurance. Also called monthly housing expense.
Planned unit development (PUD).
A project consisting of individually owned parcels of land together with common areas and facilities that are owned by an association of which the owners of all the parcels are members.
Plat (of survey).
A map of land made by a surveyor showing boundary lines, buildings, and other improvements on the land.
Points (Loan Discount Points)
Prepaid interest assessed at closing by the lender. Each point is equal to one percent of the loan amount.
Power of Attorney
A legal document authorizing one person to act on behalf of another. It does not mean that the other person IS an attorney or that they can represent them in court as an attorney.
Prepaid Expenses
Necessary to create an escrow account or to adjust the seller's existing account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance of their due date. This can enable the mortgage to be paid off much more quickly, with a major savings in
total interest costs.
Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form in 36 states and the District of Columbia.
Prepayment Risk
This is the risk to the Lender that the loan will be paid off before the end of the term. It is considered to be a risk because loans are often refinanced when interest rates drop. This means the
Lender gets their capital back but have to lend it out at a lower rate.
Prescription.
The doctrine by which easements are acquired by long, continuous, and exclusive use and possession of property.
Primary Mortgage Market
Lenders making mortgage loans directly to borrower's such as savings and loan association, commercial banks and mortgage companies. These lenders usually sell their mortgages into the
secondary mortgage markets such as FNMA of GNMA, etc. The original lender will usually still service the loan, that is, send the payment coupons or statements to the Borrower.
Principal
The amount of debt, not counting interest left on a loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment (as low as five percent in some cases). With the smaller down payment loans,
however, borrower's are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of one to five percent of your mortgage
amount and may require an additional monthly fee depending on your loan's structure.
Public records.
Records which by law impart constructive notice of matters relating to land.
Purchase money mortgage.
A mortgage given by the purchaser to the seller simultaneously with the purchase of real estate to secure the unpaid balance of the purchase price.
Quieting title.
The removal of a cloud on title by proper action in a court.
Quit Claim Deed
Type of deed that transfers all the rights that grantor (giver) may have, which might be none. Example, you could legally give someone a quit claim deed of your rights in the Brooklyn Bridge.
That does not mean that the person you give the deed to now owns the Brooklyn Bridge.
Realtor ©
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
Recession
The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses
equity in the home as security. This means the money for refinance is not disbursed till after the 3 days are up. The only exception would be an emergency.
Recording. The noting in the designated public office of the details of a properly executed legal document, such as a deed or mortgage, thereby making it a part of the public record, and
thus by law imparting constructive notice of that document.
Recording Fees
Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records. The record is given a official records book and page number
making it easy to find.
Redemption. The right of the owner in some states to reclaim title to property if the owner pays the debt to the mortgagee within a stipulated time after foreclosure.
Refinance
Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.
Reinsurance. The act of an insurer transferring a portion of the risk to other insurers. The original insurer is sole insurer for a portion of the risk and shares the risk in the excess amount with the
reinsurers. The first portion of the loss risk retained by the ceding company as its sole liability is called the "primary liability."
Reissue rate. A reduced rate of title insurance premium applicable in cases where the owner of the land has been previously insured in an owner's policy by the insurer within a certain time.
REIT. Real Estate Investment Trust, a business trust which deals principally with interest in land. REITs generally are strictly organized to conform to the requirements of provisions of the
Internal Revenue Code which give tax advantages to conforming REITs.
Release. A deed from the mortgagee or trustee of a deed of trust which releases specific property from the lien of the mortgage or deed of trust.
Remainder. An interest or estate in land in a person other than the grantor in which the right of possession and enjoyment of the land is postponed until the termination of some other interest
or estate in that land.
Renegotiable rate mortgage. A loan secured by a long-term mortgage of up to 30 years, which provides for renegotiation at equal stated intervals of the interest rate for a maximum variation
of 5 percent over the life of the mortgage.
Reserve. The portion of the title insurance company's retained earnings set aside for some specific purpose.
Liability reserve. A segregated or earmarked portion of retained earnings established to show the estimated amount of a known or potential future liability.
Reserve for undetermined title losses. The liability reserve established and maintained against unpaid losses and expenses related to every specific claim presented to the title insurance
company by a policyholder. The amount of reserve is established by careful estimates of probable liability. It is re-viewed periodically and changed when warranted.
Statutory reserve. The reserve requirement established by state statutes as the minimum which must be maintained by a title insurance company, either (1) by a company incorporated under
the laws of that state or (2) as a qualification for a company incorporated in another state to do business in the state.
RESPA
Short for the Real Estate Settlement Procedures Act.
(12 U.S.C. 2601) which, together with Regulation X promulgated pursuant to the Act, regulate real estate transfers involving a "federally related mortgage loan" by requiring, among other
things, certain disclosures to borrowers.
RESPA is a federal law that allows consumers to review information known or estimated settlement cost once after application and once prior to or at a settlement. The law requires lenders to
furnish the information after application only.
Restriction. Provision in deed or will or in a "Declaration of Condition, Reservations and Restrictions" which limits in some way the right to use land or convey its title. Examples are building
setback lines and limitations to residential uses.
Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower using using the borrower's equity in the home as Satisfaction of Mortgage (The document issued by the
mortgagee when the mortgage loan is paid in full.
Reversion. Provision in conveyance by which, upon the happening of an event or contingency, title to the land will return to the grantor or the successor in interest in the land.
Right of way. See Easement.
Riparian. Pertaining to the banks of a watercourse. The owner of land adjacent to a watercourse is called a riparian owner and the rights of the riparian owner related to that watercourse are
called riparian rights.
Sale and leaseback. A financial device which an owner of land may employ to raise money and still have the use of the land by selling the land to the financier and immediately leasing it
back for the period the owner wishes to use it.
Seasoned Mortgage
A mortgage that payments have been made on. The longer the seasoning and payment history of the mortgage, the greater the likelihood it will be paid in the future.
Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the first one. If the borrower does not make payments on the first mortgage, they can foreclose it and wipe out the
interest of the second mortgage holder.
Secondary Mortgage Market
The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders security.
Separate property. Property a husband or wife owns independently of the other.
Servicing
All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes insurance, property inspections and the like.
Service charge. A charge paid by the borrower to the lender for the lender's expenses in processing the loan.
Setback. See Building line.
Settlement / Settlement Costs
see Closing / Closing Costs
Shared appreciation mortgage. A loan having a fixed interest rate set below the market rate for the term of the loan which provides for contingent interest based upon a percentage of the
appreciation in the value of the security at the sale or transfer of the property, or the payment of the loan.
Simple Interest
Interest which is computed only on the principal balance.
Simultaneous issue. Simultaneous issuance of an owner's policy and a mortgagee policy, or an owner's policy and a leasehold policy, or owner's policy to different insureds. A reduced
premium rate is applicable in such cases.
Special warranty deed. A deed containing a covenant whereby the seller agrees to protect the buyer against being dispossessed because of any adverse claims to the land by the seller, or
anyone claiming through the seller.
Standard coverage policy. A form of title insurance which contains certain standard printed exceptions not included in the ALTA policies. This form of policy is used primarily in some of the
western states.
Starter. See Back title letter.
Subdivision. A tract of land surveyed and divided into lots for purposes of sale.
Subordination. The act of a creditor acknowledging in writing that the lien of the debt due from a debtor shall be inferior to the lien of the debt due another creditor from the same debtor.
Subrogation. The substitution of one person in the place of another with reference to a claim, demand, or right, so that the individual who is substituted succeeds to the rights of the other in
relation to the debt or claim and its rights, remedies, or securities.
Substitution loan and substitution rate. A loan made to the same borrower on the same land, or by the same lender on the same land, the title to which was insured by the insurer in
connection with the original loan. A reduced rate for premium is given in such cases.
Survey
A measure of land, land prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions and the location and dimensions of any
buildings.
Sweat Equity
Equity created by a purchasers work on a property purchased.
Take out loan. A permanent mortgage loan which a lender agrees to make to a borrower upon completion of improvements on the borrower's land. The proceeds of the loan are used
principally to pay off the construction loan.
Tandem plan. The purchase by the Government National Mortgage Association of certain mortgages at par for subsequent resale at market prices to the Federal National Mortgage
Association.
Tax deed. The deed given to a purchaser at a public sale of land for non-payment of taxes. It conveys to the purchaser only such title as the defaulting taxpayer had and does not convey
good title to that extent unless statutory procedures for the sale were strictly followed.
Tenancy by the entirety or entireties. A form of
ownership existing in many states where husband and wife together are treated as an entity.
Tenant. One who has right of possession of land by any kind of title. The word "tenant" used alone in modern times is used almost exclusively in the limited meaning of a tenant of a
leasehold estate.
Tenants in common. Persons who are co-owners of residential interest in the same land. At death of a co-tenant, interest passes by will or by laws of intestate succession.
Testate. Having made a will. One who makes a will is known as the testator or testatrix.
Time share ownership. A technique for dividing the title to a commercial property or a vacation home among many different owners, with each owner acquiring the right to occupy the
premises during a specified portion of each year.
Time share unit. An interest in a residential or commercial property which by contract or by conveyance of a real property interest allows a purchaser to occupy the unit during a particular
week or weeks for a stated number of years. There are two major forms of time share estate:
(a) Interval ownership. A time share estate where the unit purchaser is deeded an estate for years, giving a right to occupy the unit for a particular week during a stated number of years with
a remainder interest in fee as a tenant in common with all other purchasers of the unit.
(b) Time span ownership. A time share estate where the unit purchaser is deeded an undivided percentage interest in the unit as a tenant in common with all other purchasers and the right
to occupy the unit for a particular time period is governed by contractual provisions of the time share declaration.
Title
A document that gives evidence of an individual's ownership of property
Title Insurance
A policy, usually issued by a title insurance company which insures a home buyer or lender against errors in the title search. The cost of the policy is usually a function of the value of
property, and is often borne by the purchaser and /or seller.
Title plant. A compilation of records maintained by tide companies and containing information about specific parcels of land. This information would be ascertained otherwise only by a
search of the public records.
Title Search
An examination of municipal records to determine the legal ownership of the property. Usually is performed by a title company
Torrens system. A governmental title registration system wherein tide to land is evidenced by a certificate of title issued by a public official known as the registrar of title.
Truth-in-Lending
A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for a the loan.
Turnkey housing. Housing initially financed and built by private sponsors and purchased by housing authorities for use by low-income families under the public housing program.
Underwriting
The decision whether to make a loan to a potential home buyer based on credit, employment, assets and other factors and the matching of this risk to an appropriate rate and term or loan
amount.
Usury
Interest charged in excess of the legal rate established by law.
VA loan. A loan for purchase of land in which the Veteran's Administration guarantees the lender payment of a home mortgage by a qualified veteran.
Variable Rate Mortgage
see Adjustable Rate Mortgage
Vendor. Seller.
Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status and balance of his or her financial accounts.
Verification of Employment (VOE)
A document signed by the borrower's employer verifying his or her position and salary.
Vest. To become owned by.
Waiver of liens. See Lien waiver.
Warranty deed. A deed in which the grantor war-rants or guarantees that good title is being conveyed.
Wraparound mortgage. A mortgage which secures a debt which includes the balance due on an existing senior mortgage and an additional amount advanced by the wraparound mortgagee.
The wraparound mortgagee thereafter makes the amortizing payments on the senior mortgage. An example: A landowner has a mortgage securing a debt with an outstanding balance of
$2,000,000. A lender now advances the same mortgagor a new $1,000,000 and undertakes to make the remaining payments due on the $2,000,000 debt. A $3,000,000 wraparound
mortgage on the land is taken to secure this new $3,000,000 wraparound note.
Hard money lenders are lending companies offering a specialized type of real-estate backed loan. Hard money lenders provide short-term loans (also called a bridge loan) that provide funding
based on the value of real estate that has been collateralized for the loan. Hard money lenders typically have much higher interest rates than banks because they fund deals that do not
conform to bank standards.
Hard money lenders will offer a range of requirements on the loan-to-value percentage, type of real estate and minimum loan size for a hard money loan.
Hard money risk
Hard money loans are more expensive because they are not based upon traditional credit guidelines which protect investors and banks from high default rates. As hard money lenders may not
require the income verification that typical lenders require, they experience higher default rates (and, thus, charge a higher rate of interest). Individuals and companies may opt to take a hard
money loan when they cannot obtain typical mortgage financing because they do not have acceptable credit or other necessary documentation.
Hard money collateral
Hard money collateral is typically the real estate loaned on. However it can and does sometimes include other assets of the individual or business borrowing the hard money. In many cases a
hard money lender will offer a smaller loan size based upon a lower "Loan To Value Ratio". This means they may opt to loan no more than 65% of the property value. Therefore it is common
for real estate investors to offer additional real estate as collateral in order to obtain a larger loan amount. This is known as cross-collateralization.
Market
Hard money lenders may serve a regional market, or may offer loans nationwide. Some hard money lenders are represented by brokers who may take a percentage of the loan (called points) in
exchange for preparing and submitting the loan documentation (as well as finding a direct lender). Other hard money lenders deal directly with applicants. Other ways hard money lenders may
vary include: charging application fees (some charge, others charge fees only when closing); prepayment penalties (some or none); and a focus on investment properties or a willingness to
finance owner occupied property as well.
Several online directories offer links to multiple hard money lenders for brokers or borrowers seeking a lender.
Regulation
Several states' usury laws, including Tennessee and New Jersey, prevent hard money lenders from operating with their usual practices. Regulation of hard money not only differs by state, it
differs by the status of the borrower in terms of whether or not the loan is made to a business or to a consumer. Consumers generally have additional protections in individual states. They also
have more lending oversight and regulation benefits federally when the loan is issued by a commercial bank, that is federally chartered by the FDIC. Some of the most aggressive loan terms
are issued by commercial hard money lenders.
Commercial hard money lender
Commercial hard money is issued to a business entity or individual signing on behalf of a business entity or corporation. It can be secured against a commercial property or residential
investment property. It can also be secured against a residence in conjunction with a business property as a means of obtaining additional collateral for the lender. That type of additional
security is referred to as a blanket mortgage. The sources of asset based commercial hard money loans are generally the following:
1. Private Individuals
2. Mortgage Companies
3. Federal Banks
4. SBA Lenders
These commercial hard money lenders all have varying degrees of benefits as well as downfalls in terms of choosing a commercial hard money loan lender. For example, a private individual
may offer special terms, however may be unwilling to offer a work out plan as a matter of procedure, in the event the loan becomes delinquent. A federally-chartered bank may offer a
competitive loan rate in comparison to an individual, however may demand a high pre-payment penalty fee, costing the borrower more money if they decide to sell or refinance the loan
within one to five years.
Source: Wikepedia
Commercial hard money is a term describing a commercial loan that is generally non bankable. The company usually does not meet the standard banking criteria, but has real estate and or
assets that are sufficient to collateralize the loan to the investors/lenders.
Commercial hard money rates
Commercial hard money rates are generally higher than other rates. The industry standard range is between 11% and 16%. Typically borrowers pay between 3 and 6 points (percent of the loan
amount borrowed).
Commercial hard money collateral
Commercial hard money collateral is generally real estate. It can be more than one property and it can also include other assets. When there is not sufficient equity in the property to meet the
lenders loan to value ratio criteria, the borrower may pledge other real estate and "cross collateralize" the loan. Most commercial hard money lenders will not lend beyond 65% of the property
value. Cross collateral loans allow loans to be made at higher amounts when the owner has more than one property to be pledged.
Property value will usually be determined by the lender, who may use a conservative approach to valuation of the property. For instance they may determine the value based on the ability to
sell it in thirty days or less.
Commercial Hard Money Lenders
There are various commercial lenders that are willing to make loans against real estate collateral regardless of the credit history of the borrower. They are asset based loans and depend
primarily on real estate value. Only a very few banks will make a commercial hard money loan. Mostly private investment groups and finance companies are making commercial hard money
loans.
A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. After the Great Depression, the U.S. Congress required that
banks only engage in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S. law, some use
the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. In some other jurisdictions, the strict
separation of investment and commercial banking never applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial services direct
to consumers. Many banks offer both commercial and retail banking services.
Possible meanings
Commercial bank has two possible meanings:
Commercial bank is the term used for a normal bank to distinguish it from an investment bank.
This is what people normally call a "bank". The term "commercial" was used to distinguish it from an investment bank. Since the two types of banks no longer have to be separate companies,
some have used the term "commercial bank" to refer to banks which focus mainly on companies. In some English-speaking countries outside North America, the term "trading bank" was and is
used to denote a commercial bank. During the great depression and after the stock market crash of 1929, the U.S. Congress passed the Glass-Steagall Act 1933-35 (Khambata 1996) requiring
that commercial banks only engage in banking activities (accepting deposits and making loans, as well as other fee based services), whereas investment banks were limited to capital markets
activities. This separation is no longer mandatory.
It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time (or term) deposits. It makes loans to businesses and consumers. It also
buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds.
Commercial banking can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of
the public (retail banking).
Origin of the word
The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green
tablecloth.[1] However, there are traces of banking activity even in ancient times.
In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called
a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only
legal tender in Rome- that of the Imperial Mint. [2]
The role of commercial banks
Commercial banks engaged in the following activities:
processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other means
issuing bank drafts and bank cheques
accepting money on term deposit
lending money by way of overdraft, installment loan or otherwise
providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures
safekeeping of documents and other items in safe deposit boxes
currency exchange
sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a “financial supermarket”
Types of loans granted by commercial banks
Secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral (i.e., security) for the loan.
Mortgage loan
A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under this arrangement, the money is used to purchase property. Commercial banks, however, are
given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it,
to recover sums owing to it.
In the past, commercial banks have not been greatly interested in real estate loans and have placed only a relatively small percentage of their assets in mortgages. As their name implies, such
financial institutions secured their earning primarily from commercial and consumer loans and left the major task of home financing to others. However, due to changes in banking laws and
policies, commercial banks are increasingly active in home financing.
Changes in banking laws now allow commercial banks to make home mortgage loans on a more liberal basis than ever before. In acquiring mortgages on real estate, these institutions follow
two main practices. First, some of the banks maintain active and well-organized departments whose primary function is to compete actively for real estate loans. In areas lacking specialized
real estate financial institutions, these banks become the source for residential and farm mortgage loans. Second, the banks acquire mortgages by simply purchasing them from mortgage
bankers or dealers.
In addition, dealer service companies, which were originally used to obtain car loans for permanent lenders such as commercial banks, wanted to broaden their activity beyond their local
area. In recent years, however, such companies have concentrated on acquiring mobile home loans in volume for both commercial banks and savings and loan associations. Service
companies obtain these loans from retail dealers, usually on a nonrecourse basis. Almost all bank/service company agreements contain a credit insurance policy that protects the lender if the
consumer defaults.
Unsecured loan
Unsecured loans are monetary loans that are not secured against the borrowers assets (i.e., no collateral is involved). These may be available from financial institutions under many different
guises or marketing packages:
credit card debt, personal loans, bank overdrafts, credit facilities or lines of credit, corporate bonds
A Corporate Bond is a bond issued by a corporation. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The
term "commercial paper" is sometimes used for instruments with a shorter maturity.)
Sometimes, the term "corporate bonds" is used to include all bonds except those issued by governments in their own currencies. Strictly speaking, however, it only applies to those issued by
corporations. The bonds of local authorities and supranational organizations do not fit in either category.
Corporate bonds are often listed on major exchanges (bonds there are called "listed" bonds) and ECNs like MarketAxess, and the coupon (i.e. interest payment) is usually taxable. Sometimes
this coupon can be zero with a high redemption value. However, despite being listed on exchanges, the vast majority of trading volume in corporate bonds in most developed markets takes
place in decentralized, dealer-based, over-the-counter markets.
Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. Other bonds, known as convertible bonds, allow investors to convert the
bond into equity.
One can obtain an unfunded synthetic exposure to corporate bonds via credit default swaps.
Types
Corporate debt falls into several broad categories:
secured debt vs unsecured debt
senior debt vs subordinated debt
Generally, the higher one's position in the company's capital structure, the stronger one's claims to the company's assets in the event of a default.
Risk analysis
Compared to government bonds, corporate bonds generally have a higher risk of default. This risk depends, of course, upon the particular corporation issuing the bond, the current market
conditions and governments to which the bond issuer is being compared and the rating of the company. Corporate bond holders are compensated for this risk by receiving a higher yield than
government bonds.
Consequently, this default risk can be quantified using spread analysis, which seeks to determine the difference in yield between a given corporate bond and a risk-free treasury bond of the
same maturity. Common statistics used include Z-spread and option adjusted spread (OAS).
A mortgage loan is a loan secured by real property through the use of a mortgage (a legal instrument). However, the word mortgage alone, in everyday usage, is most often used to mean
mortgage loan.
A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through
intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.
Mortgage loan basics
Basic concepts and legal regulation
According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest as security or collateral for a loan. Therefore, a
mortgage is an encumbrance on property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic
term for a loan secured by such real property.
As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time; typically 30 years. All types of real property can, and usually are, secured
with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.
Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential property. For commercial mortgages see the separate article. Although the
terminology and precise forms will differ from country to country, the basic components tend to be similar:
Property: the physical residence being financed. The exact form of ownership will vary from country to country, and may restrict the types of lending that are possible.
Mortgage: the security created on the property by the lender, which will usually include certain restrictions on the use or disposal of the property (such as paying any outstanding debt before
selling the property).
Borrower: the person borrowing who either has or is creating an ownership interest in the property.
Lender: any lender, but usually a bank or other financial institution.
Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size.
Interest: a financial charge for use of the lender's money.
Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the
loan is arguably no different from any other type of loan.
Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly
(through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct
lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific
characteristics of the legal or financial system.
Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most
basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original
loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country.
Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds). The price at which the lenders
borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments
from the borrower, often in the form of a security (by means of a securitization). In the United States, the largest firms securitizing loans are Fannie Mae and Freddie Mac, which are
government sponsored enterprises.
Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the
creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays
that may be involved in certain circumstances.
Mortgage loan types
There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal
requirements.
Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.
Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require
full repayment of any remaining balance at a certain date, or even negative amortization.
Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to
increase or decrease the amount paid.
Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.
The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In many countries,
floating rate mortgages are the norm and will simply be referred to as mortgages; in the United States, fixed rate mortgages are typically considered "standard." Combinations of fixed and
floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period.
Historical U.S. Prime RatesIn a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. In the U.S., the term is usually up to 30 years
(15 and 30 being the most common), although longer terms may be offered in certain circumstances. For a fixed rate mortgage, payments for principal and interest should not change over the
life of the loan, although ancillary costs (such as property taxes and insurance) can and do change.
In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market
index. Common indices in the U.S. include the Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"); other indices are in use but are less popular.
Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the
risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market
conditions, including the yield curve.
Additionally, lenders in many markets rely on credit reports and credit scores derived from them. The higher the score, the more creditworthy the borrower is assumed to be. Favorable interest
rates are offered to buyers with high scores. Lower scores indicate higher risk for the lender, and higher rates will generally be charged to reflect the (expected) higher default rates.
A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some
point short of that term. This payment is sometimes referred to as a "balloon payment" or bullet payment. The interest rate for a balloon loan can be either fixed or floating. The most common
way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due.
Other loan types:
Assumed mortgage
Balloon mortgage
Blanket loan
Bridge loan
Budget loan
Buydown mortgage
Commercial loan
Endowment mortgage
Equity loan
Flexible mortgage
Foreign National mortgage
Graduated payment mortgage loan
Hard money loan
Jumbo mortgages
Offset mortgage
Package loan
Participation mortgage
Reverse mortgage
Repayment mortgage
Seasoned mortgage
Term loan or Interest-only loan
Wraparound mortgage
Negative amortization loan
Non-conforming mortgage
Loan to value and downpayments
Upon making a mortgage loan for purchase of a property, lenders usually require that the borrower make a downpayment, that is, contribute a portion of the cost of the property. This
downpayment may be expressed as a portion of the value of the property (see below for a definition of this term). The loan to value ratio (or LTV) is the size of the loan against the value of the
property. Therefore, a mortgage loan where the purchaser has made a downpayment of 20% has a loan to value ratio of 80%. For loans made against properties that the borrower already
owns, the loan to value ratio will be imputed against the estimated value of the property.
The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will
be insufficient to cover the remaining principal of the loan.
Value: appraised, estimated, and actual
Since the value of the property is an important factor in understanding the risk of the loan, determining the value is a key factor in mortgage lending. The value may be determined in various
ways, but the most common are:
Actual or transaction value: this is usually taken to be the purchase price of the property. If the property is not being purchased at the time of borrowing, this information may not be available.
Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value by a licensed professional is common. There is often a requirement for the lender to obtain an official
appraisal.
Estimated value: lenders or other parties may use their own internal estimates, particularly in jurisdictions where no official appraisal procedure exists, but also in some other circumstances.
Equity or homeowner's equity
The concept of equity in a property refers to the value of the property minus the outstanding debt, subject to the definition of the value of the property. Therefore, a borrower who owns a
property whose estimated value is $400,000 but with outstanding mortgage loans of $300,000 is said to have homeowner's equity of $100,000.
Payment and debt ratios
In most countries, a number of more or less standard measures of creditworthiness may be used. Common measures include payment to income (mortgage payments as a percentage of gross
or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various net worth measures. In many countries, credit scores are used in
lieu of or to supplement these measures. There will also be requirements for documentation of the creditworthiness, such as income tax returns, pay stubs, etc; the specifics will vary from
location to location. Many countries have lower requirements for certain borrowers, or "no-doc" / "low-doc" lending standards that may be acceptable in certain circumstances.
Standard or conforming mortgages
Many countries have a notion of standard or conforming mortgages that define a perceived acceptable level of risk, which may be formal or informal, and may be reinforced by laws,
government intervention, or market practice. For example, a standard mortgage may be considered to be one with no more than 70-80% LTV and no more than one-third of gross income
going to mortgage debt.
A standard or conforming mortgage is a key concept as it often defines whether or not the mortgage can be easily sold or securitized, or, if non-standard, may affect the price at which it may
be sold. In the United States, a conforming mortgage is one which meets the established rules and procedures of the two major government-sponsored entities in the housing finance market
(including some legal requirements). In contrast, lenders who decide to make nonconforming loans are exercising a higher risk tolerance and do so knowing that they face more challenge in
reselling the loan. Many countries have similar concepts or agencies that define what are "standard" mortgages. Regulated lenders (such as banks) may be subject to limits or higher risk
weightings for non-standard mortgages. For example, banks in Canada face restrictions on lending more than 75% of the property value; beyond this level, mortgage insurance is generally
required (as of April 2007, there is a proposal to raise this limit to 80%).
Repaying the capital
There are various ways to repay a mortgage loan; repayment depends on locality, tax laws and prevailing culture.
Capital and interest
The most common way to repay a loan is to make regular payments of the capital (also called principal) and interest over a set term. This is commonly referred to as (self) amortization in the U.
S. and as a repayment mortgage in the UK. A mortgage is a form of annuity (from the perspective of the lender), and the calculation of the periodic payments is based on the time value of
money formulas. Certain details may be specific to different locations: interest may be calculated on the basis of a 360-day year, for example; interest may be compounded daily, yearly, or
semi-annually; prepayment penalties may apply; and other factors. There may be legal restrictions on certain matters, and consumer protection laws may specify or prohibit certain practices.
Depending on the size of the loan and the prevailing practice in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to 30 years is the usual maximum
term (although shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically made monthly, contain a capital (repayment of the principal) and an
interest element. The amount of capital included in each payment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital.
Towards the end of the mortgage the payments are mostly capital and a smaller portion interest. In this way the payment amount determined at outset is calculated to ensure the loan is repaid
at a specified date in the future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not change.
Interest only
The main alternative to capital and interest mortgage is an interest only mortgage, where the capital is not repaid throughout the term. This type of mortgage is common in the UK, especially
when associated with a regular investment plan. With this arrangement regular contributions are made to a separate investment plan designed to build up a lump sum to repay the mortgage at
maturity. This type of arrangement is called an investment-backed mortgage or is often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a
Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage. Historically, investment-backed mortgages offered various tax advantages over
repayment mortgages, although this is no longer the case in the UK. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient return to
clear the debt.
Until recently it was not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property market will rise sufficiently for the loan
to be repaid by trading down at retirement (or when rent on the property and inflation combine to surpass the interest rate).
No capital or interest
For older borrowers (typically in retirement), it may be possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up with the capital, increasing the
debt each year.
These arrangements are variously called reverse mortgages, lifetime mortgages or equity release mortgages, depending on the country. The loans are typically not repaid until the borrowers
die, hence the age restriction. For further details, see equity release.
Interest and partial capital
In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding capital balance is due
at some point short of that term. In the UK, a part repayment mortgage is quite common, especially where the original mortgage was investment-backed and on moving house further borrowing
is arranged on a capital and interest (repayment) basis.
Foreclosure and non-recourse lending
In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions - principally, non-payment of the mortgage loan - obtain. Subject to local legal requirements, the
property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some jurisdictions, mortgage loans are non-recourse loans: if the funds
recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the
borrower remains responsible for any remaining debt. In virtually all jurisdictions, specific procedures for foreclosure and sale of the mortgaged property apply, and may be tightly regulated by
the relevant government; in some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of
lenders to foreclose is extremely limited, and mortgage market development has been notably slower.
Mortgage lending: United States
United States mortgage process
In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting an application and documentation related to his/her financial
history and/or credit history to the underwriter. Many banks now offer "no-doc" or "low-doc" loans in which the borrower is required to submit only minimal financial information. These loans
carry a higher interest rate and are available only to borrowers with excellent credit. Sometimes, a third party is involved, such as a mortgage broker. This entity takes the borrower's information
and reviews a number of lenders, selecting the ones that will best meet the needs of the consumer.
Loans are often sold on the open market to larger investors by the originating mortgage company. Many of the guidelines that they follow are suited to satisfy investors. Some companies,
called correspondent lenders, sell all or most of their closed loans to these investors, accepting some risks for issuing them. They often offer niche loans at higher prices that the investor does
not wish to originate.
If the underwriter is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called stipulations. The meeting of such
conditions can be a daunting experience for the consumer, but it is crucial for the lending institution to ensure the information being submitted is accurate and meets specific guidelines. This
is done to give the lender a reasonable guarantee that the borrower can and will repay the loan. If a third party is involved in the loan, it will help the borrower to clear such conditions.
The following documents are typically required for traditional underwriter review. Over the past several years, use of "automated underwriting" statistical models has reduced the amount of
documentation required from many borrowers. Such automated underwriting engines include Freddie Mac's "Loan Prospector" and Fannie Mae's "Desktop Underwriter". For borrowers who
have excellent credit and very acceptable debt positions, there may be virtually no documentation of income or assets required at all. Many of these documents are also not required for no-
doc and low-doc loans.
Credit Report
1003 — Uniform Residential Loan Application
1004 — Uniform Residential Appraisal Report
1005 — Verification Of Employment (VOE)
1006 — Verification Of Deposit (VOD)
1007 — Single Family Comparable Rent Schedule
1008 — Transmittal Summary
Copy of deed of current home
Federal income tax records for last two years
Verification of Mortgage (VOM) or Verification of Payment (VOP)
Borrower's Authorization
Purchase Sales Agreement
1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) - used if borrower is self-employed
Predatory mortgage lending
There is concern in the U.S. that consumers are often victims of predatory mortgage lending [2]. The main concern is that mortgage brokers and lenders, operating legally, are finding
loopholes in the law to obtain additional profit. The typical scenario is that terms of the loan are beyond the means of the borrower. The borrower makes a number of interest and principal
payments, and then defaults. The lender then takes the property and recovers the amount of the loan, and also keeps the interest and principal payments, as well as loan origination fees.
Option ARM
An option ARM provides the option to pay as little as the equivalent of an amortized payment based on a 1% interest rate, (please note this is not the actual interest rate). As a result, the
difference between the monthly payment and the interest on the loan is added to the loan principal; the loan at this point has negative amortization. In this respect, an option ARM provides a
form of equity withdrawal (as in a cash-out refinancing) but over a period of time.
The option ARM gives a number of payment choices each month (for example, the equivalent of an amortized payment where the interest rate 1%, interest only based on actual interest rate,
actual 30 year amortized payment, actual 15 year amortized payment). The interest rate may adjust every month in accordance with the index to which the loan is tied and the terms of the
specific loan. These loans may be useful for people who have a lot of equity in their home and want to lower monthly costs; for investors, allowing them the flexibility to choose which payment
to make every month; or for those with irregular incomes (such as those working on commission or for whom bonuses comprise a large portion of income).
One of the important features of this type of loan is that the minimum payments are often fixed for each year for an initial term of up to 5 years. The minimum payment may rise each year a
little (payment size increases of 7.5% are common) but remain the same for another year. For example, a minimum payment for year 1 may be $1,000 per month each month all year long. In
year 2 the minimum payment for each month is $1,075 each month. This is a gradual increase in the minimum payment. The interest rate may fluctuate each month, which means that the
extent of any negative amortization cannot be predicted beyond worst-case scenario as dictated by the terms of the loan.
Option ARM mortgages have been criticized on the basis that some borrowers are not aware of the implications of negative amortization; that eventually option ARMs reset to higher payment
levels (an event called "recast" to amortize the loan), and borrowers may not be capable of making the higher monthly payments; and that option ARMs have been used to qualify mortgages
for individuals whose incomes cannot support payments higher than the minimum level.
Costs
Lenders may charge various fees when giving a mortgage to a mortgagor. These include entry fees, exit fees, administration fees and lenders mortgage insurance. There are also settlement
fees (closing costs) the settlement company will charge. In addition, if a third party handles the loan, it may charge other fees as well.
The United States mortgage finance industry
Mortgage lending is a major category of the business of finance in the United States. Mortgages are commercial paper and can be conveyed and assigned freely to other holders. In the U.S.,
the Federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the
Government National Mortgage Association (known as Ginnie Mae), the Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation
(known as Freddie Mac). These programs work by buying a large number of mortgages from banks and issuing (at a slightly lower interest rate) "mortgage-backed bonds" to investors, which are
known as mortgage-backed securities (MBS).
This allows the banks to quickly relend the money to other borrowers (including in the form of mortgages) and thereby to create more mortgages than the banks could with the amount they
have on deposit. This in turn allows the public to use these mortgages to purchase homes, something the government wishes to encourage. The investors, meanwhile, gain low-risk income at a
higher interest rate (essentially the mortgage rate, minus the cuts of the bank and GSE) than they could gain from most other bonds.
Securitization is a momentous change in the way that mortgage bond markets function, and has grown rapidly in the last 10 years as a result of the wider dissemination of technology in the
mortgage lending world. For borrowers with superior credit, government loans and ideal profiles, this securitization keeps rates almost artificially low, since the pools of funds used to create new
loans can be refreshed more quickly than in years past, allowing for more rapid outflow of capital from investors to borrowers without as many personal business ties as the past.
The greatly increased rate of lending led (among other factors) to the United States housing bubble of 2000-2006. The growth of lightly regulated derivative instruments based on mortgage-
backed securities, such as collateralized debt obligations and credit default swaps, is widely reported as a major causative factor behind the 2007 subprime mortgage financial crisis.
Second-layer lenders in the US
A group called second-layer lenders became an important force in the residential mortgage market in the latter half of the 1960s. These federal credit agencies, which include the Federal
Home Loan Mortgage Corp., the Federal National Mortgage Association, and the Government National Mortgage Association, conduct secondary market activities in the buying and selling of
loans and provide credit to primary lenders in the form of borrowed money. They do not have direct contact with the individual consumer.
Federal Home Loan Mortgage Corporation
The Federal Home Loan Mortgage Corporation, sometimes known as Freddie Mac, was established in 1970. This corporation is designed to promote the flow of capital into the housing market
by establishing an active secondary market in mortgages[1]. It may by law deal only with government-supervised lenders such as savings and loan associations, savings banks, and commercial
banks; its programs cover conventional whole mortgage loans, participations in conventional loans, and FHA and VA loans.
Federal National Mortgage Association
The Federal National Mortgage Association, known in financial circles as Fannie Mae, was chartered as a government corporation in 1938, rechartered as a federal agency in 1954, and
became a government-sponsored, stockholder-owned corporation in 1968[1]. Fannie Mae, which has been described as "a private corporation with a public purpose", basically provides a
secondary market for residential loans. It fulfills this function by buying, servicing, and selling loans that, since 1970, have included FHA-insured, VA-guaranteed, and conventional loans.
However, purchases outrun sales by such a wide margin that some observers view this association as a lender with a permanent loan portfolio rather than a powerful secondary market
corporation.
Government National Mortgage Association
The Government National Mortgage Association, which is often referred to as Ginnie Mae, operates within the Department of Housing and Urban Development. In addition to performing the
special assistance, management, and liquidation functions that once belonged to Fannie Mae, Ginnie Mae has an important additional function — that of issuing guarantees of securities
backed by government-insured or guaranteed mortgages. Such mortgage-backed securities are fully guaranteed by the U.S. government as to timely payment of both principal and interest[1].
Competition among US lenders for loanable funds
To be able to provide homebuyers and builders with the funds needed, financial institutions must compete for deposits. Consumer lending institutions compete for loanable funds not only
among themselves but also with the federal government and private corporations. Called disintermediation, this process involves the movement of dollars from savings accounts into direct
market instruments: U.S. Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of
money market funds whose higher interest rates attracted consumer deposits.[2]
To compete for deposits, US savings institutions offer many different types of plans[2]:
Passbook or ordinary accounts — permit any amount to be added to or withdrawn from the account at any time.
NOW and Super NOW accounts — function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts.
Money market accounts — carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance.
Certificate accounts — subject to loss of some or all interest on withdrawals before maturity.
Notice accounts — the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal.
Individual retirement accounts (IRAs) and Keogh accounts—a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal.
Checking accounts — offered by some institutions under definite restrictions.
Club accounts and other savings accounts—designed to help people save regularly to meet certain goals.
Mortgages in the UK
Main article: UK mortgage terminology
The mortgage loans industry and market
There are currently over 200 significant separate financial organizations supplying mortgage loans to house buyers in Britain. The major lenders include building societies, banks, specialized
mortgage corporations, insurance companies, and pension funds. Over the years, the share of the new mortgage loans market held by building societies has declined. Between 1977 and
1987, it fell drastically from 96% to 66% while that of banks and other institutions rose from 3% to 36%. The banks and other institutions that made major inroads into the mortgage market
during this period were helped by such factors as:
relative managerial efficiency;
advanced technology, organizational capabilities, and expertise in marketing;
extensive branch networks; and
capacities to tap cheaper international sources of funds for lending.[3]
By the early 1990s, UK building societies had succeeded in greatly slowing if not reversing the decline in their market share. In 1990, the societies held over 60% of all mortgage loans but
took over 75% of the new mortgage market – mainly at the expense of specialized mortgage loans corporations. Building societies also increased their share of the personal savings deposits
market in the early 1990s at the expense of the banks – attracting 51% of this market in 1990 compared with 42% in 1989.[4] One study found that in the five years 1987-1992, the building
societies collectively outperformed the UK clearing banks on practically all the major growth and performance measures. The societies' share of the new mortgage loans market of 75% in
1990-91 was similar to the share level achieved in 1985. Profitability as measured by return on capital was 17.8% for the top 20 societies in 1991, compared with only 8.5% for the big four
banks. Finally, bad debt provisions relative to advances were only 0.4% for the top 20 societies compared with 2.8% for the four banks.[5]
Though the building societies did subsequently recover a significant amount of the mortgage lending business lost to the banks, they still only had about two-thirds of the total market at the
end of the 1980s. However, banks and building societies were by now becoming increasingly similar in terms of their structures and functions. When the Abbey National building society
converted into a bank in 1989, this could be regarded either as a major diversification of a building society into retail banking – or as significantly increasing the presence of banks in the
residential mortgage loans market. Research organization Industrial Systems Research has observed that trends towards the increased integration of the financial services sector have made
comparison and analysis of the market shares of different types of institution increasingly problematical. It identifies as major factors making for consistently higher levels of growth and
performance on the part of some mortgage lenders in the UK over the years:
the introduction of new technologies, mergers, structural reorganization and the realization of economies of scale, and generally increased efficiency in production and marketing operations
– insofar as these things enable lenders to reduce their costs and offer more price-competitive and innovative loans and savings products;
buoyant retail savings receipts, and reduced reliance on relatively expensive wholesale markets for funds (especially when interest rates generally are being maintained at high levels
internationally);
lower levels of arrears, possessions, bad debts, and provisioning than competitors;
increased flexibility and earnings from secondary sources and activities as a result of political-legal deregulation; and
being specialized or concentrating on traditional core, relatively profitable mortgage lending and savings deposit operations.[6]
Mortgage types
The UK mortgage market is one of the most innovative and competitive in the world. Unlike some other countries, there is little intervention in the market by the state or state funded entities
and virtually all borrowing is funded by either mutual organisations (building societies and credit unions) or proprietary lenders (typically banks). Since 1982, when the market was substantially
deregulated, there has been substantial innovation and diversification of strategies employed by lenders to attract borrowers. This has led to a wide range of mortgage types.
As lenders derive their funds either from the money markets or from deposits, most mortgages revert to a variable rate, either the lender's standard variable rate or a tracker rate, which will tend
to be linked to the underlying Bank of England (BoE) repo rate (or sometimes LIBOR). Initially they will tend to offer an incentive deal to attract new borrowers. This may be:
A fixed rate; where the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and/or
have more onerous early repayment charges and are therefore less popular than shorter term fixed rates.
A capped rate; where similar to a fixed rate, the interest rate cannot rise above the cap but can vary beneath the cap. Sometimes there is a collar associated with this type of rate which
imposes a minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.
A discount rate; where there is set margin reduction in the standard variable rate (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the discount is expressed as a margin
over the base rate (e.g. BoE base rate plus 0.5% for 2 years) and sometimes the rate is stepped (e.g. 3% in year 1, 2% in year 2, 1% in year three).
A cashback mortgage; where a lump sum is provided (typically) as a percentage of the advance e.g. 5% of the loan.
To make matters more confusing these rates are often combined: For example, 4.5% 2 year fixed then a 3 year tracker at BoE rate plus 0.89%.
With each incentive the lender may be offering a rate at less than the market cost of the borrowing. Therefore, they typically impose a penalty if the borrower repays the loan within the
incentive period or a longer period (referred to as an extended tie-in). These penalties used to be called a redemption penalty or tie-in, however since the onset of Financial Services Authority
regulation they are referred to as an early repayment charge.
Self Cert Mortgage
Mortgage lenders usually use salaries declared on wage slips to work out a borrower's annual income and will usually lend up to a fixed multiple of the borrower's annual income. Self
Certification Mortgages, informally known as "self cert" mortgages, are available to employed and self employed people who have a deposit to buy a house but lack the sufficient
documentation to prove their income.
This type of mortgage can be beneficial to people whose income comes from multiple sources, whose salary consists largely or exclusively of commissions or bonuses, or whose accounts may
not show a true reflection of their earnings. Self cert mortgages have two disadvantages: the interest rates charged are usually higher than for normal mortgages and the loan to value ratio is
usually lower.
100% Mortgages
Normally when a bank lends a customer money they want to protect their money as much as possible; they do this by asking the borrower to fund a certain percentage of the property purchase
in the form of a deposit.
100% mortgages are mortgages that require no deposit (100% loan to value). These are sometimes offered to first time buyers, but almost always carry a higher interest rate on the loan.
Together/Plus Mortgages
A development of the theme of 100% mortgages is represented by Together/Plus type mortgages, which have been launched by a number of lenders in recent years.
Together/Plus Mortgages represent loans of 100% or more of the property value - typically up to a maximum of 125%. Such loans are normally (but not universally) structured as a package of a
95% mortgage and an unsecured loan of up to 30% of the property value. This structure is mandated by lenders' capital requirements which require additional capital for loans of 100% or
more of the property value.
UK mortgage process
UK lenders usually charge a valuation fee, which pays for a chartered surveyor to visit the property and ensure it is worth enough to cover the mortgage amount. This is not a full survey so it
may not identify all the defects that a house buyer needs to know about. Also, it does not usually form a contract between the surveyor and the buyer, so the buyer has no right to sue if the
survey fails to detect a major problem. For an extra fee, the surveyor can usually carry out a building survey or a (cheaper) "homebuyers survey" at the same time.[7]
Mortgage insurance
Mortgage insurance is an insurance policy designed to protect the mortgagee (lender) from any default by the mortgagor (borrower). It is used commonly in loans with a loan-to-value ratio over
80%, and employed in the event of foreclosure and repossession.
This policy is typically paid for by the borrower as a component to final nominal (note) rate, or in one lump sum up front, or as a separate and itemized component of monthly mortgage
payment. In the last case, mortgage insurance can be dropped when the lender informs the borrower, or its subsequent assigns, that the property has appreciated, the loan has been paid down,
or any combination of both to relegate the loan-to-value under 80%.
In the event of repossession, banks, investors, etc. must resort to selling the property to recoup their original investment (the money lent), and are able to dispose of hard assets (such as real
estate) more quickly by reductions in price. Therefore, the mortgage insurance acts as a hedge should the repossessing authority recover less than full and fair market value for any hard asset.
Islamic mortgages
Main article: Islamic economic jurisprudence
The Sharia law of Islam prohibits the payment or receipt of interest, which means that practising Muslims cannot use conventional mortgages. However, real estate is far too expensive for most
people to buy outright using cash: Islamic mortgages solve this problem by having the property change hands twice. In one variation, the bank will buy the house outright and then act as a
landlord. The homebuyer, in addition to paying rent, will pay a contribution towards the purchase of the property. When the last payment is made, the property changes hands.[citation needed]
Typically, this may lead to a higher final price for the buyers. This is because in some countries (such as the United Kingdom and India) there is a Stamp Duty which is a tax charged by the
government on a change of ownership. Because ownership changes twice in an Islamic mortgage, a stamp tax may be charged twice. Many other jurisdictions have similar transaction taxes
on change of ownership which may be levied. In the United Kingdom, the dual application of Stamp Duty in such transactions was removed in the Finance Act 2003 in order to facilitate
Islamic mortgages.[8]
An alternative scheme involves the bank reselling the property according to an installment plan, at a price higher than the original price.
All of these methods are still compensating the lender as if they were charging interest, but the loans are structured in a way that in name they are not, but they share the financial risks
involved in the transaction with the homebuyer.[citation needed]
Other terminologies
Like any other legal system, the mortgage business sometimes uses confusing jargon. Below are some terms explained in brief. If a term is not explained here it may be related to the legal
mortgage rather than to the loan.
Advance This is the money you have borrowed plus all the additional fees.
Base rate In UK, this is the base interest rate set by the Bank of England. In the United States, this value is set by the Federal Reserve and is known as the Discount Rate.
Bridging loan This is a temporary loan that enables the borrower to purchase a new property before the borrower is able to sell another current property.
Disbursements These are all the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc.
Early redemption charge / Pre-payment penalty / Redemption penalty This is the amount of money due if the mortgage is paid in full before the time finished.
equity This is the market value of the property minus all loans outstanding on it.
First time buyer This is the term given to a person buying property for the first time.
Loan origination fee A charge levied by a creditor for underwriting a loan. The fee often is expressed in points. A point is 1 percent of the loan amount.
Sealing fee This is a fee made when the lender releases the legal charge over the property.
Subject to contract This is an agreement between seller and buyer before the actual contract is made.
General, or related to more than one nation
Commercial mortgage
Nonrecourse debt
Refinancing
Shared appreciation mortgage
No Income No Asset (NINA)
Annual percentage rate
Foreign currency mortgage
Related to the United Kingdom
Buy to let
Remortgage
UK mortgage terminology
Related to the United States
Commercial lender (US) - a term for a lender collateralizing non-residential properties.
Fixed rate mortgage calculations (USA)
pre-qualification - U.S. mortgage terminology
pre-approval - U.S. mortgage terminology
FHA loan - Relating to the U.S. Federal Housing Administration
VA loan - Relating to the U.S. Veterans Administration.
eMortgages
Location Efficient Mortgage - a type of mortgage for urban areas
Predatory mortgage lending
Other nations
Danish mortgage market
Legal details
Deed - legal aspects
Mechanics lien - a legal concept
Perfection - applicable legal filing requirements
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Good Investment Concepts
Intrinsic Value
Present value of the operating cash flow stream (Net Operating Profit After Tax minus change in Total Capital) discounted at the company’s Cost of Capital. Also known as Enterprise Value.
Current Enterprise Market Price
The aggregate market value of all of a company’s or sector’s securities outstanding, including debt, preferred and equity.
Current Equity Market Price
The market value of a company’s or sector’s Common Stock Outstanding.
Free Cash Flow
Net Operating Profit After Tax minus Year-to-Year change in Net Capital.
Net Capital
Net Working Capital plus Long Term Assets.
Valuation Drivers
Factors which determine the course of the company’s (or sector’s) profits for a long time into the future. These include Sales Growth, Profit Margin, Cost of Capital, Capital Turnover and other
elements which determine operating cash flows. These are the major, but not the only valuation drivers:
Growth Rate
Growth in Sales or Revenue
Cost of Capital
The weighted-averaged cost of: common equity, preferred equity and debt (after tax) of the individual company or sector. The cost of debt is the average interest rate for all the company’s or
sector’s debt instruments over the forecast period. The cost of equity is the average total return demanded by an equity investor to invest in the company or sector. The cost of equity is
assumed to be the same for all companies and to be driven by personal income tax rates, inflation expectations and the long-run historical difference in real, after-tax returns between equities
and bonds.
Profit Margin
Net Operating Profit After Tax divided by Sales. This is different from EBIT Margin which is EBIT (Earnings Before Interest and Taxes) divided by Sales.
Capital Turnover
Sales divided by Average Net Capital
Current Stock Price per Share
Recent closing price of a share of a company’s or sector’s Common Stock
Current Debt per Share
Total reported debt plus the present value of non-capitalized operating leases divided by current shares of Common Stock outstanding
Current Enterprise Value per Share
The Enterprise or Intrinsic Value divided by current shares of Common Stock outstanding
Intrinsic Value of Equity per Share
The Intrinsic or Enterprise Value minus the market value of total debt, then divided by current shares of Common Stock outstanding.
Adjusted Intrinsic Value of Equity
The Intrinsic Value of Equity adjusted to reflect the impact of dividend payouts and of future stock buybacks presumed by the model to use excess operating cash. The adjusted intrinsic stock
value is the net present value of thirty years of cash flows to the equity investor discounted at the cost of equity. The investor cash flows will consist of dividend payouts for the first twenty nine
years and the sum of the dividend and warranted stock price per the-then-current number of shares. The adjusted intrinsic value is, therefore, equal to the maximum price an investor should
be willing to pay for the stock today in order to receive a total return equal to the cost of equity.
Simple Return
The non-compounded interest rate which an equity purchaser would earn by holding the stock for a specified period of time assuming purchase at the current market price and ending with a
future Intrinsic Value of Equity per Share.
Compound Total Return
The interest rate which an equity purchaser would earn by holding the stock for a specified period of time and re-investing dividends annually at the then Intrinsic Value of Equity per Share.
Equity Investor Internal Rate of Return
The return which an equity purchaser would earn by holding the stock for 30 years, collecting all dividends and selling the stock at the Terminal Q Ratio at the end of thirty years
Free Cash Flow Annuity
The Free Cash Flow Annuity is calculated by taking the most recent annual Free Cash Flow (defined as Net Operating Profit After Tax minus Year-to-Year change in Net Capital) and dividing it
by the current Long Term US Treasury Yield. This measure says "Ok, so if I never grow my current Free Cash Flow another nickel for the rest of time, how much is my stock worth using the
Treasury yield as the discount rate?" This is a very conservative measure of intrinsic value. Any time you find a stock selling below that price, pay attention.
1y Target Est
The 1-year target price estimate represents the median target price as forecast by analysts covering the stock. Data is provided by Thomsonfn.com. More detailed target estimate data can be
found by clicking a company's "research" link.
Avg Vol
Average Daily Volume is the monthly average of the cumulative trading volume during the last 3 months divided by 22 days. It is updated weekly and is provided by Market Guide.
Bid / Ask
The Bid price is the price you get if you sell your stock, and the Ask price is the price you have to pay to buy a stock. Note that the New York Stock Exchange (NYSE) does not permit Bid and
Ask prices to be reported for delayed quotes, so this field is always reported as "N/A" (Not Available) for NYSE stocks.
Bid Size / Ask Size
Represents the number of shares a buyer is willing to purchase for the bid or ask price.
Change
The change in price for the day. This is the difference between the last trade and the previous day's closing price (Prev Close). The change is reported as "0" if the stock hasn't traded today.
Div Date
Dividend Pay Date. The date on which the dividend was last paid, or the date on which the next one will be paid.
Dividend (ttm)
All dividends paid out in the last twelve months are added together to create a "Dividend(ttm)". The trailing dividend is then divided by the most recent closing price to derive the Yield (see
Yield). Depending on the dividend history of a particular company, the dividend(ttm) and yield could produce different results compared to the company's forward dividend which is calculated
by multiplying the payment frequency by the most recent dividend.
EPS Est
Current year analyst consensus EPS estimate from Thomson/First Call. More detailed analyst estimates and consensus data can be found by clicking the "research" link for a symbol.
EPS (ttm)
Earnings Per Share (EPS) is stated for the most recent 12 months (ttm, trailing 12 months). It represents primary earnings from continuing operations attributable to each share of common stock
outstanding, and is calculated by dividing the income from continuing operations by the average number of shares outstanding during the period (in accordance with generally accepted
accounting principles, GAAP). The income is the income or loss that remains after excluding income or loss from discontinued operations and extraordinary charges or credits that are
reported separately (again, per GAAP). Earnings Per Share is adjusted for stock splits and stock dividends. If data is not available for 12 months or more, "N/A" is displayed for EPS.
Daily updates are received on quarterly EPS data. Most earnings information is received within 48 hours of the company's earnings announcement. Every time a company declares their
earnings, a record is sent for that particular earning figure along with a 12-month rolling EPS.
Ex-Div
The Ex-Dividend Date (without dividend). You need to purchase the stock before this date to receive the current quarter's dividend or stock split.
Exchanges
With detailed quotes, the stock exchange is listed along with the stock, such as (Nasdaq:YHOO). These abbreviations are used for the exchanges:
NYSE - New York Stock Exchange
AMEX - American Stock Exchange
Nasdaq - National Association of Securities Dealers Automatic Quotation System
OTC BB - OTC (Over the Counter) Bulletin Board Market.
Toronto - Toronto Stock Exchange
Alberta - Alberta Stock Exchange
Vancouver - Vancouver Stock Exchange
Last Trade
The time and price of the last trade made for the stock. The date is reported in place of the time if the stock hasn't traded today.
Mkt Cap
The Market Capitalization is calculated by multiplying the Last Trade by the current number of shares outstanding. Shares outstanding is updated weekly and is provided by Market Guide.
Open
Opening price for the day; first trade of the day. This is not always close to the previous day's closing price, especially when company news is released after the stock market closed the
previous day.
P/E
Price to Earnings Ratio. This number is the previous closing stock price (see Prev Close) divided by the earnings per share, and reflects the value the market has placed on a stock.
PEG
PEG stands for price/earnings growth and is calculated by dividing the trailing P/E by the projected earnings growth rate (in this case, the 5 year annualized growth rate). The idea behind the
PEG Ratio is to relate price to growth.
P/S
Price to Sales Ratio. This number is the previous closing stock price (see Prev Close) divided by the revenue per share.
Prev Close
The closing price for the trading day prior to the last trade reported.
Yield
The dividend(ttm) per share divided by the previous closing stock price (see Prev Close), as a percentage (multiplied by 100).
Goodwill
A class of intangible assets such as a company's name and reputation.
Goodwill shows up on a company's books when it acquires another company, and naturally has to pay more for it than the listed book value of its assets. The excess paid is categorized as
Goodwill, added to the acquiring company's balance sheet as an asset, and then depreciated over a period of years.
Depreciation: Method to account for assets whose value is considered to decrease over time.
The total amount that assets have depreciated by during a reporting period is shown on the cash flow statement, and also makes up part of the expenses shown on the income statement. The
amount that assets have depreciated to by the end date of the period is shown on the balance sheet.
Gordon Growth Model
Valuation formula holding that the total return of a stock investment will equal its dividend yield plus its dividend growth rate:
R = D/P + G
where D is next year's annual dividend;
P is the current share price;
G is the growth rate.
Stock Valuation based on Earnings
Stock valuation based on earnings starts out with one giant logical leap: you assume that each dollar of earnings per share of a company is really worth one actual dollar of income to you as a
stockholder. This is theoretically because you expect the company to use that dollar in a beneficial way: for example, they could use it to pay you a dividend; or they could invest it in their
own growth, which would cause future earnings to be even greater.
You also generally assume that the company will go through several distinct phases, starting with a "growth" phase where earnings are increasing at a predictable rate, followed by a "mature"
phase where earnings level off to a constant level.
To find the value of a stock, you need to calculate all of these future earnings (out to infinity!), and then use your own desired rate of return as a discount rate to find their present value. The
infinite sum of these present values is the fair market value of the stock; or more accurately, it's the maximum price you should be willing to pay.
To get the formula, we'll define some variables:
E = this year's Earnings per Share
G = growth rate of earnings (written as a decimal)
N = number of years earnings will grow
We're assuming that earnings will start to grow for N years, and then level off:
Year Earnings
1 E(1 + G)
2 E(1 + G)2
N E(1 + G)N
N + 1 E(1 + G)N
N + 2 E(1 + G)N
Now we'll write R for our desired rate of return, and use it to find the present values of all of these earnings:
Year Present Value of Earnings
1 E(1 + G)/(1 + R)
2 E(1 + G)2/(1 + R)2
N E(1 + G)N/(1 + R)N
N + 1 E(1 + G)N/(1 + R)N+1
N + 2 E(1 + G)N/(1 + R)N+2
What we've got here is two geometric series; one going from 1 to N, and the other going from N + 1 to infinity. The result is basically too ugly to bother writing out; it's more sensible just to use
the formula for the geometric series in a spreadsheet or computer program. When people do write it out, they usually write it this way:
P = E1Q + E2Q2 + ... + ENQN + ENQN x Q/(1 - Q)
where E2 is the earnings in year 2 (or whatever) and Q is the so-called "discount factor" 1/(1 + R).
Zero-Growth Case
One special case is actually interesting to write out though. If you assume that the stock is already in the "mature", zero-growth years -- ie, that N is zero -- the geometric series formula will
simplify to:
P = E / R
or, equivalently,
P / E = 1 / R
So if you take a desired return of 11%, you find that the theoretical "fair" P/E ratio of the zero-growth stock is 1/.11 = 9.09, which sounds reasonable.
Constant-Growth Case
A second special case that people use is the "constant growth forever" case, meaning N is infinity. The formula in this case simplifies to
P = E1 / (R - G)
where E1 is earnings over the next 12 months.
This approach can be dangerous. Constant growth forever means the company is going to get infinitely big, which is a hard concept to fit into a common sense understanding of valuation. The
formula will give you a number as long as the growth rate G is less than the discount rate R; but you can force it to give you a ridiculously huge number if you make G very close to R. This
graph won't let you try that - the blue bars could blow through the top of your screen and hurt somebody - but you can see it happen in the discounted cash flows calculator in the stock
valuation article.
How much is a share of stock really worth? Not just in terms of analysts' opinions, but logically, based on facts?
In theory, the answer is simple: a company is worth the total amount of cash it will generate over its lifetime, discounted to its present value. (And don't panic if you don't really understand that
last sentence, because the next page explains it. You do not need any background to read this article.)
This is a simple discounted cash flows calculator, along with some popular variations and shortcuts, to make stock valuation make sense. But before we get started.... When you use any kind of
value formula, it's a good idea to remember Warren Buffett's advice, that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price". The idea is to find
a company whose prospects you really believe in, and then use a valuation technique as a reality check, to make sure the purchase price is acceptable. And try to make your valuation
estimates realistic and conservative: you're trying to protect yourself from overpaying, not justify your surplus of enthusiasm.
Gross Domestic Product (GDP)
Total annual output of the U.S. economy, measured by its final purchase price.
GDP is divided into four categories, according to the final purchaser:
GDP = Consumer Spending
+ Business and Residential Investment
+ Government Spending
- Trade Deficit.
(See the interactive GDP Diagram.)
The gross domestic product includes enough sub-components that just looking at trends in the bottom line GDP number can give you a misleading idea of what the economy is actually doing.
One example: if a retailer successfully sells a product, the sale will count toward "consumer spending" at its retail price; if the retailer fails and the product bloats its inventory, it will count
toward "business investment" at its wholesale price (i.e. the price the retailer paid for it). Later, when the retailer works off the bloat, the decline in inventory will contribute a negative number
toward business investment, officially lowering GDP. In other words, the GDP calculation can make the start of a recession look better, and the recovery stage look weaker, than they really are.
GDP data is available from the Bureau of Economic Analysis (www.bea.gov).
Also see the definition of Gross National Product.
Government Spending
Spending by the federal, state, and local governments, accounting for about 20% of the GDP. See fiscal policy, and the interactive GDP Diagram.
Fiscal Policy
All policy by the government involving the collection and spending of revenue; ie "tax and spend" policy. In particular, fiscal policy refers to efforts by the government to stimulate the
economy directly, through spending. Compare monetary policy.
Monetary Policy
Actions by the Federal Reserve to control the money supply.
In particular, monetary policy refers to efforts to fight inflation or otherwise control or stimulate the economy by controlling the availability of spending money to companies and consumers.
Compare fiscal policy.
Components of the Gross Domestic Product
If the word on the street during the late 1990s was that the business cycle was dead, the lesson of the early 2000s is that Economics Happens. So in the spirit of too little, too late, here is a "big
picture" overview of the entire U.S. economy.
Gross National Product (GNP)
Total output of the U.S. economy; see the definition of Gross Domestic Product for details. GNP and GDP tend to be used as synonyms, although GDP is definitely the preferred measure among
economists and is gaining popularity in general conversation as well; the two measures are fairly close numerically. The difference is that GDP measures all production within the U.S., by
whoever happens to be working here; GNP measures the production of all Americans, wherever they happen to be working. (Maybe you can remember the "N" in GNP stands for "anywhere").
Gross Margin
Ratio of gross profit to sales revenue. (Also sometimes used as a synonym for gross profit).
For a manufacturer, gross margin is a measure of a company's efficiency in turning raw materials into income; for a retailer it measures their markup over wholesale.
Most companies would like a gross margin that's as large as possible. An exception is the discount retailer; part of their game is to make their operations and financing so efficient that they can
afford to keep their markup tiny.
Gross Profit: Sales revenue minus sales costs. Also called "sales profit".
Gross Revenue
"Raw" sales income; the amount customers actually pay the company when they make their purchases.
When a company sells products, it has to make allowances for some portion of its sales for products expected to be returned, lost in delivery, or otherwise requiring the company to refund the
customers' money. The "official" revenue number, known as sales revenue, equals gross revenue minus these allowances.
Gross revenue is generally not an interesting number for investors. One case where it is interesting is when you're tracking the progress of a startup company. It's possible that at the very
beginning they'll be doing such a tiny amount of business that actual sales will be less than the allowances for refunds, meaning that sales revenue will technically be a negative number. In
this case the company will issue news releases about its gross revenue, so investors will at least know that a few customers have been showing up and laying out some cash.
Sales Revenue
Income from sales of goods and services, minus the cost associated with things like returned or undeliverable merchandise. Also called "Sales", "Net Sales", "Net Revenue", and just plain
"Revenue".
GOLD AND THE DISINTEGRATION OF U.S. ECONOMIC INFLUENCE
During the 1970's the world watched closely as the Watergate scandal unfolded. As well as the element of human fascination with such high level intrigue, any event which could de-stabilise
the US presidency would necessarily have a major impact on world financial markets. The worldwide concern relating to the US political troubles at the time was accompanied by an upward
spike in the gold price. Although the price of gold is affected by a large number of variables, it is probable that the price movements which occurred at the height of the Watergate scandal
were not coincidental.
In recent years we have observed the U.S. political administration become increasingly tainted with allegations and evidence of corruption and deception, the most recent of which involve
foreign contributions to Democratic campaign funds. In addition to a presidency soaked in scandal, the U.S. is currently experiencing rates of money supply growth which are the highest in 10
years and a Federal debt which has burgeoned to $5.3 trillion.
Had the current US political and economic situation prevailed 20 years ago, then the resulting worldwide apprehension would almost certainly have caused the price of gold to soar. Such an
escalation in the relative value of gold would likely have occurred irrespective of events elsewhere in the world, due to the dominant position of the U.S. within the global economy. However,
what we have actually witnessed in recent years is a bear market in gold which has seen the gold price drop to its lowest level in over 20 years when measured in inflation adjusted terms. This,
I believe, is symptomatic of America's reduced economic status in the world.
It is my opinion that there are 2 primary reasons for the reduced ability of events in the U.S. to influence financial decisions made throughout the world. Firstly, enormous growth has occurred
across Asia, catapulting this region into a position of economic leadership. The world now watches Asia with the same intense interest it once reserved for the U.S. In fact, the two largest Asian
economies, Japan and China, are also the largest foreign holders of claims on the U.S. Treasury and Federal Reserve (by claims I mean dollars, which are a liability of the financial institutions
which create them, and U.S. Government debt). This gives these Asian nations substantial leverage in any dealings with the U.S. The shift in economic power towards Asia will likely continue
at an accelerating pace and will also be a major positive for gold due to the healthy distrust of government promises which many Asians demonstrate when it comes to personal wealth
protection.
U.S. economic influence has dwindled hand in hand with the debasement of its currency.
The emergence of the Asian region as the dominant force in the global economy is not a reflection of any U.S. short-comings, but a naturally occurring phenomenon based on population
dynamics and trade. However, the other primary reason for the reduction in U.S. influence results from America's own actions. From 1933 until 1971, the U.S. dollar was linked to gold at the
official rate of $35 per ounce, which means that during this period the U.S. government was prepared to provide one ounce of gold in exchange for 35 U.S. dollars, and vice versa (to
everyone except its own citizens, that is). This official link to gold, however, created a problem for the government. It meant that the supply of U.S. dollars could not be arbitrarily increased to
suit higher levels of debt and a short term political agenda. The consequences of fiscal irresponsibility would be the complete depletion of America's gold reserves as the rest of the world
rushed to convert their de-based dollars into gold.
In 1971, President Nixon removed the official link between the U.S. dollar and gold. The U.S. government, no longer restrained by the need to exchange gold for dollars at a certain rate,
embarked on a spending spree which has seen the dollar lose around 90% of its purchasing power in 25 years. It has also reduced to a small fraction of its former self when measured against
most other major currencies.
Continuation of the current U.S. fiscal policies will firstly lead to the loss the dollar's reserve status, and eventually to the complete demise of the dollar as a useful medium of exchange. (Note
that the removal of the official link to gold did not, in itself, cause the collapse of the dollar. The real causes are numerous and include expansionist-minded banks, a Federal Reserve
unwilling to assert its independence from its political masters, and politicians who were/are prepared to mortgage the future living standards of U.S. citizens to achieve short term political
objectives. Nixon's action simply removed the last major obstacle to the furtherment of financially irresponsible practices on a large scale).
U.S. economic influence has dwindled hand in hand with the debasement of its currency.
In conclusion, evidence of political wrong-doings within the U.S. Government continue to surface. However, for the reasons discussed above, anything short of a presidential impeachment or
resignation is unlikely to significantly affect investment decisions made outside the U.S., including the decision to buy or sell gold. (Source: Milhouse)
GOLD:
THE INTRINSIC VALUE
Intrinsic Value Investing
When it comes to books written about investing in the stock market, two of the classics are "Security Analysis" and "The Intelligent Investor", both of which were written by Benjamin Graham
and published in 1934 and 1949 respectively. Graham was a very successful investor in his own right, but is also well known as the mentor of Warren Buffett. Buffett built on the foundations
provided by Graham's investment philosophy by adding a qualitative dimension to the completely quantitative approach adopted by his teacher. However, the basis of the success of these
stock market legends was essentially the same - the realisation that the "intrinsic value" of a company was independent of its market price.
According to Graham, the market does not determine value. It is a "voting machine" in which countless people register choices that are the product partly of reason and partly of emotion. For
most stocks the market tells you every minute of every day what it thinks those stocks are worth. The price that the market assigns may be much higher, much lower, or approximately equal to
the intrinsic value. It is this difference between market price and intrinsic value which provides opportunities to investors astute enough to recognise it - the greater the difference the greater
the opportunity. However, an investor who allows himself to become so concerned by a falling market price that he sells out has blown any advantage he may have had. "You are neither right
nor wrong because the crowd disagrees with you".
The above thinking has been shown to work with phenomenal success when applied to stock market investment, but can it also be applied to investing in gold ? The intrinsic value of a stock
can be determined using quantitative measures such as profit, net working capital, cashflow, and net tangible assets, and qualitative considerations such as the strength of the company's
management. However, does gold have an intrinsic value which can be different from its market price and, if so, how could we go about calculating it ?
The Intrinsic Value of Gold
Supply Considerations
With such an enormous number of variables affecting its price, including the emotional response of individuals and the whims of politicians throughout the world, how can we possibly forecast
a future dollars per ounce gold price?
When there is an imbalance in supply versus demand, prices adjust to correct that imbalance. For example, if demand exceeds supply then prices will increase to the point where demand
reduces or supply increases, thus correcting the imbalance. Because the "load" is forever changing, prices are continually adjusting. Vronsky's essay on gold's supply/demand dynamics in the
"Analysis" section of the Gold Eagle website discusses the imbalance which has existed in the gold market for some time, with commercial demand greatly outstripping worldwide production.
Had a similar situation prevailed with any other commodity then soaring prices would undoubtedly result. However, the fundamental difference between gold and all other commodities is that
gold is not consumed, it is accumulated. Nearly 100% of all the gold mined in the history of the world forms part of today's aboveground gold stock. The total amount of this aboveground stock
(currently around 120,000 tonnes) is an available source of supply at any time. During the past few weeks we have had some news regarding gold supply which has supposedly caused some
fluctuations in the gold price. Firstly, Switzerland announced that it would sell some of its gold reserves (about 400 tonnes over a 10 year period). Secondly, the Busang gold deposit, which
had been reported to contain up to 200 million ounces of gold, is now thought to be worthless. One event added future gold supply to the market whilst the other removed it. In my opinion
both events were just "noise" as the amount of gold involved was trivial in comparison to the total aboveground supply of gold.
Another important point to note regarding the aboveground gold stock is that it increases at a fairly constant rate of around 1.7% per annum (during the last 50 years the largest annual
increase was 2.1% whilst the smallest was 1.4%). Irrespective of what technological and political changes occur in the future, or how many more Busangs (real or otherwise) are discovered, it
is reasonable to assume that the total supply of gold will continue to grow at an average rate of 1.7% per annum. In fact, technological improvements and vast new discoveries will be needed
to maintain this growth rate.
Estimating a Future Gold Price
In other words, confidence in US dollars is currently at a historic high or, put another way, gold is at its lowest levels in 25 years relative to the US dollar.
Further to the above we should be able to estimate, with a fair degree of accuracy, what the aboveground gold stock will be at some time in the future. It should also be possible to estimate
the future commercial (fashion jewelry, industry, etc.) demand for gold. However, these considerations are only a small part of the equation. Much of the aboveground gold stock is held for
monetary purposes and the willingness of the owners of this gold to sell at a particular price is dependent upon countless economic, political and psychological concerns. The willingness of
others to purchase gold for monetary reasons at a certain price is dependent upon similar considerations. With such an enormous number of variables affecting its price, including the
emotional response of individuals and the whims of politicians throughout the world, how can we possibly forecast a future dollars per ounce gold price? Yet another problem, in fact the very
heart of the problem in forecasting a future gold price, is that we measure the price in terms of something which is constantly changing, that is, the US dollar (or any other national currency).
Every day the US dollar changes its character due to changes in its quantity and quality, with its true value linked to something as fragile and fluctuating as faith in the financial and political
system.
Although we cannot reliably estimate a future gold price, what we can do is calculate the relative values of gold and US dollars using the Fear Index. The Fear Index was developed by James
Turk as a means of numerically expressing the competitive relationship between gold and dollars, and is calculated as follows :
Fear Index = (US Gold Reserve) X (Market Price of Gold)
M3
Currently, with the gold price around $350 per ounce, M3 (total US money supply) of $5024.5 billion as of weekend 3rd March 1997, and a US gold reserve of 261.8 million ounces, we can
calculate the Fear Index to be 1.82%.
The lower the Fear Index the higher the value of dollars relative to gold, that is, the higher the level of confidence (or the lower the level of fear) in paper currency. To put the above
calculated figure of 1.82% into perspective, this is the lowest value for the Fear Index since 1972. In fact, the last 3 months have seen the Fear Index move below 2% for the first time since
1972. In other words, confidence in US dollars is currently at a historic high or, put another way, gold is at its lowest levels in 25 years relative to the US dollar.
I would also be interested in calculating a modified Fear Index where the total above ground stock of gold is substituted for the US Gold Reserve. However, this will have to be the subject of a
separate discussion.
Gold Investment Based On Value
The above discussion suggests that although we cannot estimate a future gold price with any degree of accuracy, we can at least determine that gold is currently very cheap and should be
purchased by investors seeking value. However, I believe that many people who identify that gold currently represents excellent value will lose money in their attempts to profit from this
realisation. This is because they will attempt to profit from their well-founded conclusion via short term trading. The following quote from Benjamin Graham was written about stock
speculation, but it can be equally well applied to the short term trading of commodities : "....speculation is largely a matter of A trying to decide what B, C and D are likely to think - with B, C
and D trying to do the same". It is likely that many of the investors who purchase gold or gold related investments based on sound fundamental reasoning will sell out at a loss because they
were unable to predict what others would do in the short term.
Gold
Gold (pronounced /ˈɡoʊld/) is a chemical element with the symbol Au (Latin: aurum) and atomic number 79. It is a highly sought-after precious metal, having been used as money, as a
store of value, in jewelry, in sculpture, and for ornamentation since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in alluvial deposits. Gold is
dense, soft, shiny and the most malleable and ductile pure metal known. Pure gold has a bright yellow color traditionally considered attractive. It is one of the coinage metals and formed the
basis for the gold standard used before the collapse of the Bretton Woods system in 1971. The ISO currency code of gold bullion is XAU.
Modern industrial uses include dentistry and electronics, where gold has traditionally found use because of its good resistance to oxidative corrosion. Chemically, gold is a transition metal
and can form trivalent and univalent cations upon solvation. At STP it is attacked by aqua regia, forming chloroauric acid and by alkaline solutions of cyanide but not by hydrochloric, nitric
or sulphuric acids. Gold dissolves in mercury, forming amalgam alloys, but does not react with it. Gold is insoluble in nitric acid, which will dissolve silver and base metals, and is the basis of
the gold refining technique known as "inquartation and parting". Nitric acid has long been used to confirm the presence of gold in items, and this is the origin of the colloquial term "acid
test", referring to a gold standard test for genuine value.
1 Characteristics 1.1 Color of gold 2 Applications 2.1 As the metal 2.1.1 Medium of monetary exchange 2.1.2 Jewelry 2.2 Medicine 2.3 Food and drink 2.4 Industry 2.5 Electronics
2.6 Other 2.7 As gold chemical compounds 3 History 4 Occurrence 5 Production 6 Price 6.1 Price records 6.2 Long term price trends 7 Compounds
7.1 Less common oxidation states: Au(-I), Au(II), and Au(V) 7.2 Mixed valence compounds 8 Isotopes 9 Symbolism 10 Toxicity
Characteristics
Electron shell diagram of gold.Gold is the most malleable and ductile of all metals; a single gram can be beaten into a sheet of one square meter, or an ounce into 300 square feet. Gold leaf
can be beaten thin enough to become translucent. The transmitted light appears greenish blue, because gold strongly reflects yellow and red.
Gold readily creates alloys with many other metals. These alloys can be produced to increase the hardness or to create exotic colors (see below). Gold is a good conductor of heat and
electricity, and is not affected by air and most reagents. Heat, moisture, oxygen, and most corrosive agents have very little chemical effect on gold, making it well-suited for use in coins and
jewelry; conversely, halogens will chemically alter gold, and aqua regia dissolves it via formation of the chloraurate ion.
Common oxidation states of gold include +1 (gold(I) or aurous compounds) and +3 (gold(III) or auric compounds). Gold ions in solution are readily reduced and precipitated out as gold metal
by adding any other metal as the reducing agent. The added metal is oxidized and dissolves allowing the gold to be displaced from solution and be recovered as a solid precipitate.
Doctoral research undertaken by Frank Reith at the Australian National University, and published in 2004, shows that microbes can play an important role in forming gold deposits, transporting
and precipitating gold to form grains and nuggets that collect in alluvial deposits.
High quality pure metallic gold is tasteless; in keeping with its resistance to corrosion (it is metal ions which confer taste to metals).
In addition, gold is very dense, a cubic meter weighing 19300 kg. By comparison, the density of lead is 11340 kg/m³, and that of the densest element, osmium, is 22610 kg/m³.
Color of gold
Mainly, Gold appears to be metallic yellow. Gold, caesium and copper are the only elemental metals with a natural color other than gray or white. The usual gray color of metals depends on
their "electron sea" that is capable of absorbing and re-emitting photons over a wide range of frequencies. Gold reacts differently, depending on subtle relativistic effects that affect the
orbitals around gold atoms.
Applications As the metal
Medium of monetary exchange
In various countries, gold is used as a standard for monetary exchange, in coinage and in jewelry. Pure gold is too soft for ordinary use and is typically hardened by alloying with copper or
other base metals. The gold content of gold alloys is measured in carats (k), pure gold being designated as 24k. Gold coins intended for circulation from 1526 into the 1930s were typically a
standard 22k alloy called crown gold, for hardness. Modern collector/investment bullion coins (which do not require good mechanical wear properties) are typically 24k, although the
American Gold Eagle and British gold sovereign continue to be made at 22k, on historical tradition. The special issue Canadian Gold Maple Leaf coin contains the highest purity gold of any
bullion coin, at 99.999% (.99999 fine). The popular issue Canadian Gold Maple Leaf coin has a purity of 99.99%. Several other 99.99% pure gold coins are currently available, including
Australia's Gold Kangaroos (first appearing in 1986 as the Australian Gold Nugget, with the kangaroo theme appearing in 1989), the several coins of the Australian Lunar Calendar series, and
the Austrian Philharmonic. In 2006, the U.S. Mint began production of the American Buffalo gold bullion coin also at 99.99% purity.
Since the abandonment of the gold standard and the confiscation of monetary gold in the 1930s by the United States Government, gold has not generally been used in daily commerce.
Many holders of gold coinage retain their gold in storage as a hedge against inflation or other economic disruptions.
Jewelry
Because of the softness of pure (24k) gold, it is usually alloyed with base metals for use in jewelry, altering its hardness and ductility, melting point, color and other properties. Alloys with lower
caratage, typically 22k, 18k, 14k or 10k, contain higher percentages of copper, or other base metals or silver or palladium in the alloy. Copper is the most commonly used base metal, yielding
a redder color. Eighteen carat gold containing 25% copper is found in antique and Russian jewellery and has a distinct, though not dominant, copper cast, creating rose gold. Fourteen carat
gold-copper alloy is nearly identical in color to certain bronze alloys, and both may be used to produce police and other badges. Blue gold can be made by alloying with iron and purple
gold can be made by alloying with aluminium, although rarely done except in specialized jewelry. Blue gold is more brittle and therefore more difficult to work with when making jewelry.
Fourteen and eighteen carat gold alloys with silver alone appear greenish-yellow and are referred to as green gold. White gold alloys can be made with palladium or nickel. White 18 carat
gold containing 17.3% nickel, 5.5% zinc and 2.2% copper is silver in appearance. Nickel is toxic, however, and its release from nickel white gold is controlled by legislation in Europe.
Alternative white gold alloys are available based on palladium, silver and other white metals (World Gold Council), but the palladium alloys are more expensive than those using nickel. High-
carat white gold alloys are far more resistant to corrosion than are either pure silver or sterling silver. The Japanese craft of Mokume-gane exploits the color contrasts between laminated
colored gold alloys to produce decorative wood-grain effects.
Medicine
In medieval times, gold was often seen as beneficial for the health, in the belief that something that rare and beautiful could not be anything but healthy.[citation needed] Even some modern
esotericists and forms of alternative medicine assign metallic gold a healing power.[citation needed] Some gold salts do have anti-inflammatory properties and are used as pharmaceuticals
in the treatment of arthritis and other similar conditions. However, only salts and radioisotopes of gold are of pharmacological value, as elemental (metallic) gold is inert to all chemicals it
encounters inside the body. In modern times injectable gold has been proven to help to reduce the pain and swelling of rheumatoid arthritis. Dentistry. Gold alloys are used in restorative
dentistry, especially in tooth restorations, such as crowns and permanent bridges. The gold alloys' slight malleability facilitates the creation of a superior molar mating surface with other teeth
and produces results that are generally more satisfactory than those produced by the creation of porcelain crowns. The use of gold crowns in more prominent teeth such as incisors is favored
in some cultures and discouraged in others. Colloidal gold (colloidal sols of gold nanoparticles) in water are intensely red-colored, and can be made with tightly-controlled particle sizes up to
a few tens of nm across by reduction of gold chloride with citrate or ascorbate ions. Colloidal gold is used in research applications in medicine, biology and materials science. The technique
of immunogold labeling exploits the ability of the gold particles to adsorb protein molecules onto their surfaces. Colloidal gold particles coated with specific antibodies can be used as probes
for the presence and position of antigens on the surfaces of cells (Faulk and Taylor 1979). In ultrathin sections of tissues viewed by electron microscopy, the immunogold labels appear as
extremely dense round spots at the position of the antigen (Roth et al. 1980). Colloidal gold is also the form of gold used as gold paint on ceramics prior to firing. Gold, or alloys of gold and
palladium, are applied as conductive coating to biological specimens and other non-conducting materials such as plastics and glass to be viewed in a scanning electron microscope. The
coating, which is usually applied by sputtering with an argon plasma, has a triple role in this application. Gold's very high electrical conductivity drains electrical charge to earth, and its very
high density provides stopping power for electrons in the SEM's electron beam, helping to limit the depth to which the electron beam penetrates the specimen. This improves definition of the
position and topography of the specimen surface and increases the spatial resolution of the image. Gold also produces a high output of secondary electrons when irradiated by an electron
beam, and these low-energy electrons are the most commonly-used signal source used in the scanning electron microscope. The isotope gold-198, (half-life: 2.7 days) is used in some cancer
treatments and for treating other diseases.
Food and drink
Gold can be used in food and has the E Number 175.
Gold leaf, flake or dust is used on and in some gourmet foodstuffs, notably sweets and drinks as decorative ingredient.[6] Gold flake was used by the nobility in Medieval Europe as a
decoration in foodstuffs and drinks, in the form of leaf, flakes or dust, either to demonstrate the host's wealth or in the belief that something that valuable and rare must be beneficial for one's
health. Goldwasser (English: Goldwater) is a traditional herbal liqueur produced in Gdańsk, Poland, and Schwabach, Germany, and contains flakes of gold leaf. There are also some
expensive (~$1000) cocktails which contain flakes of gold leaf[citation needed]. However, since metallic gold is inert to all body chemistry, it adds no taste nor has it any other nutritional
effect and leaves the body unaltered.
Industry
Gold solder is used for joining the components of gold jewelry by high-temperature hard soldering or brazing. If the work is to be of hallmarking quality, gold solder must match the carat
weight of the work, and alloy formulas are manufactured in most industry-standard carat weights to color match yellow and white gold. Gold solder is usually made in at least three melting-
point ranges referred to as Easy, Medium and Hard. By using the hard, high-melting point solder first, followed by solders with progressively lower melting points, goldsmiths can assemble
complex items with several separate soldered joints. Gold can be made into thread and used in embroidery. Gold is ductile and malleable, meaning it can be drawn into very thin wire and
can be beaten into very thin sheets known as gold leaf. Gold produces a deep, intense red color when used as a coloring agent in cranberry glass. In photography, gold toners are used to shift
the color of silver bromide black and white prints towards brown or blue tones, or to increase their stability. Used on sepia-toned prints, gold toners produce red tones. Kodak published formulas
for several types of gold toners, which use gold as the chloride (Kodak, 2006). As gold is a good reflector of electromagnetic radiation such as infrared and visible light as well as radio waves,
it is used for the protective coatings on many artificial satellites, in infrared protective faceplates in thermal protection suits and astronauts' helmets and in electronic warfare planes like the
EA-6B Prowler. Gold is used as the reflective layer on some high-end CDs. Automobiles may use gold for heat insulation. McLaren uses gold foil in the engine compartment of its F1 model.
Electronics
The concentration of free electrons in gold metal is 5.90×1022 cm-3. Gold is highly conductive to electricity, and has been used for electrical wiring in some high energy applications (silver
is even more conductive per volume, but gold has the advantage of corrosion resistance). For example, gold electrical wires were used during some of the Manhattan Project's atomic
experiments, but large high current silver wires were used in the calutron isotope separator magnets in the project. Though gold is attacked by free chlorine, its good conductivity and general
resistance to oxidation and corrosion in other environments (including resistance to non-chlorinated acids) has led to its widespread industrial use in the electronic era as a thin layer coating
electrical connectors of all kinds, thereby ensuring good connection. For example, gold is used in the connectors of the more expensive electronics cables, such as audio, video and USB
cables. The benefit of using gold over other connector metals such as tin in these applications is highly debated. Gold connectors are often criticized by audio-visual experts as unnecessary
for most consumers and seen as simply a marketing ploy. However, the use of gold in other applications in electronic sliding contacts in highly humid or corrosive atmospheres, and in use for
contacts with a very high failure cost (certain computers, communications equipment, spacecraft, jet aircraft engines) remains very common, and is unlikely to be replaced in the near future
by any other metal. Besides sliding electrical contacts, gold is also used in electrical contacts because of its resistance to corrosion, electrical conductivity, ductility and lack of toxicity.[8]
Switch contacts are generally subjected to more intense corrosion stress than are sliding contacts.
Other
Many competitions, and honors, such as the Olympics and the Nobel Prize, award a gold medal to the winner.
As gold chemical compounds
Gold is attacked by and dissolves in alkaline solutions of potassium or sodium cyanide, and gold cyanide is the electrolyte used in commercial electroplating of gold onto base metals and
electroforming. Gold chloride (chloroauric acid) solutions are used to make colloidal gold by reduction with citrate or ascorbate ions. Gold chloride and gold oxide are used to make highly-
valued cranberry or red-colored glass, which, like colloidal gold sols, contains evenly-sized spherical gold nanoparticles. Gold has been known and highly valued since prehistoric times. It
may have been the first metal used by humans and was valued for ornamentation and rituals. Egyptian hieroglyphs from as early as 2600 BC describe gold, which king Tushratta of the Mitanni
claimed was "more plentiful than dirt" in Egypt.[9] Egypt and especially Nubia had the resources to make them major gold-producing areas for much of history. The earliest known map is
known as the Turin papyrus and shows the plan of a gold mine in Nubia together with indications of the local geology. The primitive working methods are described by Strabo and included
fire-setting. Large mines also occurred across the Red Sea in what is now Saudi Arabia. The legend of the golden fleece may refer to the use of fleeces to trap gold dust from placer deposits
in the ancient world. Gold is mentioned frequently in the Old Testament, starting with Genesis 2:11 (at Havilah) and is included with the gifts of the magi in the first chapters of Matthew New
Testament. The Book of Revelation 21:21 describes the city of New Jerusalem as having streets "made of pure gold, clear as crystal". The south-east corner of the Black Sea was famed for its
gold. Exploitation is said to date from the time of Midas, and this gold was important in the establishment of what is probably the world's earliest coinage in Lydia between 643 and 630 BC.
From 6th or 5th century BCE, Chu (state) circulated Ying Yuan, one kind of square gold coin.
Jason returns with the golden fleece on an Apulian red-figure calyx krater, ca. 340–330 BC.The Romans developed new methods for extracting gold on a large scale using hydraulic mining
methods, especially in Spain from 25 BC onwards and in Romania from 150 AD onwards. One of their largest mines was at Las Medulas in León (Spain), where seven long aqueducts enabled
them to sluice most of a large alluvial deposit. The mines at Roşia Montană in Transylvania were also very large, and until very recently, still mined by opencast methods. They also exploited
smaller deposits in Britain, such as placer and hard-rock deposits at Dolaucothi. The various methods they used are well described by Pliny the Elder in his encyclopedia Naturalis Historia
written towards the end of the first century AD.
The Mali Empire in Africa was famed throughout the old world for its large amounts of gold. Mansa Musa, ruler of the empire (1312–1337) became famous throughout the old world for his
great hajj to Mecca in 1324. When he passed through Cairo in July of 1324, he was reportedly accompanied by a camel train that included thousands of people and nearly a hundred
camels. He gave away so much gold that it depressed the price in Egypt for over a decade.[10] A contemporary Arab historian remarked:
“ Gold was at a high price in Egypt until they came in that year. The mithqal did not go below 25 dirhams and was generally above, but from that time its value fell and it cheapened in price
and has remained cheap till now. The mithqal does not exceed 22 dirhams or less. This has been the state of affairs for about twelve years until this day by reason of the large amount of gold
which they brought into Egypt and spent there [...] ” —Chihab Al-Umari
The European exploration of the Americas was fueled in no small part by reports of the gold ornaments displayed in great profusion by Native American peoples, especially in Central
America, Peru, Ecuador and Colombia.
Although the price of some platinum group metals can be much higher, gold has long been considered the most desirable of precious metals, and its value has been used as the standard for
many currencies (known as the gold standard) in history. Gold has been used as a symbol for purity, value, royalty, and particularly roles that combine these properties. Gold as a sign of wealth
and prestige was made fun of by Thomas More in his treatise Utopia. On that imaginary island, gold is so abundant that it is used to make chains for slaves, tableware and lavatory-seats. When
ambassadors from other countries arrive, dressed in ostentatious gold jewels and badges, the Utopians mistake them for menial servants, paying homage instead to the most modestly-dressed
of their party.
There is an age-old tradition of biting gold in order to test its authenticity. Although this is certainly not a professional way of examining gold, the bite test should score the gold because gold
is a soft metal, as indicated by its score on the Mohs' scale of mineral hardness. The purer the gold the easier it should be to mark it. Painted lead can cheat this test because lead is softer
than gold (and may invite a small risk of lead poisoning if sufficient lead is absorbed by the biting).
This 156-ounce (4.85 kg) nugget was found by an individual prospector in the Southern California Desert using a metal detector.Gold in antiquity was relatively easy to obtain geologically;
however, 75% of all gold ever produced has been extracted since 1910. It has been estimated that all the gold in the world that has ever been refined would form a single cube 20 m (66 ft)
on a side (equivalent to 8000 m³).
One main goal of the alchemists was to produce gold from other substances, such as lead — presumably by the interaction with a mythical substance called the philosopher's stone. Although
they never succeeded in this attempt, the alchemists promoted an interest in what can be done with substances, and this laid a foundation for today's chemistry. Their symbol for gold was the
circle with a point at its center (☉), which was also the astrological symbol, and the ancient Chinese character, for the Sun. For modern creation of artificial gold by neutron capture, see gold
synthesis.
During the 19th century, gold rushes occurred whenever large gold deposits were discovered. The first documented discovery of gold in the United States was at the Reed Gold Mine near
Georgeville, North Carolina in 1803. The first major gold strike in the United States occurred in a small north Georgia town called Dahlonega.[14] Further gold rushes occurred in California,
Colorado, Otago, Australia, Witwatersrand, Black Hills, and Klondike.
Because of its historically high value, much of the gold mined throughout history is still in circulation in one form or another.
Occurrence
In nature, gold most often occurs in its native state (that is, as a metal), though usually alloyed with silver. Native gold contains usually eight to ten percent silver, but often much more —
alloys with a silver content over 20% are called electrum. As the amount of silver increases, the color becomes whiter and the specific gravity becomes lower.
Ores bearing native gold consist of grains or microscopic particles of metallic gold embedded in rock, often in association with veins of quartz or sulfide minerals like pyrite. These are called
"lode" deposits. Native gold is also found in the form of free flakes, grains or larger nuggets that have been eroded from rocks and end up in alluvial deposits (called placer deposits). Such free
gold is always richer at the surface of gold-bearing veins owing to the oxidation of accompanying minerals followed by weathering, and washing of the dust into streams and rivers, where it
collects and can be welded by water action to form nuggets.
Gold sometimes occurs combined with tellurium as the minerals calaverite, krennerite, nagyagite, petzite and sylvanite, and as the rare bismuthide maldonite (Au2Bi) and antimonide
aurostibite (AuSb2). Gold also occurs in rare alloys with copper, lead, and mercury: the minerals auricupride (Cu3Au), novodneprite (AuPb3) and weishanite ((Au,Ag)3Hg2).
Economic gold extraction can be achieved from ore grades as little as 0.5 g/1000 kg (0.5 parts per million, ppm) on average in large easily mined deposits. Typical ore grades in open-pit
mines are 1–5 g/1000 kg (1–5 ppm); ore grades in underground or hard rock mines are usually at least 3 g/1000 kg (3 ppm). Because ore grades of 30 g/1000 kg (30 ppm) are usually needed
before gold is visible to the naked eye, in most gold mines the gold is invisible.
Since the 1880s, South Africa has been the source for a large proportion of the world’s gold supply, with about 50% of all gold ever produced having come from South Africa. Production in
1970 accounted for 79% of the world supply, producing about 1,000 tonnes. However by 2007 production was just 272 tonnes. This sharp decline was due to the increasing difficulty of
extraction, changing economic factors affecting the industry, and tightened safety auditing. In 2007 China (with 276 tonnes) overtook South Africa as the world's largest gold producer, the first
time since 1905 that South Africa has not been the largest.
The city of Johannesburg located in South Africa was founded as a result of the Witwatersrand Gold Rush which resulted in the discovery of some of the largest gold deposits the world has
ever seen. Gold fields located within the basin in the Free State and Gauteng provinces are extensive in strike and dip requiring some of the world's deepest mines, with the Savuka and
TauTona mines being currently the world's deepest gold mine at 3,777 m. The Second Boer War of 1899–1901 between the British Empire and the Afrikaner Boers was at least partly over the
rights of miners and possession of the gold wealth in South Africa.
Other major producers are the United States, Australia, China, Russia and Peru. Mines in South Dakota and Nevada supply two-thirds of gold used in the United States. In South America, the
controversial project Pascua Lama aims at exploitation of rich fields in the high mountains of Atacama Desert, at the border between Chile and Argentina. Today about one-quarter of the
world gold output is estimated to originate from artisanal or small scale mining.
After initial production, gold is often subsequently refined industrially by the Wohlwill process or the Miller process. Other methods of assaying and purifying smaller amounts of gold include
parting and inquartation as well as cuppelation, or refining methods based on the dissolution of gold in aqua regia.
The world's oceans hold a vast amount of gold, but in very low concentrations (perhaps 1–2 parts per 10 billion). A number of people have claimed to be able to economically recover gold
from sea water, but so far they have all been either mistaken or crooks. Reverend Prescott Jernegan ran a gold-from-seawater swindle in America in the 1890s. A British fraudster ran the same
scam in England in the early 1900s.
Fritz Haber (the German inventor of the Haber process) attempted commercial extraction of gold from sea water in an effort to help pay Germany's reparations following World War I.
Unfortunately, his assessment of the concentration of gold in sea water was unduly high, probably due to sample contamination. The effort produced little gold and cost the German
government far more than the commercial value of the gold recovered.[citation needed] No commercially viable mechanism for performing gold extraction from sea water has yet been
identified. Gold synthesis is not economically viable and is unlikely to become so in the foreseeable future.
The average gold mining and extraction costs[when?] are $238 per troy ounce but these can vary widely depending on mining type and ore quality. In 2001, global mine production
amounted to 2,604 tonnes, or 67% of total gold demand in that year. At the end of 2006, it was estimated that all the gold ever mined totaled 158,000 tonnes. This can be represented by a
cube with an edge length of just 20.2 meters.
At current consumption rates, the supply of gold is believed to last 45 years.
Price: Gold as an investment and Gold standard
LBMA USD morning price fixings ($US per troy ounce) since 2001.
Gold price per ounce in USD since 1968, in actual US$ and 2006 US$.Like other precious metals, gold is measured by troy weight and by grams. When it is alloyed with other metals the term
carat or karat is used to indicate the amount of gold present, with 24 karats being pure gold and lower ratings proportionally less. The purity of a gold bar can also be expressed as a decimal
figure ranging from 0 to 1, known as the millesimal fineness, such as 0.995 being very pure.
The price of gold is determined on the open market, but a procedure known as the Gold Fixing in London, originating in September 1919, provides a daily benchmark figure to the industry.
The afternoon fixing appeared in 1968 to fix a price when US markets are open.
Historically gold coinage was widely used as currency; When paper money was introduced, it typically was a receipt redeemable for gold coin or bullion. In an economic system known as the
gold standard, a certain weight of gold was given the name of a unit of currency. For a long period, the United States government set the value of the US dollar so that one troy ounce was
equal to $20.67 ($664.56/kg), but in 1934 the dollar was devalued to $35.00 per troy ounce ($1125.27/kg). By 1961 it was becoming hard to maintain this price, and a pool of US and
European banks agreed to manipulate the market to prevent further currency devaluation against increased gold demand.
On March 17, 1968, economic circumstances caused the collapse of the gold pool, and a two-tiered pricing scheme was established whereby gold was still used to settle international
accounts at the old $35.00 per troy ounce ($1.13/g) but the price of gold on the private market was allowed to fluctuate; this two-tiered pricing system was abandoned in 1975 when the price
of gold was left to find its free-market level. Central banks still hold historical gold reserves as a store of value although the level has generally been declining. The largest gold depository in
the world is that of the U.S. Federal Reserve Bank in New York, which holds about 3%[citation needed] of the gold ever mined, as does the similarly-laden U.S. Bullion Depository at Fort Knox.
In 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes.
Price records
Since 1968 the price of gold on the open market has ranged widely, from a high of $850/oz ($27,300/kg) on January 21, 1980, to a low of $252.90/oz ($8,131/kg) on June 21, 1999 (London
Gold Fixing).[21] The 1980 high was not overtaken until January 3, 2008 when a new maximum of $865.35 per troy ounce was set (a.m. London Gold Fixing). The current annual record price
was set on March 17, 2008 at $1023.50/oz (am. London Gold Fixing).
Long term price trends
Since April 2001 the gold price has more than tripled in value against the US dollar, prompting speculation that this long secular bear market (or the Great Commodities Depression) has
ended and a bull market has returned. In March 2008, the gold price increased above $1000, which in real terms is still well below the $850/oz. peak on January 21, 1980. Indexed for
inflation, the 1980 high would equate to a price of around $2400 in 2007 US dollars.
In the last century, major economic crises (such as the Great Depression, World War II, the first and second oil crisis) lowered the Dow/Gold ratio (which is inherently inflation adjusted)
substantially, in most cases to a value well below 4. During these difficult times, investors tried to preserve their assets by investing in precious metals, most notably gold and silver.
Compounds
Although gold is a noble metal, it forms many and diverse compounds. The oxidation state of gold in its compound ranges from −1 to +5 but Au(I) and Au(III) dominate. Gold(I), referred to as
the aurous ion, is the most common oxidation state with “soft” ligands such as thioethers, thiolates, and tertiary phosphines. Au(I) compounds are typically linear. A good example is Au(CN)2−,
which is the soluble form of gold encountered in mining. Curiously, aurous complexes of water are rare. The binary gold halides, such as AuCl, form zig-zag polymeric chains, again featuring
linear coordination at Au. Most drugs based on gold are Au(I) derivatives.
Gold(III) (“auric”) is a common oxidation state and is illustrated by gold(III) chloride, AuCl3. Its derivative is chloroauric acid, HAuCl4, which forms when Au dissolves in aqua regia. Au(III)
complexes, like other d8 compounds, are typically square planar.
Less common oxidation states: Au(-I), Au(II), and Au(V)
Compounds containing the Au− anion are called aurides. Caesium auride, CsAu which crystallizes in the caesium chloride motif. Other aurides include those of Rb+, K+, and
tetramethylammonium (CH3)4N+. Gold(II) compounds are usually diamagnetic with Au-Au bonds such as [Au(CH2)2P(C6H5)2]2Cl2. A noteworthy, legitimate Au(II) complex contains xenon as
a ligand, [AuXe4](Sb2F11)2. Gold pentafluoride is the sole example of Au(V), the highest verified oxidation state.
Some gold compounds exhibit aurophilic bonding, which describes the tendency of gold ions to interact at distances that are too long to be a conventional Au-Au bond but shorter that van
der Waals bonding. The interaction is estimated to be comparable in strength to that of a hydrogen bond.
Mixed valence compounds
Well-defined cluster compounds are numerous. In such cases, gold has a fractional oxidation state. A representative example is the octahedral species {Au(P(C6H5)3)}62+. Gold
chalcogenides, e.g. "AuS" feature equal amounts of Au(I) and Au(III).
Isotopes: Isotopes of gold
Gold has only one stable isotope, 197Au, which is also its only naturally-occurring isotope. 36 radioisotopes have been synthesized ranging in atomic mass from 169 to 205. The most stable
of these is 195Au with a half-life of 186.1 days. 195Au is also the only isotope to decay by electron capture. The least stable is 171Au, which decays by proton emission with a half-life of 30
µs. Most of gold's radioisotopes with atomic masses below 197 decay by some combination of proton emission, α decay, and β+ decay. The exceptions are 195Au, which decays by electron
capture, and 196Au, which has a minor β- decay path. All of gold's radioisotopes with atomic masses above 197 decay by β- decay.
At least 32 nuclear isomers have also been characterized, ranging in atomic mass from 170 to 200. Within that range, only 178Au, 180Au, 181Au, 182Au, and 188Au do not have isomers.
Gold's most stable isomer is 198m2Au with a half-life of 2.27 days. Gold's least stable isomer is 177m2Au with a half-life of only 7 ns. 184m1Au has three decay paths: β+ decay, isomeric
transition, and alpha decay. No other isomer or isotope of gold has three decay paths.
Symbolism
Three Gold Sovereigns with a Krugerrand.
Swiss-cast 1 kg gold bar.Gold has been associated with the extremities of utmost evil and great sanctity throughout history. In the Book of Exodus, the Golden Calf is a symbol of idolatry and
rebellion against God. In popular culture, the golden pocket watch and its fastening golden chain were the characteristic accessories of the capitalists, the rich and the industrial tycoons.
Credit card companies associate their product with wealth by naming and coloring their top-of-the-range cards “gold” although, in an attempt to out-do each other, platinum has now
overtaken gold.
In the Book of Genesis, Abraham was said to be rich in gold and silver, and Moses was instructed to cover the Mercy Seat of the Ark of the Covenant with pure gold. Eminent orators such as
John Chrysostom were said to have a “mouth of gold with a silver tongue.” Gold is associated with notable anniversaries, particularly in a 50-year cycle, such as a golden wedding anniversary,
golden jubilee, etc.
Great human achievements are frequently rewarded with gold, in the form of medals and decorations. Winners of races and prizes are usually awarded the gold medal (such as the Olympic
Games and the Nobel Prize), while many award statues are depicted in gold (such as the Academy Awards, the Golden Globe Awards the Emmy Awards, the Palme d'Or, and the British
Academy Film Awards).
Medieval kings were inaugurated under the signs of sacred oil and a golden crown, the latter symbolizing the eternal shining light of heaven and thus a Christian king's divinely inspired
authority. Wedding rings are traditionally made of gold; since it is long-lasting and unaffected by the passage of time, it is considered a suitable material for everyday wear as well as a
metaphor for the relationship. In Orthodox Christianity, the wedded couple is adorned with a golden crown during the ceremony, an amalgamation of symbolic rites.
The symbolic value of gold varies greatly around the world, even within geographic regions. For example, gold is quite common in Turkey but considered a most valuable gift in Sicily.
Toxicity
Pure gold is non-toxic and non-irritating when ingested[33] and is sometimes used as a food decoration in the form of gold leaf. It is also a component of the alcoholic drinks Goldschläger,
Gold Strike, and Goldwasser. Gold is approved as a food additive in the EU (E175 in the Codex Alimentarius).
Soluble compounds (gold salts) such as potassium gold cyanide, used in gold electroplating, are toxic to the liver and kidneys. There are rare cases of lethal gold poisoning from potassium
gold cyanide.[34][35] Gold toxicity can be ameliorated with chelating agents such as British anti-Lewisite.
Carat (purity) ChipGold Colloidal gold White gold Rose gold Black gold Gold as an investment Gold coin Precious metal Digital gold currency Hallmark
Altay Mountains Commodity fetishism Fool's Gold Roman mining Roman engineering Gold fingerprinting Prospecting GPAA
Bibliography
Faulk W, Taylor G (1979) An Immunocolloid Method for the Electron Microscope Immunochemistry 8, 1081–1083.
Kodak (2006) Toning black-and-white materials. Technical Data/Reference sheet G-23, May 2006.
Roth J, Bendayan M, Orci L (1980) FITC-Protein A-Gold Complex for Light and Electron Microscopic Immunocytochemistry. Journal of Histochemistry and Cytochemistry 28, 55–57.
World Gold Council, Jewellery Technology, Jewellery Alloys
Los Alamos National Laboratory – Gold Gold Look up gold Getting Gold 1898 book
Technical Document on Extraction and Mining of Gold Picture in the Element collection from Heinrich Pniok WebElements.com — Gold . Source: Wikipedia
GOLD:
THE INTRINSIC VALUE
Intrinsic Value Investing
When it comes to books written about investing in the stock market, two of the classics are "Security Analysis" and "The Intelligent Investor", both of which were written by Benjamin Graham
and published in 1934 and 1949 respectively. Graham was a very successful investor in his own right, but is also well known as the mentor of Warren Buffett. Buffett built on the foundations
provided by Graham's investment philosophy by adding a qualitative dimension to the completely quantitative approach adopted by his teacher. However, the basis of the success of these
stock market legends was essentially the same - the realisation that the "intrinsic value" of a company was independent of its market price.
According to Graham, the market does not determine value. It is a "voting machine" in which countless people register choices that are the product partly of reason and partly of emotion. For
most stocks the market tells you every minute of every day what it thinks those stocks are worth. The price that the market assigns may be much higher, much lower, or approximately equal to
the intrinsic value. It is this difference between market price and intrinsic value which provides opportunities to investors astute enough to recognise it - the greater the difference the greater
the opportunity. However, an investor who allows himself to become so concerned by a falling market price that he sells out has blown any advantage he may have had. "You are neither right
nor wrong because the crowd disagrees with you".
The above thinking has been shown to work with phenomenal success when applied to stock market investment, but can it also be applied to investing in gold ? The intrinsic value of a stock
can be determined using quantitative measures such as profit, net working capital, cashflow, and net tangible assets, and qualitative considerations such as the strength of the company's
management. However, does gold have an intrinsic value which can be different from its market price and, if so, how could we go about calculating it ?
The Intrinsic Value of Gold
Supply Considerations
With such an enormous number of variables affecting its price, including the emotional response of individuals and the whims of politicians throughout the world, how can we possibly forecast
a future dollars per ounce gold price?
When there is an imbalance in supply versus demand, prices adjust to correct that imbalance. For example, if demand exceeds supply then prices will increase to the point where demand
reduces or supply increases, thus correcting the imbalance. Because the "load" is forever changing, prices are continually adjusting. Vronsky's essay on gold's supply/demand dynamics in the
"Analysis" section of the Gold Eagle website discusses the imbalance which has existed in the gold market for some time, with commercial demand greatly outstripping worldwide production.
Had a similar situation prevailed with any other commodity then soaring prices would undoubtedly result. However, the fundamental difference between gold and all other commodities is that
gold is not consumed, it is accumulated. Nearly 100% of all the gold mined in the history of the world forms part of today's aboveground gold stock. The total amount of this aboveground stock
(currently around 120,000 tonnes) is an available source of supply at any time. During the past few weeks we have had some news regarding gold supply which has supposedly caused some
fluctuations in the gold price. Firstly, Switzerland announced that it would sell some of its gold reserves (about 400 tonnes over a 10 year period). Secondly, the Busang gold deposit, which
had been reported to contain up to 200 million ounces of gold, is now thought to be worthless. One event added future gold supply to the market whilst the other removed it. In my opinion
both events were just "noise" as the amount of gold involved was trivial in comparison to the total aboveground supply of gold.
Another important point to note regarding the aboveground gold stock is that it increases at a fairly constant rate of around 1.7% per annum (during the last 50 years the largest annual
increase was 2.1% whilst the smallest was 1.4%). Irrespective of what technological and political changes occur in the future, or how many more Busangs (real or otherwise) are discovered, it
is reasonable to assume that the total supply of gold will continue to grow at an average rate of 1.7% per annum. In fact, technological improvements and vast new discoveries will be needed
to maintain this growth rate.
Estimating a Future Gold Price
In other words, confidence in US dollars is currently at a historic high or, put another way, gold is at its lowest levels in 25 years relative to the US dollar.
Further to the above we should be able to estimate, with a fair degree of accuracy, what the aboveground gold stock will be at some time in the future. It should also be possible to estimate
the future commercial (fashion jewelry, industry, etc.) demand for gold. However, these considerations are only a small part of the equation. Much of the aboveground gold stock is held for
monetary purposes and the willingness of the owners of this gold to sell at a particular price is dependent upon countless economic, political and psychological concerns. The willingness of
others to purchase gold for monetary reasons at a certain price is dependent upon similar considerations. With such an enormous number of variables affecting its price, including the
emotional response of individuals and the whims of politicians throughout the world, how can we possibly forecast a future dollars per ounce gold price? Yet another problem, in fact the very
heart of the problem in forecasting a future gold price, is that we measure the price in terms of something which is constantly changing, that is, the US dollar (or any other national currency).
Every day the US dollar changes its character due to changes in its quantity and quality, with its true value linked to something as fragile and fluctuating as faith in the financial and political
system.
Although we cannot reliably estimate a future gold price, what we can do is calculate the relative values of gold and US dollars using the Fear Index. The Fear Index was developed by James
Turk as a means of numerically expressing the competitive relationship between gold and dollars, and is calculated as follows :
Fear Index = (US Gold Reserve) X (Market Price of Gold)
M3
Currently, with the gold price around $350 per ounce, M3 (total US money supply) of $5024.5 billion as of weekend 3rd March 1997, and a US gold reserve of 261.8 million ounces, we can
calculate the Fear Index to be 1.82%.
The lower the Fear Index the higher the value of dollars relative to gold, that is, the higher the level of confidence (or the lower the level of fear) in paper currency. To put the above
calculated figure of 1.82% into perspective, this is the lowest value for the Fear Index since 1972. In fact, the last 3 months have seen the Fear Index move below 2% for the first time since
1972. In other words, confidence in US dollars is currently at a historic high or, put another way, gold is at its lowest levels in 25 years relative to the US dollar.
I would also be interested in calculating a modified Fear Index where the total above ground stock of gold is substituted for the US Gold Reserve. However, this will have to be the subject of a
separate discussion.
Gold Investment Based On Value
The above discussion suggests that although we cannot estimate a future gold price with any degree of accuracy, we can at least determine that gold is currently very cheap and should be
purchased by investors seeking value. However, I believe that many people who identify that gold currently represents excellent value will lose money in their attempts to profit from this
realisation. This is because they will attempt to profit from their well-founded conclusion via short term trading. The following quote from Benjamin Graham was written about stock
speculation, but it can be equally well applied to the short term trading of commodities : "....speculation is largely a matter of A trying to decide what B, C and D are likely to think - with B, C
and D trying to do the same". It is likely that many of the investors who purchase gold or gold related investments based on sound fundamental reasoning will sell out at a loss because they
were unable to predict what others would do in the short term.
Asset Management: Odit Investment Strategy for Asset Enhancement.
1- Odit uses Arbitrage, simultaneous buying and selling of securities in different markets
with the purpose of profiting from the price difference in the markets, under absolutely
controlled circumstances only.
2- Odit strongly avoids Derivatives, a volatile financial instrument whose value depends
on or is derived from the performance of a secondary source such as an underlying bond
or currency.
3- Odit hedges, making arrangements to safeguard against loss on an investment, by the
use of various techniques: avoiding overvalued securities and potential bubble bursts,
having in mind the intrinsic value of securities, watching historical lows of strong
fundamentals securities, etc.
4- Odit strongly avoids Leverage, the use of credit (such as margin) to improve one’s
speculative ability. Odit prefers to increase the rate of return on an investment, by the use
of less risky methods.
5- Odit strongly avoids Short Sale, a sale of a security that the seller does n’t own (if the
seller does own the security it is said to be in a “long position”), and that the seller must
borrow. The only exception is when a security is very obviously near of a bubble burst
situation. Usually, the technique is employed when prices are likely to drop. If the price of
the security does drop, the seller can make a profit on the price of the shares sold versus
the price of the shares bought to pay back the borrowed shares.
6- Odit can invest up to 3/10 of the assets in Aggressive Growth concerning exclusively
undervalued securities. Odit Invests in equities expected to experience acceleration in
growth of earnings per share. Odit hedges watching the best opportunity on undervalued
securities. However Odit avoids shorting of equities unless there are obvious and strong
expectation of earnings disappointment.
7- Odit can invest, alternatively, up to 1/10 of the assets in Distressed Securities, buying
equity, debt, or trade claims at deep discounts of companies in or facing bankruptcy or
reorganization, when there is strong indications that Odit can profit from the market’s lack
of understanding of the true value of the deeply discounted securities and because the
majority of institutional investors cannot own below investment grade securities.
8- Odit can invest, alternatively, up to 1/10 of the assets in Emerging Markets, investing in
equity or debt of emerging (less mature) markets which tend to have higher inflation and
volatile growth. Short selling is not permitted in many emerging markets, and, therefore,
such type of hedging is often not available.
9- Odit can invest, alternatively, up to 1/10 of the assets in Fund of Funds which could be
mixes and matches hedge funds and other pooled investment vehicles. This blending of
different strategies and asset classes aims to provide a more stable long-term
investment return than any of the individual funds. Volatility depends on the mix and ratio
of strategies employed.
10- Odit can invest up to 3/10 of the assets in Income. Investing with primary focus on
yield or current income rather than solely on capital gains. May utilize leverage to buy
bonds and sometimes fixed income like RE Notes in order to profit from discounted
purchase, principal appreciation and interest income under absolutely controlled
circumstances only.
11- Odit can invest, alternatively, up to 1/10 of the assets in Macro. Aims to profit from
changes in global economies, typically brought about by shifts in government policy which
impact interest rates, in turn affecting currency, stock, and bond markets. Participates in
all major markets -- equities, bonds, currencies and commodities -- though not always at
the same time. Uses leverage and derivatives to accentuate the impact of market moves,
under absolutely controlled circumstances only.
12- Odit can invest, alternatively, up to 1/10 of the assets in Market Neutral - Arbitrage.
Attempts to hedge out most market risk by taking offsetting positions, often in different
securities of the same issuer.
13- Odit can invest, alternatively, up to 1/10 of the assets in Market Neutral - Securities
Hedging. Invests equally in long and short equity portfolios generally in the same sectors
of the market. Market risk is greatly reduced, but effective stock analysis and stock picking
is essential to obtaining meaningful results. Leverage may be used to enhance returns,
under absolutely controlled circumstances only.
14- Odit can invest, alternatively, up to 1/10 of the assets in Market Timing, allocating
assets among different asset classes depending on the manager’s view of the economic
or market outlook.
15- Odit can invest, alternatively, up to 1/10 of the assets in Opportunistic. Investment
theme changes from strategy to strategy as opportunities arise to profit from events such
as IPOs, sudden price changes often caused by an interim earnings disappointment,
hostile bids, and other event-driven opportunities. May utilize several of these investing
styles at a given time and is not restricted to any particular investment approach or asset
class.
16- Odit strongly avoids Short Selling: Sells securities short in anticipation of being able to
re-buy them at a future date at a lower price due to the manager’s assessment that the
securities are overvalued, or the market, or in anticipation of earnings disappointments
often due to accounting irregularities, new competition, change of management, etc.
However, Odit can invest, alternatively, up to 1/10 of the assets in some opportunities,
under absolutely controlled circumstances.
17- Odit can invest up to 3/10 of the assets in Value, under certain circumstances. Usually
Odit Invests in securities perceived to be selling at deep discounts to their intrinsic value
or their potential worth. Such securities may be out of favor with analysts. Long-term
holding, patience, and strong discipline are often required until the ultimate value is
recognized by the market.
Should you decide to contact us for any business opportunity CLICK HERE
Asset Management For Accredited Investors Only. Minimum Amount Per
Account: One Million USD. Unless otherwise agreed the standard holding period is 18 months.
Odit Asset Management is the only global group who charge no management fees
(usually 2 % or larger fee, based on the amount of assets under management).
Odit Asset Management is the only global group who create a Limited Liability Company
for the asset management of each Accredited Investor, as well as the only who appoint the
Accredited Investor as Supervisor for the financial operation, treasury, investment accounts
and accountability control of such Limited Liability Company.
Odit Asset Management is the only global group whose income rely solely on the success
of the Client, the Accredited Investor, regarding the investment made. Odit considers
extremely trustworthy the quality of the investment decisions made by Odit's experts, so,
should Odit is not able to provide to the Accredited Investor an Annual Return, the income
(contingent fee: performance fee or incentive fee) of Odit will be ZERO.
Odit Asset Management Annual FEE will be contingent, based solely on the performance
of investments. The only incentive of Odit comes from the creation of wealth for the
Accredited Investor. That is to say that if there is no Annual Return, Success, Profit, to the
benefit of the Accredited Investor, there will not be any FEE paid to the order of Odit.
Contingent FEE Structure:
-- Annual Profit up to 20 % >>>>>>>>>>>>>>>>>>> Contingent FEE: 20% of Annual Profit
-- Annual Profit larger than 20 % >>>>>>>>>>>>>>> Contingent FEE: 25 % of Annual Profit
-- Annual Profit larger than 35 % >>>>>>>>>>>>>>> Contingent FEE: 30 % of Annual Profit
-- Annual Profit larger than 50 % >>>>>>>>>>>>>>> Contingent FEE: 35 % of Annual Profit
-- Annual Profit larger than 65 % >>>>>>>>>>>>>>> Contingent FEE: 40 % of Annual Profit
-- Annual Profit larger than 80 % >>>>>>>>>>>>>>> Contingent FEE: 45 % of Annual Profit
-- Annual Profit larger than 100 % >>>>>>>>>>>>>> Contingent FEE: 50 % of Annual Profit
Note: This is neither an offer nor an advertisement. See disclaimer at left column.
Should you decide to contact us for any business opportunity CLICK HERE
Asset Management For Accredited Investor. Minimum $1 Million USD. No FEE On Assets. Top Security And Secrecy. We Manage Accredited Investors' s Assets. Minimum Investment 1 Million
USD. No Fee, Profit Share Only. Secrecy. We Manage Assets Of Accredited Investors. Minimum 1 Million USD. No Fees. Profit Share Only. Top Secrecy. Safe. High Potential Profit. No
Management Fee. Potential Profit Above 300%. Minimum $1 Million USD. Secret & Safety. High Profit For Latin American Investors. Management of Assets From $1 Million USD. No
Management Fee. Secrecy. Safe Global Asset Management Service. Minimum $1 Million USD. Profit of 300 %. No Management Fee. Secrecy. Global Money Manager Provide High Profit.
No Management Fee. Minimum $1 Million USD. Secret, Safe, High Profit. The Highest Profit At The Lowest Risk. Minimum $1 Million USD. No Management Fee. Secret. You Control Money.
We Provide Wisdom, You Control The Money. No Management Fee. Minimum $1 Million USD. High Profit, Secrecy, Safe. Potential Profit Of 300 % At Lower Risk. Invesment Wisdom, No
Management Fee. Minimum $1 Million USD. Secrecy. Our Only Incentive Is Investor's Success. No Management Fee. Minimum 1 Million USD. High Potential Profit. Safe. No Management
Fee For Global Investors. Minimum 1 Million USD. The Highest Profit At The Lowest Risk. Secrecy. Separate Accounts For H.N.W. Investors. No Management Fee. Minimum 1 Million USD.
Very High Potential Profit. A Limited Liability Company Per Account. High Net Worth Investors. No Management Fee. Minimum 1 Million USD. Up To 300 % Profit In The Holding Period.
Minimum 1 Million USD. No Management Fee. High Net Worth Investors. Investor Controls The Investment Task. We Provide The Wisdom. No Management Fee. Minimum 1 Million USD.
Safe. Manejo De Activos Para Inversionistas. Alta Ganancia Y Al Menor Riesgo. No Cobro Por Manejo. Secreto Total. Ganancia Potencial Muy Alta, Bajo Riesgo. No Cobro Por El Manejo De
Las Inversiones. Total Secreto Y Seguridad. Alta Ganancia Para Inversionista Latino. Operaciones Seguras Y Secretas. No Cobro Por Manejo De Inversiones. Hasta 300 % De Ganancia
Durante Tenencia. Absoluto Secreto Y Menor Riesgo. No Cobro Por Manejo De Inversiones.
Obtenga La Mayor Ganancia En Inversiones. No Cargo Por Manejo Experto, Seguro y Secreto.
Get The Highest Profit From Investment. Expert Asset Management. No FEE. Secret, Safe. You Control The Funds.
Usted Controla Fondos.
Market Timing Strategies
Market timing sounds easy. These strategies involve moving between risky assets, such as stocks or
bonds, and less risky short term securities like Treasury Bills based on "technical", "fundamental" or
"quantitative" analyses. Reduced to its core proposition, market timing means "buying low and selling
high." Identifying high or "overvalued" versus low or "undervalued" is the complicated thing. Since
riskier assets usually have higher returns over longer periods, staying "out of the market" or invested in
less-risky short term securities can mean a considerable sacrifice of overall return.
It was Issac Newton who in 1768, after being wiped out in one of the many stock market crashes of his
era, said:
"I can calculate the motions of the heavenly bodies but not the movements of the stock market".
His lesson has been learned by most active investors since then. The pricing of long term financial
assets like stocks or bonds involves all components of the human condition; fear, greed, optimism,
pessimism, crowd psychology. Politics, economics, revolution, natural disaster, technology also have
impact.
Growth Stock
A stock that appears attractive because of potential earnings growth by its company.
A stock may be considered a "buy" as a growth stock if it's P.E.G. ratio is relatively low among companies in its industry.
Compare value stock.
High Net Worth Individual - HNWI
A classification used by the financial services industry to denote an individual or a family with high net worth. Although there is no precise definition of how rich somebody must be to fit into
this category, high net worth is generally quoted in terms of liquid assets over a certain figure. The exact amount differs by financial institution and region. The categorization is relevant
because high net worth individuals generally qualify for separately managed investment accounts instead of regular mutual funds.
The most commonly quoted figure for membership in the high net worth "club" is $1 million in liquid financial assets. An investor with less than $1 million but more than $100,000 is
considered to be "affluent", or perhaps even "sub-HNWI". The upper end of HNWI is around $5 million, at which point the client is then referred to as "very HNWI". More than $50 million in
wealth classifies a person as "ultra HNWI".
HNWIs are in high demand by private wealth managers. The more money a person has, the more work it takes to maintain and preserve those assets. These individuals generally demand (and
can justify) personalized services in investment management, estate planning, tax planning, and so on. High net worth individual
In private banking, a high-net-worth individual (HNWI) is a person with a high net worth. Typically these individuals are defined as having investable assets (financial assets not including
primary residence) in excess of US$1 million. [1][2] The number of high net worth individuals worldwide is estimated at 9.5 million. HNWI wealth totals US$37.2 trillion, representing an 11.4%
gain since 2005.[1]
UHNWI
Banking and Finance
Retail
UHNWI refers to Ultra-High-Net-Worth Individuals, individuals or families who have at least US$30 million[1][2] in investable assets. The number of ultra high net worth individuals worldwide is
estimated at about 95,000.[1] The exact dividing lines depend on how a bank wishes to segment its market; for example, the term Very High Net Worth Individuals [3] can refer to those with
assets between $5 million and $50 million, with Ultra High Net Worth Individuals only those with above $50 million.
Banking and Finance
Most global banks, such as Credit Suisse, Deutsche Bank or UBS, have a separate Business Unit with designated teams consisting of client advisors and product specialists exclusively for
UHNWI. Because of their extreme high net worth and the way their assets were generated, these clients are often considered to have semi-institutional or institutional like characteristics.
Retail
Brands in various sectors, such as Bentley, Maybach and Rolls-Royce in motoring, actively target UHNWI and HNWI to sell their products. Figures gathered by Rolls-Royce suggest there are
80,000 people in the UHNWI category around the world.[4] They have, on average, eight cars and three or four homes. Three-quarters own a jet aircraft and most have a yacht.
Source: Wikipedia . High Net Worth Investors. Due Diligence For High Net Worth Investors
I just found a resource on conducting hedge fund due diligence for high net worth portfolios. It is not a complete guide to conducting this type of due diligence but I think they brought up
many good points within this article. A hedge fund investment should be utilized to improve the efficient frontier of an accredited investor’s portfolio and protect against downside risk by the
allocation of a segment of the portfolio appropriate to the client’s risk tolerance. Both quantitative and qualitative due diligence are essential to protect a client’s investment against fraud,
divergence from stated strategy, and/or poor investing.
A fund of hedge funds investment can offer diversification, and innate due diligence, within the hedge fund investment by limiting the allocation that any single fund can hold. A fund of funds
downside comes from the layering of fees and the more apparent lack of transparency that’s prevalent with many funds. In addition, the preeminent hedge funds are often hard to locate
because they are often available by referral only.
The correlation of a hedge fund with traditional benchmarks is a vital component in due diligence. One must also be aware that although stated pre-tax returns of a fund may be appealing,
short-term trading can destroy the tax efficiency which is critical to high net worth investors. Research into the operation of the hedge fund manager and their performance in varying markets
and well as tactical ongoing analysis of the fund’s performance are imperative to quality due diligence. Hedge Fund Due Diligence. Hedge Fund Due Diligence Guide
New hedge funds are launched daily, which is constantly increasing the importance of conducting formal hedge fund due diligence and determining which hedge funds are appropriate for
you or your firm to invest in becomes increasingly important. Every person or company is going to have different investment horizons, risk tolerances, strategy preferences, etc. so it is usually
more valuable to know the basics of how to evaluate a hedge fund then it is to hear someone say which hedge funds are "the best." I think giving hedge fund recommendations even to the
degree of suggesting exactly how to evaluate a hedge fund is too close to finance advice to put online but the SEC website does provide this advice in conducting a minimum level of hedge
fund due diligence before investing:
Read a fund's prospectus or offering memorandum and related materials
Understand how a fund's assets are valued
Ask questions about fees
Understand any limitations on your right to redeem your shares
Research the backgrounds of hedge fund managers
Don't be afraid to ask questions
Hedge Funds Due Diligence Articles, Guides & Tools
I have been collecting the hedge fund due diligence resources below over the past 18 months and I'm posting them here in hopes that they will a few people construct a relatively holistic view
of what hedge fund due diligence is about along with provide a few example RFPs and tools to use while conducting due diligence on hedge fund managers. This is not an exhaustive list and
the information anywhere on this blog or within the linked sites should not be treated as investment advice or a substitute for financial advice of any type. This is simply an aggregation of
online hedge fund due diligence resources. I have only listed 21 resources here so far, I hope to make this more robust, if you have something you think should be added here please email me
at Richard@RichardCWilson.com.
Hedge Fund Due Diligence Articles
Hedge Fund Regulation Corner | Compliance & Law Notes
SEC on Hedge Fund Regulation
Hedge Fund Risk Analysis
Hedge Fund Fraud | SEC & Hedge Funds Fraud Case
Hedge Fund Due Diligence Tips
The Importance of RFPs in conducting hedge fund due diligence
Hedge Fund Manager Due Diligence
Due Diligence for High Net Worth Clients
Investment Due Diligence
Risks of hedge fund investing & portfolio management
How long should hedge fund due diligence take?
Institutional Hedge Fund Risk Controls
Hedge Fund Due Diligence Questions
Importance of transparency and hedge fund due diligence
Hedge Fund Due Diligence Whitepapers & PowerPoints
Whitepaper on Hedge Fund Operational Risk & Transparency
Alpha through rigorous hedge fund due diligence
In-depth hedge fund risk & due diligence PowerPoint
White Paper on Mitigating Operational Risk During Hedge Fund Due Diligence
Hedge Fund Due Diligence Tools
FINRA Broker Check
Hedge Fund of Fund RFP Example - Used in Institutional Due Diligence Processes
HFN's Guide to Hedge Fund Due Diligence
Book on Hedge Fund Due Diligence
Fund of Fund Due Diligence
Additional Hedge Fund Guide Sections
Hedge Fund Strategy
Hedge Fund Marketing
Hedge Fund Terms
Articles Related to "Hedge Fund Due Diligence"
1. Guide to Investing
2. Hedge Fund Risk Management
3. Hedge Funds FAQ
4. Request for Proposal
Permanent Link: Hedge Fund Due Diligence
Tags: Hedge Fund Due Diligence, Hedge Funds Due Diligence, Hedge Fund Manager Due Diligence, Hedge Fund RFP, Hedge Fund Operational Due Diligence, Hedge Fund Due Diligence
Questionnaire
Link to This Resource: Hedge Fund Due Diligence http://richard-wilson.blogspot.com/2008/03/hedge-fund-due-diligence.html
Hedge Fund Strategy
Hedge Funds Strategy Guide
The 10-15,000 hedge funds now being managed throughout the world use between 200-400 different hedge fund strategies. How can you keep these all straight? The short answer is you can't,
but I have started compilining a list of hedge fund strategy definitions here below. Let me know if you are looking for something and can't find it here.
Hedge Fund Strategy Explanations
Emerging Markets
Equity Long Short
Fixed Income Arbitrage Investment Strategy | 1 Page Guide
130/30 Hedge Fund Resources
Global Macro
Global Macro Hedge Funds
Multi Strategy Hedge Fund
Sustainable Investing
Event Driven Hedge Funds
Green Hedge Funds
Art Investment Strategy
African Hedge Funds
130/30 Hedge Funds See Rapid Growth
Top 5 Hedge Fund Strategies
Hedge Fund Investment Strategies
Litigation Funding Hedge Fund Strategy
Short Selling
Emerging Markets Hedge Funds
Risk Arbitrage Hedge Fund Strategy
Hedge Fund Litigation Funding List
Warrant Arbitrage
Arbitrage Investment Strategy
More Hedge Fund Guides
Hedge Fund Terms
Hedge Fund Marketing
Hedge Fund Due Diligence
Articles Related to Hedge Fund Strategy:
1. Hedge Fund Investment Strategies
2. Multi Strategy Hedge Fund
3. Top 5 Hedge Fund Strategies
4. Hedge Fund Jobs
5. Hedge Fund Managers
6. Hedge Fund Research
Permanent Link: Hedge Fund Strategy
Tags: hedge fund strategy, hedge funds strategy, hedge fund strategy guide, hedge fund strategy explanation, hedge funds strategies, hedge fund strategy information, guide to hedge fund
strategies, hedge fund manager strategy, hedge fund investing strategy, information on hedge fund strategy, hedge fund strategy research, hedge fund strategy due diligence
Link to This Resource: Hedge Fund Strategy
Fund of Hedge Funds Fund of Hedge Funds Update
There has been a lot of talk over the last 2 years and 2 quarters particularly about the death of fund of hedge funds (fofs). Like much other doomsday discussions regarding the hedge funds I
don't see these fund of fund groups going anywhere. In fact, I still think there is room for further growth in the fund of fund arena as demand from internationally-based investors is increasing as
most fund of funds are still currently designed for U.S or EU investors.
The main reason why I think hedge fund of funds will be always be around is that many investors have just enough assets to play around in hedge funds. This requires them to either allocate
their funds to a friend or close business partner who runs a single strategy fund or diversify their entry to the hedge fund market by investing in 3-12 hedge funds at one time. Some of the most
popular retail products these days are all in one portfolios whether they be lifestyle portfolios, all cap separate managed account products, or retirement focussed growth & income mutual
funds. Many investors would rather pay an extra layer of 1% fees in return for a no hassles lower risk exposure to the hedge fund industry.
Another reason why fund of hedge funds will be around for a long time is that 55% of all fof assets are from institutions. The percentage of fund of funds used in a institutions total portfolio is on
the rise, not the decline. This class of investors generally takes a longer view than high net worth individuals or family offices. It would take several catastrophic events in consecutive quarters
or years to stall or create a small decline in the institutional use of hedge fund of funds.
Read dozens of additional articles like this within the guide to Hedge Fund Terms and Definitions.
- Fund of Hedge Funds
Articles Related to "Fund of Hedge Funds":
Fund of Funds
Hedge Fund Due Diligence
Hedge Fund Performance
9 Hedge Fund Database Tips
Preqin's Hedge Fund Resources
Hedge Fund Employment
CTA Directory
Hedge Fund Database
Fund of Fund Database
Hedge Funds
Related Terms: Fund of Hedge Funds, FoF, Hedge Fund of Fund, Hedge Fund of Funds, Fund of Hedge Funds, Hedge Fund Portfolio, Portfolio of Hedge Funds, fund of funds hedge funds, fund
of funds hedge fund, a hedge fund of funds, funds of hedge funds portfolio, top hedge fund of funds, best fund of hedge funds, top fund of hedge funds, best hedge fund of funds, fof, fund of
hedge fund managers, fund of hedge funds
Below are a collection of useful and interesting news pieces, articles and videos related to hedge funds:
Link 1: Assets of a Brazilian hedge fund sharply drops: Ciano Investimentos Gestao de Recursos Ltda.‘s flagship hedge fund lost 95 percent of its assets to withdrawals after founder Ilan
Goldfajn, a former central bank director, left the company.
Investors withdrew 197.4 million reais ($85 million) Ciano 60 Hedge Fundo de Investimento Multimercado since Nov. 11, a day after Goldfajn departed. The fund’s value plunged to 10.3
million reais as of Nov. 21, according to the Web site of Brazil’s securities regulator, CVM.
“Some investors withdrew funds because of my decision to leave Ciano,” Goldfajn, 42, said in a telephone interview from Rio de Janeiro. “Because of my departure, we waived a 10 percent
redemption fee.” Source
Link 2: Hedge Funds Search for Assets in Japan. Japan's Ashiya city has been home to the nation's industrial titans since samurai ruled the land more than a century ago. Now it's a feeding
ground for hedge funds tapping the wealth of new multi-millionaires like Kunihisa Sagami.
Sagami, founder of mail-order cosmetics and jewelry supplier Epix, is one of the residents of the gated enclave overlooking the port city of Kobe who are among the highest taxpayers in
Japan. They're the elite in a nation where households hold a combined $15 trillion in financial assets -- more than the annual gross domestic product of the U.S. Source
Link 3: Texas Hedge Fund Being Liquidated. Parkcentral Capital Management, an investment firm that manages money for the family of Ross Perot, is liquidating a fixed-income hedge fund
because it is “no longer viable.”
This year through October, Parkcentral Global Hub’s assets fell as much as 40 percent, to $1.5 billion. The fund is selling its remaining holdings to pay creditors, Eddie Reeves, a spokesman,
said Tuesday. Mr. Perot and members of his family were the fund’s biggest investors.
“Parkcentral Global has been impacted dramatically by the unprecedented upheaval of the capital markets in general and the freezing of credit markets in particular,” Mr. Reeves said. ”The
fund is no longer viable.” Source
Link 4: Spitzer's wife to join a hedge fund. The wife of former New York Gov. (and Sheriff of Wall Street) Eliot Spitzer is going to work on Wall Street.
Silda Wall Spitzer, who endured the humiliation of her husband’s resignation amidst a prostitution scandal in March, has joined hedge fund Metropolitan Capital Advisors (which is technically
on Madison Avenue), New York Magazine reports. The $300 million firm is run by CNBC personality Karen Finerman, whose husband, Lawrence Golub, is a longtime friend of Eliot Spitzer and
contributor to his campaigns.
Silda Spitzer will help “recruit new investors” in her new job, which she started last month. Source
Link 5: Hedge Fund Pacificor Sued. Pacificor has been sued by the former owners of a mortgage lender the California hedge fund bought.
John and Kitty Gaiser have sued the Santa Barbara-based firm and the estate of its former manager, Michael Klein, seeking $30 million. The Gaisers’ lawsuit says that Pacificor “misused a
position of trust and control in order to attempt to take control of and acquire—without compensation—John and Kitty Gaiser’s ownership of Quality Home Loans,” the Gaisers’ law firm said in a
statement. Source
Link 6: Hedge fund assets stuck within Lehman. Several companies reliant on four US hedge funds face collapse because the funds cannot access shares and loans held at the London arm of
Lehman Brothers, the collapsed bank.
The four funds – whose names were kept secret in a High Court ruling this week – claimed that they were likely to close in mid-December if they failed to get access to information about their
assets frozen at Lehman. The funds made an unsuccessful effort to force the administrators of Lehman, four PwC partners, to give them details of their assets and how much they owe to
Lehman.
Source
Related to Thanksgiving Hedge Fund Linkfest Roundup
Free Online Hedge Fund Videos
Careers & Employment Guide
Hedge Fund Tracker Tool
Fund Marketing and Sales Advice
Top Hedge Fund Managers
Hedge Fund Holdings & Securities Analysis
Hedge Fund Terminology
Geographical Guides
Hedge Fund Startup Tools
Tags: hedge fund, hedge funds, Thanksgiving, Thanksgiving Day, Thanksgiving 2008, Thanksgiving News, hedge Fund Thanksgiving, Investment Thanksgiving, Thanks Giving
Link to This Resource: Hedge Fund
GLG Partners Hedge Fund Update
GLG Partners Fund
GLG Partners Hedge Fund Update
Just a quick note to let you know that our team has updated the Hedge Fund Tracker notes for GLG Partners.
To read the updated profiles see this link: GLG Partners Hedge Fund Tracker Profile Notes
Related to GLG Partners Hedge Fund Update
Hedge Fund Tracker Tool
Fund Marketing and Sales Advice
Top Hedge Fund Managers
Free Online Hedge Fund Videos
Careers & Employment Guide
Tags: GLG Partners, Hedge Fund Notes, GLG Funds, GLG Fund, GLG Partners New York, GLG Partners Assets, GLG Partners AUM, GLG Hedge Fund manager, GLG Europe, GLG Australia
Link to This Resource: GLG Partners Hedge Fund Update
Top 4 Hedge Fund Industry Fears | Market Insights
Hedge Fund Fears
The Top 4 Hedge Fund Fears
Over the last 3 months and a series of conversations with hedge fund managers, prime brokerage professionals, administrators and marketers it seems there are 4 big fears in the industry right
now.
Top 4 Hedge Fund Fears
A flat or highly volatile market for a period of more than 18-24 months - effectively wiping out those hedge funds which were hanging on for those greener pastures of another bull market.
Long-term deterioration of leverage of almost any type. While many hedge funds already use no or close to no leverage many others use large amounts of it and many funds would be
hampered if new regulations are put into place which severely limit their access to it. Read an article on this topic here.
Desperate hedge fund managers committing enough fraud to scare off a large percentage of the High net worth and ultra high net worth investor base. There is article on my site on ethics
located here.
Overbearing regulation which pushes hedge fund activity into Canada, over to London and across the world away from New York. The industry is already suffering large redemption losses and
regulation done the wrong way could stifle further innovation or at least push even more of it offshore. As the recently hedge fund testimony showed, many hedge funds are open to some forms
of regulation or over-sight but these must be done in ways which are sensitive to the intellectual knowledge and security disclosure concerns specific to this industry. Listen to the recent
congressional testimony by hedge fund managers by clicking here.
Other interesting points that have come out of talking to hedge funds - most expect the markets to stay flat or negative for an additional 6-9 months and the majority see this to be a huge
opportunity for positioning their fund for explosive growth in 2010 and 2011.
Related to Top 4 Hedge Fund Industry Fears | Market Insights
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Tags: Hedge Fund Fears, Hedge Fund Market, Hedge Fund Markets, Hedge Fund Market performance, Hedge Fund Frauds, Hedge Fund leverage, Use of Leverage By Hedge Funds
Link to This Resource: Top 4 Hedge Fund Industry Fears | Market Insights
Managers | Hedging Skills
Japanese Hedge Funds
Japanese Hedge Fund Managers| Notes
It would seem that choppy markets in Japan over the past several years is now helping hedge funds in this region navigate the current financial crisis. Most of the funds I know which run funds
focusing on Japanese securities also run diversified Asia or China funds which have done very poorly, I would be curious to see if those managers who run both Japan-specific funds as well as
China funds faired better than the average fund in China. Here is the article excerpt:
Japan's hedge fund industry, dominated by so-called long-short funds that bet on rising and falling stock prices, will attract capital on signs they are starting to outperform peers, Credit Suisse
Group AG said.
The 81-fund Eurekahedge Japan Long-Short Equities Index fell 11 percent this year through October, compared with a 21 percent drop for an index that tracks more than 1,000 global long-
short hedge funds and a 40 percent slide by the MSCI World Index, a global benchmark.
``Japanese long-short strategies have weathered reasonably well the market turmoil,'' Boris Arabadjiev, head of alpha strategies at Zurich-based Credit Suisse's asset management unit, said in
an interview in Tokyo yesterday. ``That relative performance has already started to attract capital, and we believe that it will continue to attract capital. We continue to be favorably disposed to
managers investing in Japan.''
This year has been the worst on record for hedge funds, an estimated $1.56 trillion industry, with the average fund losing 16 percent through October, according to data compiled by Chicago-
based Hedge Fund Research Inc. The industry saw net withdrawals of $62.7 billion in October, according to Eurekahedge Pte., a Singapore-based industry data provider. Read more...
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Tags: Japanese hedge Funds, Japanese Hedge Fund Managers, Japan Hedge Fund Industry, Japanese Managers, Japanese funds, Money management japan, long short funds in Japan
Link
Hedge Fund Marketing Tools Tools for Hedge Fund Marketers & 3PMs
I have created this page to list a collection of online hedge fund marketing tools available to professionals within the hedge fund marketing space. If you have a favorite tool or run a firm
which offers a tool for third party marketers please email me at Richard@HedgeFundGroup.org to discuss having it posted here.
Master Contact Database: The industry's leading master contact database containing details on over 20,700 alternative investment funds, CTAs fund of funds, etc.
Fund of Hedge Fund Database Fund of Hedge Funds Database which profiles 2,585 funds and is the most comprehensive database of its kind
Fund of Hedge Fund Directory: Directory of Funds of Hedge Funds
profiles 1,032 carefully selected funds of hedge funds and funds of CTAs
Preqin Hedge Fund Investor Databases: A complete investor database solution for hedge funds looking to raise capital across several distribution channels.
Capital Hedge Investor Databases: A complete investor database solution for hedge funds looking to raise capital across several distribution channels.
Email Newsletter Creation Tool: Aweber is the #1 provider of email newsletter creation and management services. Creating an email newsletter keeps you in front of your prospects and loyal
customers. Aweber offers a suite of low cost professional email newsletter templates and their how-to guides, quick online support and email tips make them a favorite of thousands of firms.
Click here now to see what Aweber offers.
Hedge Fund Database: Thorough database which contains comprehensive information on 3,169 single manager hedge funds.
Hedge Fund Directory: A less expensive and lighter collection of single hedge fund manager contact details.
CTA Database A source for managed futures data for the past 20 years and contains comprehensive data on 864 CTA programs.
CTA Directory A less expensive lighter version of the database above
Hedge Fund Asset Flow Reports Order reports to dig into where asset flows are coming and going within the hedge fund industry. Monthly reports available.
Articles related to Hedge Fund Marketing Tools:
1. Hedge Fund Marketing Guide
2. Marketing to Institutional Investors
3. Financial Public Relations
4. Email Newsletter Creation Tool
5. Sales Details
6. Third Party Marketing
7. Capital Introductions
8. Hedge Fund Seed Capital
9. Hedge Fund Media Exposure
10. Financial Advisor Marketing
Tags: Hedge Fund Marketing Tools,Hedge Fund Marketing Aides, Hedge Fund Sales Tools, Third Party Marketing Tools, Help with Hedge Fund Marketing, Hedge Fund Marketing Consultant
Link to This Resource: Hedge Fund Marketing Tools
Hound Dog
See the main articles on continuously compounded interest and dollar cost averaging.
Periodically and Continuously Compounded Interest
Back when Elvis was King and computers were scarce (and could that really be just a coincidence?) banks used to compound interest quarterly. That meant that four times a year they would
have an "interest day", when everybody's balance got bumped up by one fourth of the going interest rate... and bank employees would have to work late, going home all sweaty and covered
with ink. If you held an account in those days, every year your balance would increase by a factor of (1 + r/4)4.
Today it's possible to compound interest monthly, daily, and in the limiting case, continuously, meaning that your balance grows by a small amount every instant.
To get the formula we'll start out with interest compounded n times per year:
FVn = P(1 + r/n)Yn
where P is the starting principal and FV is the future value after Y years.
To get to the continuous case we take the limit as the time slices get tiny:
FV =
limit P(1 + r/n)Yn
n
We can simplify the right side by introducing a new variable, defining m = n/r
FV =
limit P(1 + 1/m)Ymr
m
=
P
[limit (1 + 1/m)m]Yr
m
The limit in the square brackets converges to the number e = 2.71828.... (In fact, Leonhard Euler may have thought of this limit as the definition of e, right around the time he named it "e"
after himself). So the formula becomes
FV = PeYr
This calculator lets you see how fast the formula converges.
Inputs
Starting Principal: $
Interest Rate: %
Years:
Future Value
Periodic compounding: P(1 + r/n)Yn for n equal to...
1 $
$
12 $
365 $
365 x 24 $
Continuous compounding:
PeYr $
Incidentally, if you know calculus then the continuous compounding formula has a natural interpretation. First let's replace the clunky "FV" notation, and write f(t) for the balance at time t (with
t measured in years). So
f(t) = Petr
Taking the derivative
d
dt
f(t) = d
dt
(Petr)
= rPetr
= r f(t)
In words, this is saying that
"at any instant the balance is changing at a rate that equals r times the current balance"
which of course is the definition of continuous compounding.
Does Dollar Cost Averaging Work?
Dollar cost averaging means investing a fixed amount at fixed intervals of time. That's a sensible approach, for example, if it means committing yourself to investing a fixed amount of your
salary every month toward your retirement.
However, some people also think you should dollar cost average a lump sum. For example, if you had $12,000 that you wanted to invest in a stock index fund, they would tell you to invest
$1000 per month over a year, rather than investing the whole amount immediately. The rationale is that market volatility should then work in your favor, because you will automatically be
purchasing more shares when the price is low, and fewer shares when the price is high.
As appealing as that theory is, its advantage looks like a myth, as this calculator shows. It uses market data to let you compare dollar cost averaging with lump sum investing for the start date
you specify.
Assumptions
$10,000 will be invested in a market investment, following two different strategies:
(a) the whole amount will be invested on the start date; and
(b) equal amounts will be invested at the start of every month for a year, during which the remaining cash will stay invested in a bank account at a guaranteed interest rate.
The market investment is an S&P 500 index fund with annual fees of 0.2%.
The bank account interest rate is %
Select Start Date
January
February
March
April
May
June
July
August
September
October
November
December
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976
1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950
Results
Investment Value After 12 Months
(a) Using Lump Sum Method: $
(b) Using Dollar Cost Averaging: $
Each strategy wins at least some of the time, but after a few runs you'll see that DCA is the statistical "dog", losing about two times out of three.
Of course, dollar cost averaging will win if your start date falls right before a dramatic crash (like October 1987) or at the start of an overall 12 month slump (like most of 2000). But unless you
can predict these downturns ahead of time, you have no scientific reason to believe that dollar cost averaging will give you an advantage.
So why do so many people persist in believing that this old dog really knows how to hunt? Maybe because it has a psychological appeal: if the market dips, people will be happy because DCA
will be saving them money; and if the market goes up, people will be happy regardless.
IRA
Individual Retirement Account. One of several specific retirement accounts allowed by the IRS to provide tax-deferral or other tax advantage. The three types of IRAs available are:
Deductible IRA Tax-deferred contributions and growth
Non-deductible IRA Tax-deferred growth only
Roth IRA Tax-free growth
Income Statement
Financial document showing a company's income and expenses over a given period (like one fiscal year). Also known as the Earnings Statement or Statement of Operations.
The "bottom line" of the income statement is the company's earnings for the period.
See the main article for a sample income statement.
Income Statement
Stock investors like to look at the income statement (a.k.a. "earnings statement" or "statement of operations") because it shows the company's "bottom line": its earnings, or profit. Most of the
income statement details the company's operations: the yellow zone back in the diagram.
Consolidated Financial Statements
Income Statement
(click on highlighted text for more information)
(dollar figures are in thousands) 1997 1996
Sales Revenue
Widget Sales $ 12,347 $ 9,746
Services 6,912 5,688
Total Sales Revenue 19,259 15,434
Sales Costs
Widget Sales 5,649 4,688
Services 3,166 2,712
Total Sales Costs 8,815 7,400
Gross Profit 10,444 8,034
Gross Margin 54 % 52 %
Operating Expenses
Sales & Marketing 4,078 3,132
General & Administrative 916 705
Research & Development 2,364 1,831
Total Operating Expenses 7,358 5,668
Operating Income 3,086 2,366
Operating Margin 16 % 15 %
Interest Payments to Bondholders 147 253
Earnings Before Taxes 2,939 2,113
Provision for Taxes 1,028 739
Earnings ("net income") 1,911 1,374
Profit Margin 10 % 9 %
Dividends paid to Shareholders 10 -
Earnings available to Shareholders 1,901 1,374
Introduction / Diagram
Income Statement
Cash Flow Statement
Balance Sheet
Books & Links
Notes
This company is showing positive earnings. In fact, if you compare the earnings between the two years shown, you'll find that earnings "grew" by 39%. As you might expect, the figures for sales
costs and operating expenses are also higher, so the company is probably growing physically as well: in order to make more money, it's increasing its capacity to produce more of whatever it
sells.
One important thing that the income statement doesn't show is how the company is paying for this growth. To find that, you need to look at the cash flow statement. Another shortcoming of the
income statement is that expense items are only shown "by department" and not "by type". For example, employee salaries make up part of sales cost and part of all items listed under
operating expenses; but you can't tell from here how big a part.
Index Fund
Mutual fund holding a portfolio of securities that closely matches an established index (like the S&P 500). Index funds offer diversification and low management fees (since the decision of
which securities to invest in is mainly automatic, being predetermined by the index itself). See the index funds overview and the page on index funds and optimal portfolios.
Index funds allow average people to participate intelligently in the stock market, by offering diversification and low fees. The "why" of index investing is widely available. (In a nutshell,
actively managed mutual funds only do about as well as index funds but charge higher fees; and individual stock investors can do even worse, mainly because they keep stumbling over bum
advice - which is also widely available.) So this article covers the basics on the "what" of index investing: exactly what indexes and index funds are, how they select and weight stocks, and
how different index families divide up the market. That's followed with some simple suggestions on building portfolios with index funds and ETFs.
Index Basics
A stock index is a hypothetical portfolio of stocks - a list of names and numbers of shares - selected according to some established criteria. An index fund is a real mutual fund that buys stocks
and holds them in a portfolio that approximates the index.
The most widely followed index is the S&P 500, consisting of 500 hand picked large companies selected by Standard & Poor's. The best known index fund is the Vanguard 500 from The
Vanguard Group, which tracks the S&P 500.
The performance of an index fund won't exactly match that of the index, for at least two reasons. First, the fund needs to charge a management fee to cover the expenses of running a "real"
mutual fund, including salaries of brokers and admin people who keep the customers' accounts straight. Second, the fund has some flexibility in exactly how closely they track the index. (That
can actually be a good thing: some well-known funds consistently show some skill and frequently manage to beat their index, even after fees.)
Most modern indexes weight stocks according to their market capitalization. That means that if A and B are two companies in the S&P 500 and the market capitalization of A is twice that of
B, then if you invest in an S&P 500 index fund your proportional ownership of A will be twice that of B, dollar-wise. That's the same as saying that you'll be allocating your money in the same
proportions as the whole market is. That's a good thing if you believe in market efficiency, because you'll be passively benefiting from whatever logic the market used to make its allocation
decisions. If you don't particularly believe in market efficiency, that's still okay - the index is still a diversified bunch of stocks.
(The Dow Jones Industrial Average doesn't weight its companies this way, because it's a throwback to olden times. It really is just "a bunch of stocks", where the weighting of each stock within
the index has no particular significance.)
Index Funds and Optimal Portfolios
The portfolio demo was easy to use because it assumes that the investment universe consists only of two market securities, plus riskless cash. But of course the real investment universe is a lot
bigger than that, with thousands of choices among U.S. stocks alone. In theory you could find the optimal point on the efficient frontier generated by this many securities, but doing that
wouldn't be practical. For one thing, you'd have to calculate the covariance between every pair of securities: thousands of securities means millions of covariance calculations. But even if
you could do all those calculations, you wouldn't really want to. That's because the efficient frontier is based on an idealized model of the way investments work; and when you apply a huge
number of calculations to a model you tend to amplify the error between the model and reality, leaving you with more "noise" than anything else.
So as a practical matter, putting portfolio theory to work means reducing the problem to something about as simple as the portfolio demo, and investing in a small number of index funds
rather than a huge number of individual stocks and bonds.
Index investing is where portfolio theory starts to rely on the efficient market hypothesis. When you buy an index you're allocating your money the same way the whole market is - which is a
good thing if you believe the market has a plan. This is why portfolio theory really is a branch of economics rather than finance: instead of studying financial statements you study the
aggregate behavior of investors, some of whom presumably have studied financial statements so that market valuations will reflect their due diligence.
(This viewpoint also gives rise to some bad blood that's pretty entertaining if you aren't involved. The economists see business analysts as necessary to market efficiency, but otherwise rather
beneath them as a life form, like the bacteria that make yogurt: they're useful, but they're basically germs. The "germs" respond that the economists are delusional eggheads whose theories
collapse whenever real money is involved.)
Tobin Separation Theorem
The pioneering result that helped popularize index investing was Tobin's "separation theorem", which Bill Sharpe summarized this way in an interview:
James Tobin ... in a 1958 paper said if you hold risky securities and are able to borrow - buying stocks on margin - or lend - buying risk-free assets - and you do so at the same rate, then the
efficient frontier is a single portfolio of risky securities plus borrowing and lending....
Tobin's Separation Theorem says you can separate the problem into first finding that optimal combination of risky securities and then deciding whether to lend or borrow, depending on your
attitude toward risk. It then showed that if there's only one portfolio plus borrowing and lending, it's got to be the market.
The reasoning behind this is easy to understand from the same kind of diagram we have already been looking at:
As usual you're trying to build an optimal portfolio for your risk tolerance; and as before, it will lie somewhere on the straight line joining the cash rate Rf to some optimal mix on the efficient
frontier. We're specifically assuming what Sharpe said, that high risk investors can and will buy on margin, with money borrowed at the low rate Rf. That's why there is just one straight line in
the picture, and one unique optimal mix on the efficient frontier; so the problem of building an optimal portfolio is "separated" into somehow finding the optimal mix and then combining it
with cash to give you your desired risk tolerance.
Now for the part that's really interesting. Assume that everybody is facing the same efficient frontier that you are, and that the market is efficient in the specific sense that it behaves in the
aggregate as if everybody is trying to build an efficient portfolio this way. That means it behaves as if everybody is on your straight line, with the same optimal mix as you. So the mix that the
market is holding - the index - is guaranteed to be your own personal optimal mix.
That's an incredibly elegant result... but it requires you to accept some really strong hypotheses. (Two quick jabs: real investors can't afford to be so cavalier about the special risks of margin
buying; and different tax brackets mean different people face different efficient frontiers. Goodbye single straight line; so long universal optimal mix.)
Probably due to problems like those, results about index investing have trended away from proofs that index funds are optimal toward statistical models confirming that index funds are hard to
beat. That's a trend we'll be following on the next three pages, with CAPM (a theoretical model that looks like a statistical model) and the three factor model (a pure statistical model with a
little theory suggested as an afterthought).
Next: how CAPM relates individual securities to the index.
Inflation
The tendency for prices and wages to become more expensive.
Investors tend to pay attention to inflation mainly out of fear that the Federal Reserve will try to fight it by tightening the money supply.
See the inflation calculator; also the Bureau of Labor Statistics (www.bls.gov) for a monthly report on changes in the Consumer Price Index and Producer Price Index, along with another
inflation calculator.
Inflation
Inflation is usually calculated as the annual change in the Consumer Price Index, available from the Bureau of Labor Statistics. This first calculator uses CPI data to show how things have
been going.
Date Range
January 1 through December 31
Results
Annualized Inflation Rate: %
$1.00 at the beginning of 1900 had the same purchasing power as $26.61 at the end of 2008.
Data: BLS Pre 1913: Robert Shiller
Inflation averaged about 3% annually during the 20th century. It was briefly much higher than that right after both world wars (probably due to pent-up demand versus used-up supply) and
also during the late 1970s (probably due to the government's policy of "printing press financing" - see the government spending diagram for details). Inflation remained low during the boom
of the 1990s, which is very encouraging: it shows how a hot economy can create growth in both demand and supply, so that the price level remains stable.
(Note that the early 1890s had very sharp deflation - it was a great time to have money, but a disaster for farmers and anyone else in debt. 1896 is when William Jennings Bryan made his
famous "cross of gold" speech, pleading for a looser monetary policy.)
What the Fed Does
People expect that, by regulating the money supply, the Federal Reserve will be able to keep consumer prices stable... and also to keep the economy growing at a reasonable rate and to
keep unemployment low. That's already more "goals" than "controls", which would result in some pretty schizophrenic marching orders. For example, if OPEC announces that they plan to cut
oil output in order to drive prices up, should the Fed raise interest rates to fight inflation... or see the higher oil prices as a recessionary factor, and maybe even think about lowering interest
rates?
To see the answer, just notice that this isn't really a monetary problem: the higher oil prices aren't the result of too much easy money. That means that restricting the money supply wouldn't
be a fix, so the Fed won't raise interest rates.
This example shows why energy prices are one of the special indices that get excluded from the Core CPI numbers: energy prices are volatile enough that when they change it doesn't tell
you very much about the rate of inflation overall.
Food and beverages
Housing
Apparel
Transportation
Medical care
Recreation
Education and communication
Other goods and services Total CPI
- Energy
- Food Special Indexes
Total CPI minus Special Indexes Core CPI
(Oh by the way: Irving Fisher, who developed the monetary theory that forms the basis of the Fed's operations, is the same person who predicted that the stock market had reached a
permanently high plateau... just weeks before the Crash of 1929. These guys are very good, but they aren't wizards.)
Inflation Calculator
One place most people will feel the effects of inflation is in their retirement accounts; so this calculator shows what inflation does to the buying power of an investment.
Inputs
Current Principal: $
Years to grow:
Growth Rate: %
Inflation Rate: %
Results
Future Value: $
Buying Power in Today's Dollars: $
(Also see the portfolio guidelines page in the index funds article, for some calculators that combine inflation with historical stock market returns.)
Inventory
Finished product that's ready for sale, but hasn't been sold yet.
Inventory is considered a current asset, and shown on the balance sheet, generally at cost.
On the scale of the national economy, changes in inventory levels can have confusing effects on the GDP.
Investment
On the cash flow statement and in economics, investment means spending that results in an increase in assets. This includes capital spending on plant and equipment, i.e. a real increase in
the means of production; but it also includes any swelling of unsold inventory, which can indicate a problem with consumer demand.
Residential investment mainly refers to the purchase of homes.
Annual business and residential investment respectively make up about 12% and 4% of the GDP; see the interactive GDP Diagram.
Investment Strategy
1-The most important tales of success have been related with great business opportunities: Bill Gates and Paul Allen ( Microsoft ), Warren Buffet "The Oracle of Omaha" (Berkshire Hathaway ),
the Walton Family ( Wal-Mart ), etc. Someone with knowledge enough and business's sense, who, with the required timing, acquired a piece of such potential success, today is a member of
the limited Billionaire's Club. Unfortunately, the best time for success on Microsoft, Berkshire Hathaway, Wal-Mart, etc, has gone. However, never is too late. There are present opportunities for
new tales of success. Less than one percent, among the thousands of companies which try to prevail in the competitive present global market, are ranked among such that have an important
opportunity for success. Part of DHC' wealth is the acquired knowledge, during the last ten years, and the creation of a system to first detect and after fully investigate, coals with potential
enough to be transformed to diamonds, together with the use of all available, legal, and safe tools.
2- Many companies which half a century ago were among the most important, among the strongest, today are almost insignificant when compared with leaders. The U.S. automotive and
steel companies, all together, are far from the market capitalization of Microsoft, a postindustrial enterprise. Some of such postindustrial enterprises began in a room of the founder's house.
Many individuals who half a century ago were among the wealthiest, today are almost insignificant when compared with Bill Gates. Thus, DHC' system seek a multiplying effect, using all
available tools at the same time, to first surpass the wealthiest, and after continue being ahead. The key to detect potential diamonds is to seek for companies with strong fundamentals and
fuel enough to substantially accelerate present growth trends, together with the required timing, strength progression, and market conditions.
3- DHC' strategy is supported by fundamental analysis seeking quality, combined with technical analysis seeking timing. The market conditions are continuously observed, seeking all
available information concerning macros, and watching S&P 500 Index, NYSE Composite Index, NASDAQ Composite Index, Nikkei, DAX, FTSE, etc. DHC' proprietary test includes: (A)
Liquidity progression enough to build the holding or to sell positions under average conditions; (B) Intrinsic Value progression enough to avoid a "bubble's burst"; (C) Strength progression
enough to provide a performance of at least 1000 % on a long term basis. (D) Confidence Level enough to minimize investment risk on a long term basis; (E) Uniqueness to provide
specialties; (F) Avoidance of companies which rely solely on a commodity or a regulated service.
4- DHC' bonds are issued, on a private basis, in a jurisdiction where government charges no tax on interest earned, with a face value of ONE MILLION U.S.D., and a coupon of 14 %, payable
on an annual basis ( one year maturity, 14 % APR ). A legally defensible operation of bond's buyer, in a more favorable business environment, could be beneficiary of a DHC' loan up to half a
million U.S.D. Bond's buyer will have the benefit of a tax free income from interest ( ? ), and additionally, the opportunity to start over again. Using such proceeds bond's buyer could have the
opportunity to joint DHC in a legally defensible high return joint venture.
5- DHC invest, on a long term and global basis, in equity of the companies of the world with the highest earnings growth for the next five to ten years, which previously pass DHC' proprietary
tests. Companies provide the highest quality and a predictable value improvement of at least 1000 % for the next five to ten years. Companies provide the strongest return on equity, income
per employee, profit margin, financial health and earnings growth for the next five to ten years. Likewise companies provide high confidence level and mean recommendation of buy or
strong buy by all renowned analysts, as well as low risk expectation, no risk of bubble's burst, very high return expectation, low volatility, high liquidity progression, very high strength
progression and uniqueness.
Investment strategy
In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Usually the strategy will be designed around
the investor's risk-return tradeoff: some investors will prefer to maximize expected returns by investing in risky assets, others will prefer to minimize risk, but most will select a strategy somewhere
in between.
Passive strategies are often used to minimize transaction costs, and active strategies such as market timing are an attempt to maximize returns.
One of the better known investment strategies is buy and hold. Buy and hold is a long term investment strategy, based on the concept that in the long run equity markets give a good rate of
return despite periods of volatility or decline. A purely passive variant of this strategy is indexing where an investor buys a small proportion of all the shares in a market index such as the S&P
500, or more likely, in a mutual fund called an index fund.
This viewpoint also holds that market timing, that one can enter the market on the lows and sell on the highs, does not work or does not work for small investors, so it is better to simply buy and
hold. The smaller, retail investor more typically uses the buy and hold investment strategy in real estate investment where the holding period is typically the lifespan of their mortgage.
Algorithmic trading
Buy and hold
CANSLIM
Contrarian
Liability driven investment strategy
Market timing
Trading strategy
Trend following
MoneyWeek Investment Advice
Wheel of fortune Design and test your investment strategy for a virtual wheel of fortune, optimize your strategies using different utility functions.
Virtual stock market Design and test your investment strategy for a virtual stock market, where three stocks and a bank account are available for investing.
Category: Investment (Source: Wikipedia)
Investment or investing[1] is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption.
Investment is the choice by the individual to risk his savings with the hope of gain. Rather than store the good produced, or its money equivalent, the investor chooses to use that good either to
create a durable consumer or producer good, or to lend the original saved good to another in exchange for either interest or a share of the profits.
In the first case, the individual creates durable consumer goods, hoping the services from the good will make his life better. In the second, the individual becomes an entrepreneur using the
resource to produce goods and services for others in the hope of a profitable sale. The third case describes a lender, and the fourth describes an investor in a share of the business.
In each case, the consumer obtains a durable asset or investment, and accounts for that asset by recording an equivalent liability. As time passes, and both prices and interest rates change,
the value of the asset and liability also change.
An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin "vestis", meaning garment, and
refers to the act of putting things (money or other claims to resources) into others' pockets. See Invest. The basic meaning of the term being an asset held to have some recurring or capital
gains. It is an asset that is expected to give returns without any work on the asset per se.
Types of investments
The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial
asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.
Business management
The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: Managers determine the investment value of the assets that a
business enterprise has within its control or possession. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (see below).
Assets are used to produce streams of revenue that often are associated with particular costs or outflows. All together, the manager must determine whether the net present value of the
investment to the enterprise is positive using the marginal cost of capital that is associated with the particular area of business.
In terms of financial assets, these are often marketable securities such as a company stock (an equity investment) or bonds (a debt investment). At times the goal of the investment is for
producing future cash flows, while at others it may be for purposes of gaining access to more assets by establishing control or influence over the operation of a second company (the investee).
Economics
In economics, investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or
factory) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and output, gross investment (represented by the variable I) is also a component of
Gross domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is consumption, G is government spending, and NX is net exports. Thus investment is everything that
remains of production after consumption, government spending, and exports are subtracted.
Both non-residential investment (such as factories) and residential investment (new houses) combine to make up I. Net investment deducts depreciation from gross investment. It is the value of
the net increase in the capital stock per year.
Investment, as production over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock, that is, an accumulation
measurable at a point in time (say December 31st).
Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate
may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing
those funds rather than loaning them out for interest.
Finance
In finance, investment=cost of capital, like buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold,
real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Returns on investments will follow the risk-return spectrum.
Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide
income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments.
Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.
Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs.
Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.
Personal finance
Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment.
Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important, as investment risk can cause a capital loss when an investment is realized,
unlike saving(s) where the more limited risk is cash devaluing due to inflation.
In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit accounts are labeled as investment accounts by
banks for marketing purposes. Whether an asset is a saving(s) or an investment depends on where the money is invested: if it is cash then it is savings, if its value can fluctuate then it is
investment.
Real estate
In real estate, investment is money used to purchase property for the sole purpose of holding or leasing for income and where there is an element of capital risk. Unlike other economic or
financial investment, real estate is purchased. The seller is also called a Vendor and normally the purchaser is called a Buyer.
Residential real estate
The most common form of real estate investment as it includes the property purchased as other people's houses. In many cases the Buyer does not have the full purchase price for a property
and must engage a lender such as a Bank, Finance company or Private Lender. Herein the lender is the investor as only the lender stands to gain returns from it. Different countries have their
individual normal lending levels, but usually they will fall into the range of 70-90% of the purchase price. Against other types of real estate, residential real estate is the least risky.
Commercial real estate
Commercial real estate is the owning of a small building or large warehouse a company rents from so that it can conduct its business. Due to the higher risk of Commercial real estate, lending
rates of banks and other lenders are lower and often fall in the range of 50-70%.
Junk Bond
A bond with a credit rating below investment grade. These bonds typically offer a higher interest rate than investment grade corporate bonds.
Keogh Plan
A retirement account offering tax-deferred growth, designed for people who are self-employed or employees of non-incorporated businesses.
Liability
An obligation to pay. These include accounts payable, and bond and bank debt.
Liabilities are shown on the balance sheet.
Note that a liability is not necessarily an evil thing for a company. Technically it's just an asset that they have temporary control over but don't own. If it's a useful asset and if the cost of
"borrowing" it is cheap, then a liability can be a positive thing.
One example: if a retailer sells a gift certificate, they have to show a liability for the value of the merchandise they will be obligated to hand over when the giftee shows up to redeem it; but in
the meantime they already have the cash the gifter paid, and they can use it any way they want -- this liability is really an interest-free loan.
LIBOR
LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London money market offer each other for
short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. Due to London's importance as a global
financial center, LIBOR applies not only to the Pound Sterling, but also to major currencies such as the US Dollar, Swiss Franc, Japanese Yen and Canadian Dollar.
LIBOR is determined every morning at 11:00am London time. A department of the British Bankers Association averages the inter-bank interest rates being offered by its membership. LIBOR is
calculated for periods as short as overnight and as long as one year. While the rates banks offer each other vary continuously throughout the day, LIBOR is fixed for the 24 hour period.
Generally, the difference between the instantaneous rate and LIBOR is very small, especially for short durations.
The most important financial derivatives related to LIBOR are Eurodollar futures. Traded at the Chicago Mercantile Exchange (CME), Eurodollars are US dollars deposited at banks outside the
United States, primarily in Europe. By holding the deposits outside the country, US depositors are not subject to Federal Reserve margin requirements, allowing higher leverage of the funds.
The interest rate paid on Eurodollars is largely determined by LIBOR, and Eurodollar futures provide a way of betting on or hedging against future interest rate changes.
Interest rate swaps are another significant financial derivative dependent on LIBOR. In an interest rate swap, two parties exchange sets of interest payments on a given amount of capital.
Generally, one party will have a fixed interest payment, while the other will have a variable rate. The variable rate payment stream is often defined in terms of LIBOR. Interest rate swaps, and
by extension LIBOR, are extremely important in providing a liquid secondary market for residential mortgages, which in turn allows lower interest rates on US mortgages.
While LIBOR does have implications for transactions conducted in Euros, the advent of the Euro has brought with it the creation of the Euribor. Conceptually similar to the LIBOR, the Euribor
benchmark is defined and maintained by the European Banking Federation. Source: Wisegeek
The London Interbank Offered Rate (or LIBOR, pronounced /ˈlaɪbɔr/) is a daily reference rate based on the interest rates at which banks borrow unsecured funds from banks in the London
wholesale money market (or interbank market). It is roughly comparable to the U.S. Federal funds rate.
Introduction
During 1984 it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably interest rate swaps, foreign currency options
and forward rate agreements. Whilst recognizing that such instruments brought more business and greater depth to the London Interbank market, it was felt that future growth could be inhibited
unless a measure of uniformity was introduced. In October 1984 the British Bankers' Association working with other parties such as the Bank of England established various working parties,
which eventually culminated in the production of the BBAIRS terms – the BBA standard for interest swap rates. Part of this standard included the fixing of BBA interest settlement rates, the
predecessor of BBA LIBOR. From 2 September 1985 the BBAIRS terms became standard market practice.
BBA LIBOR fixings did not commence officially before 1 January 1986, although before that some rates have been fixed for a trial period commencing in December 1984.
It should be noted that member banks are international in scope, with more than sixty nations represented among its 223 members and 37 associated professional firms (as of 2008).
Scope
LIBOR rates are widely used as a reference rate for financial instruments such as:
forward rate agreements
short-term interest rate futures contracts
interest rate swaps
inflation swaps
floating rate notes
syndicated loans
variable rate mortgages[1]
currencies, especially the US dollar (see also Eurodollar).
They thus provide the basis for some of the world's most liquid and active interest rate markets.
For the Euro, however, the usual reference rates are the Euribor rates compiled by the European Banking Federation, from a larger bank panel. A Euro LIBOR does exist, but mainly for
continuity purposes in swap contracts dating back to pre-EMU times.
Technical features
LIBOR is published by the British Bankers' Association (BBA) after 11:00 am (and generally around 11:45 am) each day (London time). It is a trimmed average of inter-bank deposit rates
offered by designated contributor banks, for maturities ranging from overnight to one year. LIBOR is calculated for 10 currencies. There are either eight, twelve or sixteen contributor banks on
each currency panel and the reported interest is the mean of the middle values (the interquartile mean). The rates are a benchmark rather than a tradable rate, the actual rate at which banks
will lend to one another continues to vary throughout the day.
LIBOR is often used as a rate of reference for Pound Sterling and other currencies, including US dollar, Euro, Japanese Yen, Swiss Franc, Canadian dollar, Australian Dollar, Swedish Krona,
Danish Krone and New Zealand dollar.[2]
In the 1990s, Yen LIBOR rates were influenced by credit problems affecting some of the contributor banks.
For a precise definition of BBA LIBOR, see: The BBA LIBOR fixing & definition.
Six-month LIBOR is used as an index for some US mortgages. In the UK, the three-month LIBOR is used for some mortgages—especially for those with adverse credit history.
Definition of LIBOR. LIBOR is defined as:
“The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00
London time.”
This definition is amplified as follows:-
• The rate at which each bank submits must be formed from that bank’s perception of its cost of funds in the interbank market.
• Contributions must represent rates formed in London and not elsewhere.
• Contributions must be for the currency concerned, not the cost of producing one currency by borrowing in another currency and accessing the required currency via the foreign exchange
markets.
• The rates must be submitted by members of staff at a bank with primary responsibility for management of a bank’s cash, rather than a bank’s derivative book.
• The definition of “funds” is: unsecured interbank cash or cash raised through primary issuance of interbank Certificates of Deposit.
LIBOR-based derivatives
Eurodollar contracts
The Chicago Mercantile Exchange's Eurodollar contracts are based on three-month US dollar LIBOR rates. They are the world's most heavily traded short term interest rate futures contracts
and extend up to ten years. Shorter maturities trade on the Singapore Exchange in Asian time.
Interest rate swaps
Interest rate swaps based on short LIBOR rates currently trade on the interbank market for maturities up to 50 years. A "five year LIBOR" rate refers to the 5 year swap rate vs 3 or 6 month LIBOR.
"LIBOR + x basis points", when talking about a bond, means that the bond's cash flows have to be discounted on the swaps' zero-coupon yield curve shifted by x basis points in order to equal
the bond's actual market price. The day count convention for LIBOR rates in interest rate swaps is Actual/360.
Reliability
On Thursday, 29 May 2008 the Wall Street Journal released a controversial study suggesting that banks may have understated borrowing costs they reported for LIBOR during the 2008 credit
crunch.[3] Such underreporting could have created an impression that banks could borrow from other banks more cheaply than they could in reality. It could also have made the banking
system appear healthier than it was during the 2008 credit crunch.
For example, the study found that rates at which one major bank "said it could borrow dollars for three months were about 0.87 percentage point lower than the rate calculated using default-
insurance data."
In response to the study released by the WSJ, the British Bankers' Association announced that LIBOR continues to be reliable even in times of financial crisis. According to the British Bankers'
Association, other proxies for financial health such as the default credit insurance market, are not necessarily more sound than LIBOR at times of financial crisis, though more widely used in
Latin America, especially the Ecuadorian and Bolivian markets.
Additionally, other authorities have contradicted the Wall Street Journal article. In their March 2008 Quarterly Review The Bank for International Settlements have stated that "available data
do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings". Further, In October 2008 the International Monetary Fund published
their regular Global Financial Stability Review which also found that "Although the integrity of the U.S. dollar LIBOR fixing process has been questioned by some market participants and the
financial press, it appears that U.S. dollar LIBOR remains an accurate measure of a typical creditworthy bank’s marginal cost of unsecured U.S. dollar term funding"
Euribor
TIBOR
Leverage (finance)
Margin (finance)
Prime rate
British Bankers' Association Source: Wikipedia. What is LIBOR?
Libor stands for the London Interbank Offered Rate and is the rate of interest at which banks borrow funds from each other, in marketable size, in the London interbank market.
What is BBA LIBOR?
BBA LIBOR is the most widely used "benchmark" or reference rate for short term interest rates. It is compiled by the BBA in conjunction with Reuters and released to the market shortly after
11.00 am London time each day.
Where is the BBA LIBOR standard used?
BBA LIBOR is the primary benchmark for short term interest rates globally. It is used as the basis for settlement of interest rate contracts on many of the world’s major futures and options
exchanges (including LIFFE, Deutsche Term Börse, Euronext, SIMEX and TIFFE) as well as most Over the Counter (OTC) and lending transactions.
How is BBA LIBOR produced? And published?
The British Bankers' Association (BBA), advised by senior market practitioners, maintains a reference panel of at least 8 contributor banks. For a full current list of which banks are contributing
to each panel please see link at the bottom of the page.
The aim is to produce a reference panel of banks which reflects the balance of the market – by country and by type of institution. Individual banks are selected within this guiding principle on
the basis of reputation, scale of market activity and perceived expertise in the currency concerned.
The BBA surveys the panel’s market activity and publishes their market quotes on–screen. The top quartile and bottom quartile market quotes are disregarded and the middle two quartiles are
averaged: the resulting "spot fixing" is the BBA LIBOR rate.
The quotes from all panel banks are published on–screen to ensure transparency. For a full description of the process please see the link at the bottom of the page.
BBA LIBOR fixings are provided in ten currencies:
BBA Libor fixing currencies table Currency Name ISO 4217 currency code (* see note)
Pound Sterling GBP
US Dollar USD
Japanese Yen JPY
Swiss Franc CHF
Canadian Dollar CAD
Australian Dollar AUD
Euro (** see note) EUR
Danish Kroner DKK
Swedish Krona SEK
New Zealand Dollar NZD
Note:
(*) This is an international standard describing three letter codes to define the names of currencies established by the International Organization for Standardization (ISO).
(**) BBA EUR LIBOR is the successor BBA LIBOR fixing for the eurozone legacy currencies, which ceased to be fixed at the beginning of 1999.
Where can I find BBA LIBOR data?
BBA LIBOR is compiled each London Business day by Reuters and distributed live via a number of data vendors including Reuters, Thomson Financial, Bloomberg, Quick, Infotec, Class
Editori, IDC, Proquote and Telekurs.
Many websites operated by financial services and media outlets are licensed to display BBA LIBOR data at the end of the day (that is, after 5pm London Time). Additionally, the financial
press, including the Wall Street Journal and Financial Times publish BBA LIBOR data from the previous day.
All BBA LIBOR is posted on our website, with a rolling 7 day delay, please see link at the bottom of the page.
Why is the BBA LIBOR standard important?
BBA LIBOR is important because:
it is long established
it offers the largest range of international rates
it is a truly international reference rate
it has a wide commercial use
it enjoys wide international dissemination
its mechanism is transparent
it provides a robust settlement rate
the banks represented on the panels are the most active in the cash markets and have the highest credit ratings
BBA LIBOR’s London base is significant: well over 20% of all international bank lending and more than 30% of all foreign exchange transactions take place through the offices of banks in
London and represents a unique snapshot of competitive funding costs.
London has representation from close to 500 banks, and many other major financial institutions actively trade in the euromarkets which are based primarily in London. In addition, no reserve
requirements are applied in London.
Can you provide a forecast on what BBA LIBOR rates will be in the future?
BBA LIBOR is extremely market sensitive and affected by a number of factors such as liquidity in the London cash markets, constitution of the contributor panels and local interest rate policy.
The BBA therefore is not able to provide any forecasts for the future.
Long-term BBA LIBOR
BBA LIBOR is a short–term interest rate deposit rate and is only calculated up to a maturity of 12 months. We have never calculated BBA LIBOR rates beyond this nor do we have any
intention of doing so as the liquidity in the London interbank cash market dries up after a one year maturity.
Some people use interest rates swap rates as approximation for longer periods but please be aware that the methodology is likely to be quite different for BBA LIBOR.
What do the abbreviations s/n, o/n and 1 w, 1 month mean?
These abbreviations stand for the maturities for which BBA LIBOR is fixed. There are 15 different maturities for each currency and day of fixing. The shortest maturity is overnight (O/N) for
Euro, US Dollar, Pound Sterling, and Canadian Dollar and spot/next (s/n) for all other currencies. 1 w stands for 1 week and 1m stands for 1 month. The longest maturity for which BBA LIBOR is
fixed is 12 months.
An "overnight" rate that you see quoted today will value today and mature tomorrow.
A "spot / next" rate that you see quoted today will value in 2 days (i.e. the day after tomorrow) and mature the day after that.
BBA LIBOR Historic rates
The BBA have posted all rates we hold on our website. Please see a link to the historic BBA LIBOR at the bottom of the page. BBA LIBOR fixings did not commence officially before 1 January
1986, although before that some rates have been fixed for a trial period commencing in December 1984.
Due to the specific methodology of calculating BBA LIBOR it is not possible to reconstruct rates before the official fixings commenced.
There are a few websites that purport to be showing BBA LIBOR rates before the mid-80s but these are in no way affiliated with the BBA, who is the sole supplier of BBA LIBOR, and so we
would not vouch for their accuracy.
Is there was any specific reason for why BBA LIBOR started in 1984. What was the historical impetus?
During 1984 it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably Interest Rate Swaps, Foreign Currency
Options and Forward Rate Agreements.
Whilst recognizing that such instruments brought more business and greater depth to the London Interbank market, it was felt that future growth could be inhibited unless a measure of
uniformity was introduced.
In October 1984 the BBA working with other parties such as the Bank of England established various working parties, which eventually culminated in the production of the BBAIRS terms – the
BBA standard for Interest Swap rates.
Part of this standard included the fixing of BBA Interest Settlement rates, the predecessor of BBA LIBOR. From 2 September 1985 the BBAIRS terms became standard market practice.
Factors that influence BBA LIBOR rates
BBA LIBOR rates are dependent on a number of factors, including local interest rates, banks expectations of future rate movements, the profile of contributor banks (contributor panels are
changed annually), liquidity in the London markets in the currency concerned etc.
Does BBA EUR LIBOR follow Target or London business days?
BBA Euro LIBOR follows the Target calendar – as set by the European Central Bank. So on days in which Target is open but London is closed, only the EUR BBA LIBOR rate will be fixed. If
Target is closed but London is trading we will fix EUR BBA LIBOR with the exception of the s/n maturity.
BBA LIBOR calculation basis
BBA LIBOR is not a compounded rate but is calculated on the basis of actual days in funding period/360. Therefore the formula is as follows: interest due = principal x (libor rate/100) x (actual
no of days in interest period/360). Please note that for GBP) the calculation basis is 365 days.
It is also important to work out the exact/actual number of days in the funding period which is not always 90 days for a 3 month deposit but could e.g. be 89 or 91 days.
If you have a funding period of, for example, 45 days you could extrapolate between the 1 and the 2 month rate to arrive at the correct BBA LIBOR rate.
Relationship between different currencies
BBA LIBOR is set entirely independently for each currency by a different panel of banks and the rates are not interrelated via a currency conversion or any other means. In fact BBA LIBOR
gives an idea at which interest rates banks can borrow funds in the currency concerned in the London cash market.
For instance, borrowings in USD are sometimes referred to as Eurodollar interest rates. The factor that has most impact on each of the rates is the domestic interest, which for USD rates will be
the Fed fund rates.
How can I obtain BBA LIBOR rates on the day of calculation?
In order to receive this data you must get a licence from the BBA, for which there may be a charge. Please contact BBA LIBOR Manager John Ewan for more details.
What Is Libor ?
Libor is short for the London InterBank Offered Rate, the interest rate offered for U.S. dollar deposits by a group of large London banks. There are actually several Libors corresponding to
different deposit maturities. Rates are quoted for 1-month, 3-month, 6-month and 12-month deposits.
What Is a Libor Mortgage?
A Libor mortgage is an adjustable rate mortgage (ARM) on which the interest rate is tied to a specified Libor. After an initial period during which the rate is fixed, it is adjusted to equal the
most recent value of the Libor plus a margin, subject to any adjustment cap.
For example, on April 26, 2004, one lender was offering a 6-month Libor ARM at 3%, zero points, and a margin of 1.625%. The new rate 6 months later will be 1.625% plus the 6-month Libor
at that time. If that is (say) 2.625%, the new rate will be 1.625% + 2.625% = 4.25%. If the adjustment cap that limits the size of rate changes is 1%, however, the new rate will be only
3% + 1% = 4%.
Special Features of Libor Mortgages
Low Margins for A-Quality Borrowers: Libor ARMs were developed to meet the needs of foreign investors looking to minimize their interest rate risk on dollar-denominated investments. A foreign
bank that buys the 6-month Libor ARM containing a 1.625% margin can borrow the funds it needs in the inter-bank market for 6 months at the 6-month Libor. The bank pays the depositor Libor,
and it earns Libor + 1.625% on the ARM. The margin is locked in, except to the extent that changes in Libor are not fully matched by changes in the ARM rate because of rate caps.
Because of the reduced risk, investors in Libor ARMs are willing to accept a smaller margin than is common on other ARMs. On April 26, 2004, for example, the Libor margin available to A-
quality borrowers was as low as 1.50%, compared to 2.25 – 2.75% on ARMs indexed to other series.
But not everyone can benefit from the low margin. On the same day that the lender cited above was offering a 6-month Libor ARM at 3% with a 1.625% margin, a sub-prime lender was
offering a 6-month Libor ARM to borrowers with D-credit at 10% with a 7% margin!
Attractive Buydowns: On 30-year fixed-rate mortgages, borrowers can usually "buy down" the rate by ¼% by paying about 1.5 points. I have seen 30-year Libor ARMs that allow the borrower to
buy down the rate and margin by ¼% for only 3/8 of a point. This is an incredible bargain, but the Libors that offer it may have an unusually high maximum rate.
No Negative Amortization: Libor ARMs don’t offer the payment flexibility, nor the associated risks, of negative amortization ARMs.
High Index Volatility: Libor is about as volatile as rates on short-term US Government securities, and more volatile than the COFI, CODI and MTA indexes.
Common Features of Libor Mortgages
The remaining features of Libor ARMs are very similar to those of other ARMs.
Initial rate period. This is the period during which the initial rate holds. Initial rate periods on Libor ARMs range from 6 months to 10 years.
Subsequent adjustment period. This is period between rate adjustments after the first adjustment. For example, an ARM on which the initial rate holds for 3 years and is then adjusted every
year is a "3/1". Most Libor ARMs adjust every 6 or 12 months.
Rate Adjustment Caps: Rate adjustment caps that limit the size of a rate change are generally 1% on 6-month Libors, and 2% on 1-year and 3-year Libors. On 7 and 10-year Libors, the cap is
usually 5% on the first adjustment and 2% on subsequent (annual) adjustments. On some 5-year Libors, however, the adjustment cap is the same as that on 1-year and 3-year Libors, while on
others it is the same as on 7-year and 10-year Libors.
Maximum Interest Rate: This is the highest interest rate allowed on the ARM over its life. The maximum rate on some Libor ARMs is set at 5% or 6% above the initial rate. On others it is set at
an absolute level – 11%, for example, regardless of the initial rate.
Why Select a Libor Mortgage?
You select a Libor loan not because it uses Libor but because it has a combination of other features that in combination add up to an attractive ARM for you. An ARM is attractive if, during
the period you expect to have the mortgage, the interest savings early in that period (relative to a FRM or an ARM with a longer initial rate period) outweigh the risk of interest rate and
payment increases later on.
The best way to make such a judgment is by using interest rate scenario analysis. An interest rate scenario is an assumption about what will happen to rates in the future. Usually, we focus on
rising rate scenarios, because those are the ones we worry about.
For any given scenario, we can calculate exactly how high the rate and payment will go, and when it will get there. Using the same scenario, we can compare different ARMs, as well as ARMs
against an FRM. We can also calculate the cost of an ARM or FRM over any period specified by the borrower.
Because their margins can be small, borrowers who take Libor ARMs may find it attractive to reduce the risk of future rate increases by adopting the FRM payment strategy. This involves
making the payment they would have had to make had they chosen an FRM, for as long as the FRM payment remains above the Libor ARM payment.
To see a sample of rates/payments and costs on an ARM and an FRM under different scenarios, including results for an FRM payment strategy, click on Sample Rates/Payments and Costs .
Information Needed to Assess a Libor Mortgage
You get it in two steps. In step 1, you have your loan officer or mortgage broker provide the essential data on the features of each loan you are considering. To make it as easy as possible for
them, print out and give them Worksheet of ARM Features. In Step 2, you transfer the data on ARM features into the ARM Tables calculator which will generate your tables. Have your data in
hand before clicking on ARM Tables calculator above or selecting the ARM Tables calculator on the Tutorials Menu.
Load
Sales charge on a mutual fund, usually paid at time of purchase. The NASD allows loads up to 8.5% of the value of the investment.
Load Funds up to 8.5%
Low-Load Funds 3% or below
No-Load Funds 0
No-load funds can still charge 12b-1 fees.
Long-term Debt
Debt due to be paid at a date more than one year in the future.
Market Capitalization
Total value of a company's stock; equal to the number of shares times the price per share.
Modern Portfolio Theory
Investment approach that tries to construct a portfolio offering maximum expected returns for a given level of risk tolerance.
See beta and Sharpe Ratio; also the article on modern portfolio theory.
Beta
A measure of an investment's volatility, relative to an appropriate asset class. For stocks, the asset class is usually taken to be the S&P 500 index.
The formula is:
beta = [ Cov(r, Km) ] / [ StdDev(Km) ]2
where
r is the return rate of the investment;
Km is the return rate of the asset class.
If the asset class is well chosen so that the return fluctuations of the investment and the class are highly correlated, then the formula approximates "the volatility of the investment divided by
the volatility of the class."
Beta is used in modern portfolio theory as a measure of risk; it's specifically used in the Capital Asset Pricing Model. See the main pages on CAPM and CAPM regression.
Sharpe Ratio
A number measuring the reward-to-risk efficiency of an investment, used to create risk-efficient portfolios.
The definition of the Sharpe Ratio is:
S(x) = (rx - Rf) / StdDev(x)
where
x is some investment
rx is the average annual rate of return of x
Rf is the best available rate of return of a "riskless" security (ie cash)
StdDev(x) is the standard deviation of rx
See the main article on the Sharpe Ratio for more information.
Modern Portfolio Theory - Introduction
Modern portfolio theory is the philosophical opposite of traditional stock picking. It is the creation of economists, who try to understand the market as a whole, rather than business analysts, who
look for what makes each investment opportunity unique. Investments are described statistically, in terms of their expected long-term return rate and their expected short-term volatility. The
volatility is equated with "risk", measuring how much worse than average an investment's bad years are likely to be. The goal is to identify your acceptable level of risk tolerance, and then to
find a portfolio with the maximum expected return for that level of risk.
This article covers the highlights of modern portfolio theory, describing how risk and its effects are measured, and how planning and asset allocation can help you do something about it.
Momentum
Property that allows moving things to overcome resistance and keep moving in the same direction. Works well with physical objects like cars and bowling balls. But does it work with stock prices
...? . See technical analysis.
Monetary Policy
Actions by the Federal Reserve to control the money supply.
In particular, monetary policy refers to efforts to fight inflation or otherwise control or stimulate the economy by controlling the availability of spending money to companies and consumers.
Compare fiscal policy.
Monte Carlo Simulation
A computer simulation with a built-in random process, allowing you to see the probabilities of different possible outcomes of an investment strategy.
See the main article on Monte Carlo retirement planning.
Monte Carlo Retirement Planning
All simple retirement calculators work like the chart below. They divide your life into an "accumulation phase" when you're working and making contributions, and a "distribution phase" which
begins when you retire and lasts as long as you think you will. The idea is to see how much annual income your investments will yield when you're retired.
What's missing here is volatility: fluctuations in the return rates that raise the risk that your account won't peak as high, or last as long, as this "smooth" picture suggests.
This article is an introduction to investment volatility: how to understand its effects, and how to use an improved style of retirement calculator to include volatility in your planning.
(Note: if you prefer, you can skip ahead to the Monte Carlo retirement calculator and then read the "theory" pages later.)
Mortgage
A mortgage is the transfer of an interest in property (or in law the equivalent - a charge) to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it
is lender's security for a debt. It is a transfer of an interest in land (or the equivalent), from the owner to the mortgage lender, on the condition that this interest will be returned to the owner of
the real estate when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.
The term comes from the Old French "dead pledge," apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.[1]
In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) and in some jurisdictions only land may be mortgaged.
Arranging a mortgage is seen as the standard method by which individuals and businesses can purchase residential and commercial real estate without the need to pay the full value
immediately. See mortgage loan for residential mortgage lending, and commercial mortgage for lending against commercial property.
The measurement of a mortgage with regards to cost to the borrower can be measured by Annual Percentage Rate (APR) or many other formulas for true cost such as Lender Police Effective
Annual Rate (LPEAR).
In many countries it is normal for home purchases to be funded by a mortgage. In countries where the demand for home ownership is highest, strong domestic markets have developed,
notably in Spain, the United Kingdom, Australia and the United States.
1 Participants and variant terminology
2 Mortgage lender
3 Borrower
3.1 Borrowing for investment purposes
4 Other participants
5 Default on Subdivided Property
6 Legal aspects
6.1 Mortgage by demise
6.2 Mortgage by legal charge
6.3 Equitable mortgage
7 History
8 Foreclosure and non-recourse lending
9 Mortgages in the United States
9.1 Types of mortgage instruments
9.1.1 The mortgage
9.1.2 Security Deed
9.1.3 The deed of trust
9.2 Mortgage lien priority
10 Further reading
11 See also
12 Notes and references
Participants and variant terminology
Legal systems, while having some concepts in common, employ different terminology. However, in general, a mortgage of property involves the following parties.
Mortgage lender
Mortgagee is the legal term for the mortgage lender. The main function of the mortgage is to provide security to the lender. Given the large sum of money involved in financing a property, a
mortgage lender will usually want security for the loan that will provide a claim upon that security and will take precedence over other creditors. A mortgage accomplishes this security.
The lender loans the money and registers the mortgage against the title to the property. The borrower gives the lender the mortgage as security for the loan, receives the funds, makes the
required payments and maintains possession of the property. The borrower has the right to have the mortgage discharged from the title once the debt is paid. If the mortgagor fails to repay the
loan according to the conditions set forth by the lender, then the mortgagee reserves the right to foreclose on the property.
Borrower
Mortgagor is the legal term for the borrower, who owes the obligation secured by the mortgage, and may be multiple parties. Generally, the debtor must meet the conditions of the underlying
loan or other obligation and the conditions of the mortgage. Otherwise, the debtor usually runs the risk of foreclosure of the mortgage by the creditor to recover the debt. Typically the debtors
will be the individual home-owners, landlords or businesses who are purchasing their property by way of a loan.
Most buyers of real property would have difficulty saving enough money to make an outright purchase of real estate. The use of debt increases a buyer's ability to buy through a combination
of down payment and debt. As a result a real estate transaction seldom occurs without borrowers relying on borrowed funds.
Borrowing for investment purposes
Aside from the absence of large amount of available money, there are several reasons why an investor (including a buyer of real estate) might borrow funds. Some of these include:
To diversify investments and reduce overall risk by using only part of the available funds for any one investment
To invest the borrowed funds at a higher rate of interest (yield) than the borrowing rate; for example, a sum is borrowed at an annual interest rate of 7% and used to invest in a project that
returns 10%
To free up equity for other purposes; for example, a commercial enterprise may prefer to use funds to purchase inventory or equipment instead of investing only in land and buildings.
To obtain a tax benefit. In some countries (such as Canada), mortgage interest is not tax deductible, but loans made for investment purposes are.
Other participants
Because of the complicated legal exchange, or conveyance, of the property, one or both of the main participants are likely to require legal representation. The terminology varies with legal
jurisdiction; see lawyer, solicitor and conveyancer.
Because of the complex nature of many markets the debtor may approach a mortgage broker or financial adviser to help them source an appropriate creditor, typically by finding the most
competitive loan.
The debt is, in civil law jurisdictions, referred to as hypothecation, which may make use of the services of a hypothecary to assist in the hypothecation.
Default on Subdivided Property
When a tract of land is purchased with a mortgage and then split up and sold off, then the "inverse order of alienation rule" applies to find out who will be liable for the default.
Basically, when a mortgaged tract of land is split up and sold off, then upon default, the mortgagee forecloses and proceeds against lands still owned by the mortgagor, then liability attaches
in a backward fashion, or in an 'inverse order' as they were sold. So if A acquires a 3-acre (12,000 m2) lot by mortgage then splits up the lot into three 1 acre lots (A, B, and C), and sells lot B
to X, and then lot C to Y, retaining lot A for himself then, upon default, the mortgagee will go after lot A, the mortgagor, and if that sale does not satisfy the default, then the owner of lot C will
be liable, then the owner of lot B. The idea is that the first purchaser should have more equity and subsequent purchasers receive a diluted share.
Legal aspects
Mortgages may be legal or equitable. Furthermore, a mortgage may take one of a number of different legal structures, the availability of which will depend on the jurisdiction under which the
mortgage is made. Common law jurisdictions have evolved two main forms of mortgage: the mortgage by demise and the mortgage by legal charge.
Mortgage by demise
In a mortgage by demise, the mortgagee (the lender) becomes the owner of the mortgaged property until the loan is repaid or other mortgage obligation fulfilled in full, a process known as
"redemption". This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption.
Mortgages by demise were the original form of mortgage, and continue to be used in many jurisdictions, and in a small minority of states in the United States. Many other common law
jurisdictions have either abolished or minimised the use of the mortgage by demise. For example, in England and Wales this type of mortgage is no longer available, by virtue of the Land
Registration Act 2002.
Mortgage by legal charge
In a mortgage by legal charge or technically "a charge by deed expressed to be by way of legal mortgage",[2] the debtor remains the legal owner of the property, but the creditor gains
sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.
To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders
run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority. Tax liens, in some cases, will
come ahead of mortgages. For this reason, if a borrower has delinquent property taxes, the bank will often pay them to prevent the lienholder from foreclosing and wiping out the mortgage.
This type of mortgage is most common in the United States and, since the Law of Property Act 1925,[2] it has been the usual form of mortgage in England and Wales (it is now the only form –
see above).
In Scotland, the mortgage by legal charge is also known as standard security.[citation needed]
In Pakistan, the mortgage by legal charge is most common way used by banks to secure the financing.[citation needed] It is also known as registered mortgage. After registration of legal
charge, the bank's lien is recorded in the land register stating that the property is under mortgage and cannot be sold without obtaining an NOC (No Objection Certificate) from the bank.
Equitable mortgage
See also: Security interest#Types of security
In an equitable mortgage the lender is secured by taking possession of all the original title documents of the property and by borrower's signing a Memorandum of Deposit of Title Deed
(MODTD). This document is an undertaking by the borrower that he/she has deposited the title documents with the bank with his own wish and will, in order to secure the financing obtained
from the bank.
History
At common law, a mortgage was a conveyance of land that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain
conditions were met – usually, but not necessarily, the repayment of a debt to the original landowner. Hence the word "mortgage" (a legal term in French meaning "dead pledge"). The debt
was absolute in form, and unlike a "live pledge" was not conditionally dependent on its repayment solely from raising and selling crops or livestock or simply giving the crops and livestock
raised on the mortgaged land. The mortgage debt remained in effect whether or not the land could successfully produce enough income to repay the debt. In theory, a mortgage required no
further steps to be taken by the creditor, such as acceptance of crops and livestock in repayment.
The difficulty with this arrangement was that the lender was absolute owner of the property and could sell it or refuse to reconvey it to the borrower, who was in a weak position. Increasingly
the courts of equity began to protect the borrower's interests, so that a borrower came to have an absolute right to insist on reconveyance on redemption. This right of the borrower is known as
the "equity of redemption".
This arrangement, whereby the lender was in theory the absolute owner, but in practice had few of the practical rights of ownership, was seen in many jurisdictions as being awkwardly
artificial. By statute the common law's position was altered so that the mortgagor would retain ownership, but the mortgagee's rights, such as foreclosure, the power of sale, and the right to
take possession, would be protected.
In the United States, those states that have reformed the nature of mortgages in this way are known as lien states. A similar effect was achieved in England and Wales by the Law of Property
Act 1925, which abolished mortgages by the conveyance of a fee simple.
Foreclosure and non-recourse lending
In most jurisdictions, a lender may foreclose on the mortgaged property if certain conditions – principally, non-payment of the mortgage loan – apply. Subject to local legal requirements, the
property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt.
In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have
recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt, through a deficiency judgment.
Specific procedures for foreclosure and sale of the mortgaged property almost always apply, and may be tightly regulated by the relevant government. In some jurisdictions, foreclosure and
sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market
development has been notably slower.
At the start of 2008, 5.6% of all mortgages in the United States were delinquent.[3] By the end of the first quarter that rate had risen, encompassing 6.4% of residential properties. This number
did not include the 2.5% of homes in foreclosure.[4]
Mortgages in the United States
Types of mortgage instruments
Two types of mortgage instruments are commonly used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.[5]
The mortgage
In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and
in default and ordering a sale of the property to pay the debt.[citation needed]
Security Deed
The deed to secure debt is a mortgage instrument used in the state of Georgia. Unlike a mortgage, however, a security deed is an actual conveyance of real property in security of a debt.
Upon the execution if such a deed, title passes to the grantee or beneficiary (usually lender), however the grantor (debtor) maintains equitable title to use and enjoy the conveyed land subject
to compliance with debt obligations.
Security deeds must be recorded in the county where the land is located. Although there is no specific time within which such deeds must be filed, the failure to timely record the deed to
secure debt may affect priority and therefore the ability to enforce the debt against the subject property.[6]
The deed of trust
The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a title transfer, regardless of its terms.
It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee.[7] It is also possible to foreclose them through a judicial proceeding.[citation
needed]
Most "mortgages" in California are actually deeds of trust.[8] The effective difference is that the foreclosure process can be much faster for a deed of trust than for a mortgage, on the order of
3 months rather than a year. Because the foreclosure does not require actions by the court the transaction costs can be quite a bit less.[citation needed]
Deeds of trust to secure repayments of debts should not be confused with trust instruments that are sometimes called deeds of trust but that are used to create trusts for other purposes, such as
estate planning. Though there are superficial similarities in the form, many states hold deeds of trust to secure repayment of debts do not create true trust arrangements.[citation needed]
Mortgage lien priority
Except in those few states in the United States that adhere to the title theory of mortgages,[9] either a mortgage or a deed of trust will create a mortgage lien upon the title to the real property
being mortgaged. The lien is said to "attach" to the title when the mortgage is signed by the mortgagor and delivered to the mortgagee and the mortgagor receives the funds whose
repayment the mortgage secures. Subject to the requirements of the recording laws of the state in which the land is located, this attachment establishes the priority of the mortgage lien with
respect to most other liens[10] on the property's title.[11] Liens that have attached to the title before the mortgage lien are said to be senior to, or prior to, the mortgage lien. Those attaching
afterward are said to be junior or subordinate.[12] The purpose of this priority is to establish the order in which lien holders are entitled to foreclose their liens in an attempt to recover their
debts. If there are multiple mortgage liens on the title to a property and the loan secured by a first mortgage is paid off, the second mortgage lien will move up in priority and become the new
first mortgage lien on the title. Documenting this new priority arrangement will require the release of the mortgage securing the paid off loan.
Further reading
Rhodes, Trevor. American Mortgage: Everything U Need to Know... about Financing a Home. 444 pages. McGraw-Hill, June, 2008. ISBN 0-07-159054-4
Look up Mortgage in
Wiktionary, the free dictionary.Trust deed
Bridge financing
Financing
Fixed rate mortgage
Promissory note
Loan origination
Subprime lending
Mortgage calculator
Refinancing
Foreign currency mortgage
Americans for Fairness in Lending
National Mortgage News
Mortgage insurance
collateralized mortgage obligation - CMO
Subprime mortgage crisis
Notes and references
^ Coke, Edward. Commentaries on the Laws of England. "[I]f he doth not pay, then the Land which is put in pledge upon condition for the payment of the money, is taken from him for ever,
and so dead to him upon condition, &c. And if he doth pay the money, then the pledge is dead as to the Tenant"
^ a b "Law of Property Act 1925 (c.20) Part III Mortgages, Rentcharges, and Powers of Attorney". Ministry of Justice. Retrieved on 2008-01-30.
^ Can the World Stop the Slide?, TIME, February 4, 2008, page 27.
^ Kemp, Carolyn. Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey. MortgageBankers.org. 5 June 2008. Mortgage Bankers Association. 19 June 2008
^ Kratovil, Robert; Werner, R. (1988). Real Estate Law, 9th, Prentice-Hall, Inc., Sec 20.09. ISBN 0-13-763343-2.
^ Security Interests in Georgia, By Steven M. Mills of Steven M. Mills, P.C.[1] (1999).
^ Kratovil, Robert; Werner, R. (1988). Real Estate Law, 9th, Prentice-Hall, Inc., Sec 20.09(b). ISBN 0-13-763343-2.
^ See the discussion of background principles of California real property law in Alliance Mortgage Co. v. Rothwell, 10 Cal. 4th 1226, 1235-1238 (1995).
^ Kratovil, Robert; Werner, R. (1981). Modern Mortgage Law and Practice, 2nd, Prentice-Hall, Inc., Sec 1.6. ISBN 9780135957448.
^ Exceptions include real estate tax liens and, in most states, mechanic's liens.
^ The failure to record a previously made mortgage may, under some circumstances, allow a subsequent mortgagee's mortgage to be recognized as prior in right to the otherwise prior
mortgage.
^ Of course, the lienholders can agree among themselves to a different priority arrangement through subordination arrangements. See, R. Kratovil and R. Werner Modern Mortgage Law and
Practice Chs. 30 & 38 (2nd Ed. Prentice-Hall, Inc.)
Retrieved from "http://en.wikipedia.org/wiki/Mortgage"
Category: Mortgage
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Mortgage and real estate Glossary
Abstract of Title
A summary of public records relating to the title of a particular parcel of land.
Acceleration
The right of the mortgage (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgager (borrower), or by using the right vested in the
Due-on-Sale Clause.
Acknowledgement
A formal declaration, usually before a notary, that the person has executed a document.
Adjustable Rate Mortgage (ARM)
Is a mortgage in which the interest rate is adjusted periodically based on a pre selected index. Also sometimes known as the renegotiable rate mortgage, the variable mortgage or the
Canadian roll over mortgage.
Adjustment Interval
On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index.
Administrator
Person appointed by the court to take possession of a person who died intestate, without leaving a will, pay their debts and distribute the balance of the property to those entitled to it by law.
Adverse Possession
Physical possession of real estate inconsistent with the rights of the true owner. In many states, a party in adverse possession, after satisfying the requirements of the statutes, can then acquire
the title to the land. These requirements may include the payment of property taxes on the real estate as well as the passing of a number of years.
Affiant
One who swears to or affirms the statement in an affidavit.
Affirmative Coverage
Provision in title policy where the title insurer insures against risks and losses not usually covered. For example: insurance against loss caused by violation of truth in lending laws. As you may
imagine, title insurers very rarely offer this coverage.
All Inclusive Rate
A quote for title insurance that includes the cost of title search, title examination and the policy.
ALTA
American Land Title Association.
Amortization
Means loan payment by equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. Comes from the French
word, "mort", literally to kill the loan owing.
Annual Percentage Rate (APR)
Is a interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account
points and other credit cost. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan.
Appraisal
An estimate of the value of property, made by a qualified professional called an "appraiser". There are different types of qualified appraisers. The highest qualification is considered to be the
MAI.
Approved Attorney
An attorney approved by a title insurance company as one whose opinion of title will be accepted and relied upon by the company for the issuance of title insurance policies.
Appurtenances
Rights that pass with the title to the land. These rights may affect other, usually adjoining lands, such as a access easement.
Assessment
A local tax levied the County usually against a property for a specific purpose, such as a sewer or street lights. Also can mean the assessed value of the property. Similar, but not the same as
an "appraisal" see above. Typically the property tax assessment amount is less than the fair market value.
Assignment
A transfer of a right and/or interest in land. Often used for transferring the rights of a lender, buyer or tenant. The person who assigns rights is the Assignor, the person who acquires those rights
is the Assignee.
Assumption
The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an
existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market-rate interest charges will apply. Most mortgages today are unassumable as Lenders have
found that assumed loans tend to have a far higher rate of default.
FHA loans closed before 12/15/89 and VA loans closed before 3/1/88 are freely assumable with no qualifying.
Note that the original borrower is still just as liable for the loan as the new home buyer unless the previous borrower gets a release from the Lender. This is called "novation".
Attorney in Fact
A person who holds a power of attorney from another to execute documents on behalf of the giver (or grantor) of that power. A power of attorney can be restricted or unrestricted. All powers of
attorney can be withdrawn by notice in writing.
Balloon payment
A balloon mortgage is one where a lump sum, the balance of the loan principal, becomes payable at the end of the term. A mortgage can be interest only with the whole principal due at the
end of the term or it may be calculated to amortize over a longer period, say 30 years, but with the outstanding principal balance payable at the end of, say, 10 years.
Base Title or Basic Title
Title to an area or tract of land out of which other parts are later conveyed or a subdivision is made.
Binder or commitment
An enforacable agreement from a title company that states that if the requirements outlined are satisfied, the title company will issue title insurance subject to any named exceptions.
Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for the same mortgage. This provides greater security for the Lender. It may be possible to get a "partial" release so the
Borrower can sell one of the properties provided a suitable principal reduction is made.
Bond
An insurance agreement under which the insurer agrees to pay, subject to agreed limits, compensation for financial loss caused to another by specified acts or defaults of a third party OR a
long term interest bearing security instrument, issued by a goverment or corporation.
Borrower (Mortgagor)
One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full. The mortgage is not actually the loan, it just creates the security interest in
the property. It is the promissory note that spells out the repayment terms and interest.
Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client buy who does not loan the money himself. Brokers usually charge a fee or receive a
commission for their services.
Building setback
An invisible line from the front, sides and rear of the outside boundaries of the property beyond which no permanent structure may extend. This could be found in city zoning ordinances, the
subdivision deed or other restrictive covenants.
Caps (interest)
A limit on the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan. For example a 4/1 cap would mean a maximum interest increase of
4% over the life of the loan and no more than 1% each year.
Caps (payments)
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change. Mortgage may change per year and/or the life of the loan.
Certificate of title
A written opinion by an attorney that ownership of a parcel of property is as stated in the certificate OR a deed issued by the court as a result of a foreclosure.
Chain of title
The successive transfers of ownership over the history of a parcel of land. Each deed that transfers ownership is a link in the chain.
Chain and links
An old method of land measurement. Surveyors used to use a chain of a length of 66 feet = 22 yards.
Closing
The meeting between the buyer, seller and lender or their agents where the property and funds legally changes hands. Also called settlement. Closing costs usually include an origination fee,
discount points, appraisal fee, title search and insurance, survey, taxes, deed recording, credit report charge and other costs assessed at settlement. The cost of closing usually are about three
to six percent of the mortgage amount. Commitment and agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork
or compliance with stated conditions.
Cloud on title
An outstanding claim or encumbrance revealed by a title search that adversely affects the marketability of the property. For example: a mechanic's lien, lis pendens recorded option to
purchase etc.
Coinsurance
An insurance agreement where more than one company shares a part of a single risk. This applies only to large risks and each fractional part is covered by a separate insurance contract.
Collateral
Security for a loan. In the case of a mortgage this would be the real property. But stocks and personal property can also be used as collateral for a loan.
Commitment
A promise by a lender to make a loan on specific terms or conditions to a borrower or builder. A promise by an investor to purchase mortgages from a lender with specific terms or conditions.
Construction loan (interim loan) - A loan to provide the funds necessary to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the
builder as it progresses.
Community property. A category of property, existing in some states, in which all property (except property specifically acquired by husband or wife as separate property) acquired by a
husband and wife, or either, during marriage, is owned in common by the husband and wife.
Condemnation. (1) The lawful taking of private land for public use by a government under its right of eminent domain. (2) A declaration by a governmental agency that a building is unfit for
use.
Condominium. A system of real estate ownership wherein there is separate ownership of units in a multi-unit project with each separate unit ownership being coupled with an undivided share
in the entire project less all of the units.
Condominium declaration. The document which establishes a condominium and describes the most important property rights of the unit owners. Special statutes in each state prescribe the
contents of this document, known in some states as a "master deed."
Construction disbursement service. A direct payment plan for disbursement of construction loan and equity funds through the title company as an independent escrow agent to
subcontractors and suppliers upon approval of the owner, general contractor, and lender.
Construction loan. A loan which is made to finance the actual construction or improvement on land. It is often the practice to make disbursements in increments as the construction
progresses.
Contract for deed (Agreement for deed, land contract)
A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale. It may be recordable or non-recordable. It
creates a legal interest in real estate however the buyer cannot obtain secondary financing.
Contract of sale. Agreement by one person to buy and another person to sell a specified parcel of land at a specified price.
Conventional Loan
A mortgage not insured by FHA or guaranteed by the VA.
Conveyance. (1) A document which transfers an interest in real property from one person to another; e.g., a deed. (2) The act of executing and delivering a deed or mortgage.
Cooperative (apartment). An apartment building which is owned by a corporation and in which tenancy in an apartment unit is obtained by purchase of the pertinent number of shares of the
stock of the corporation and where the owner of such shares is entitled to occupy a specific apartment in the building.
Cotenancy. Ownership of the same interest in a particular parcel of land by more than one person; e.g., tenancy in common, joint tenancy, tenancy by the entireties.
Covenant. An agreement between the parties in a deed whereby one party promises either (1) the performance or non-performance of certain acts with respect to the land or (2) that a given
state of things with respect to the land are so; e.g., covenant that the land will be used only for residential purposes.
Credit Report
A report documenting the credit history and current status of a borrower's credit standing. Credit is rated for mortgage purposes from A, excellent, down to D, very poor. To obtain a conforming
loan that can be resold to Fannie Mae, the Borrower usually needs A grade credit.
Cross Default
Language often in a second mortgage that states that a failure to pay or a default on the first mortgage is a default on the second mortgage.
Also that if the borrower has more than one mortgage with the same lender, then a default on just one of the mortgages puts ALL the other mortgages into default.
Curtesy.
A husband's life estate in the property of his deceased wife. By statute in most states, it is a life estate in one third of the land she owned during their marriage. Curtesy has been abolished by
statute in some states.
Debt-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA) or gross monthly
income (conventional). See Housing expenses-to-income ratio.
Dedication. The granting of land by the owner for some public use and its acceptance for such use by authorized public officials.
Deed. A written instrument duly executed and de-livered by which the title to land is transferred from one person to another.
Deed of Trust
In many states, this document is used in place of a mortgage to secure the payment of a note. It involves a third party, the trustee, who holds the deed to the property.
Default
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage. This can also mean failure to pay property taxes, maintain insurance on the
property or even to maintain the interior and exterior of the property.
Deferred Interest
see Negative Amortization
Deficiency judgment. A judgment against a person liable for the debt secured by a mortgage in an amount by which the funds derived from a foreclosure or trustee's sale are less than the
amount due on the debt. Not legal in every state, for example California.
Delinquency
Failure to make payments on time. This can lead to foreclosure. See default.
Devise. A gift of land by will or to give land by will. A devisee is the person to whom property is given by a will.
Discount Point
see Point
Dower. An estate for life to which a married woman by statute is entitled on the death of her husband. In most states it is a life estate of one third of the value of all land which the husband
owned during their marriage. Dower has been abolished by statute in some states. The reason for requiring a wife's joining in the deed of any land by her husband is the release of her dower
right.
Down Payment
Money paid to make up the difference between the purchase price and the mortgage amount. Down payments usually are 10 to 20 percent of the sales price on a conventional loan. VA
loans have no downpayment but are only available to Veterans who have not used up their VA entitlement. FHA loans are often as low as 3% downpayment.
When the down payment is less than 20% the Lender will usually require PMI (Private Mortgage Insurance) on a conventional loan, or MIP (Mortgage Insurance Premium) on an FHA loan.
Draw. Disbursement of a portion of the mortgage loan. Usually applies to construction loans when partial advances are made as improvements to the property progress.
Due-on-Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
Earnest Money
Money given by a buyer when making an offer to a seller as part of the purchase price to bind a transaction or assure payment. It should be held in escrow by the real estate company, a title
company or an attorney. This is usually returnable if the contract does not go through for valid reasons. It may not be returnable if the buyer just changes his mind.
Easement. A privilege or right of use or enjoyment which one person may have in the lands of another; for example, a right of way to install, operate, and maintain utility lines.
Eminent domain. The right of a government to appropriate private property for a public use by making reasonable payment to the owner of such property.
Encroachment. The intrusion of any improvement partly or entirely on the land of another.
Encumbrance. Any right or interest in land held by persons other than the fee owner which right or interest lessens the value of the fee title. Examples are judgment liens, easements,
mortgages, restrictions.
Endorsement. A form issued by the insurer at the request of the insured which changes term(s) or item(s) in an issued policy or commitment.
Equity. (1) The interest or value which an owner has in real estate over and above the debts against it. (2) A type of court of record.
Equity participation. A type of mortgage transaction in which the lender, in addition to receiving a fixed rate of interest on the loan, acquires an interest in the borrower's land and shares in
the profits derived from the land.
Escheat. The transfer of title of property to the state if the owner dies intestate and without heirs.
Escrow
Refers to a neutral third party who carries out the instruction of both the buyer and seller to handle all the paperwork of settlement or closing. Escrow may also refer to an account held by the
lender into which the home buyer pays money for tax or insurance payments.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex, marital status, handicap
status or receipt income from public assistance programs.
Equity
The difference between the fair market value and current indebtedness, also referred to as the owner's interest.
Estate. The degree, quantity, nature, and extent of interest which a person has in land.
Et ux. And wife.
Examination of title. The review of the chain of tide as revealed by an abstract of the tide or public records.
Exceptions. Those matters affecting title to the particular parcel of realty which matters are excluded from coverage of the particular title insurance policy.
Exclusion. Those general matters affecting title to real property excluded from coverage of a title insurance policy.
Executor. A person named in a will to administer the estate. Executrix is the feminine form.
FHLMC
The federal Home Loan Mortgage Corporation provides a secondary market for saving and loans by purchasing their conventional loans. Also known as "Freddie Mac."
Fee simple. An estate in which the owner is entitled to the entire property, with unconditional power of disposition during the owner's life, and which descends to the heirs upon the owner's
death if the owner dies without a will.
Fixed Rate Mortgage
The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
FNMA
The Federal National Mortgage Association is a secondary mortgage institution which is the largest single holder of home mortgages in the United States. FHMA buys VA, FHA and
conventional mortgages from primary lenders. Also known as "Fannie Mae."
Foreclosure
A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.
Fannie Mae
see FNMA.
Federal Home Loan Bank Board (FHLBB)
A regulatory and supervisory agency for federally chartered savings institutions.
Federal Home Loan Mortgage Corporation (FHLMC)
also referred to as "Freddie Mac", is a quasi-government agency that purchases conventional mortgages from insured depository institutions and HUD approved mortgage bankers.
Federal National Mortgage Association (FNMA)
also know as "Fannie Mae" a taxpaying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA.
This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
FHA. Federal Housing Administration, an agency of the federal government which insures private loans for financing of new and existing housing and for home repairs under government
approved programs.
Fixture. Personal property that by state law becomes real property upon being attached to real estate.
Foreclosure. Legal process by which a mortgagor of real property is deprived of interest in that property due to failure to comply with terms and conditions of the mortgage.
Freddie Mac
see Federal Home Loan Mortgage Corporation
Ginnie Mae
see Government National Mortgage Association
General warranty deed. A deed containing a covenant whereby the seller agrees to protect the buyer against being dispossessed because of any adverse claim against the land.
Government National Mortgage Association (GNMA)
also known as "Ginnie Mae", provides sources of funds for residential mortgage, insured or guaranteed by FHA or VA.
Graduated Payment Mortgage (GPM)
A type of flexible-payment where the payments increase for a specified period of time and then level off. This type of mortgage may have negative amortization built into it.
Grantee. In a deed, the person to whom the land is transferred.
Grantor. In a deed, the person who transfers the land.
Guaranty
A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
Hard Money Lender
Equity lenders who base their funding decisions on the unencumbered property value and its salability. They do not calculate debt ratio and usually do not take into account the borrower's
credit and income. The combined loan-to-value ratio is usually less than 65%. Funding can be very fast. Sometime in 2 days or less.
Hazard Insurance
A form of insurance in which the insurance company protects the insured from specified losses, such as fire windstorm and the like.
Heir. The person who, at the death of the owner of land, is entitled to the land if the owner has died with-out a will.
Homestead (exemption). A person's dwelling and that part of the land which is about and contiguous to the dwelling. Many states by statute give special privileges to such lands, such as
exemptions from remedies of creditors.
Housing Expenses-to-Income Ratio
The ratio expressed as a percentage, which results when a borrower's housing expenses are divided by his and/or her net effective income (FHA / VA loans) or gross monthly income
(conventional loans). Also see Debt-to-Income Ratio.
HUD. The Department of Housing and Urban Development. It is responsible for the implementation and administration of U.S. government housing and urban development programs.
Impound
That portion of a borrower's monthly payment held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also
known as Reserves.
Index
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one,
three and five year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs of funds incurred by savings
and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down. The rate must be one that is outside the influence of the lender.
Indemnity agreement. An agreement by the maker of the document to repay the addressee of the agreement up to the limit stated for any loss due to the contingency stated on the
agreement.
Insurable title. A land title which a title insurance company is willing to insure.
Insured closing service. An agreement by the insurer to indemnify the insured for any loss in settlement funds caused by (1) the failure of the company's policy issuing agents or approved
attorneys to conform to closing instructions of the insured, or (2) fraud or dishonesty of the issuing agent or approved attorney. This service is offered by the insurer to certain large lenders,
developers, etc.
Interval ownership. A form of time share owner-ship. See Time share ownership.
Intestate. Without having made a valid will or one who dies without having made a will.
Investor
A money source for a lender. Or someone who purchases real estate as a short or long term investment.
Interim Financing
A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.
Jumbo Loan
A loan which is larger (more than $203,250) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans can
not be funded by these two agencies, they usually carry a higher interest rate.
Joint protection policy. A title insurance policy in form suitable to insure the owner and/or lender.
Joint tenants. Persons who are co-owners of interests in the same land. At common law and in some states today, upon the death of a joint tenant, interest automatically passes to the
surviving joint tenant(s). This survivorship feature, when it exists, is the principal distinction between a joint tenancy and a tenancy in common.
Judgment. The formal expression and evidence of the decision of a court in a specific lawsuit. Where the judgment decrees that one party (the judgment debtor) pay another party (the
judgment creditor) a certain sum of money, the recording of that judgment creates a lien upon all land of the judgment debtor in that jurisdiction.
Junior mortgage. A mortgage, the lien of which is subordinate to that of another mortgage. Second and third mortgages are both junior mortgages.
Lien
A claim upon a piece of property for the payment of a debt or obligation.
Leasehold. The right to possession and use of land for a fixed period of time. The lease is the agreement which creates the right. The person who has the lease-hold is the tenant or lessee.
The person who grants the leasehold is the lessor or landlord.
Legal description. A property description which by law is sufficient to locate and identify the parcel of real property.
Lien. A claim or charge on property of another for payment of some debt, obligation, or duty.
Lien waiver or waiver of liens. A document signed by the general contractor, each subcontractor, and each materialman of a construction project whereby the signators waive their right to
mechanics' liens on the land involved in that particular project.
Life estate. An individual's right to the use and occupancy of real property for life.
Link. See Chain of title.
Links. See Chains and links.
Lis Pendens. A legal notice that there is litigation pending relating to the land and a warning that anyone obtaining an interest subsequent to the date of the notice may be bound by the
judgment.
Loan policy or mortgage policy or mortgagee policy. A title insurance policy in which the insurer insures the mortgagee against loss it may suffer because the tide is not vested as stated in the
policy and insures the validity and priority of the mortgage lien over any other lien not excepted to in the policy.
Loan-to-Value Ratio
The relationship between the amount of the mortgage loan and appraised value of the property expressed as a percentage.
Margin
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Marketable title. A title which a reasonable purchaser, well informed as to the facts and their legal meaning, would be willing to accept.
Market Value
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a
given time.
Master deed. See Condominium declaration.
Mechanics' and materialmen's lien or mechanics' lien or M&M lien. The lien which by statute a laborer or materialman may have against the land by reason of furnishing labor or material for
the improvement of the property. The priority of such lien varies among the states; in some states M&M liens take priority over prerecorded mortgages.
Mechanics' liens surety bond. A bond in which an approved surety company agrees to indemnify the title insurance company for any loss it may suffer due to the insurer's issuing a specific
policy without mechanics' lien exception.
Metes and bounds. A description of a parcel of land by describing the boundary lines in length and direction.
MIP: Mortgage Insurance Premium
MIP is the one-half percent borrowers pay each month on FHA insured mortgage loans. It is insurance from FHA to the lender against incurring a loss due to the borrower's default. On
September 1, 1983 the MIP was changed to a one time charge to the borrowers.
Mortgage. An instrument whereby an owner conditionally transfers title of property to another as security for payment of a debt. The owner retains possession and use of the land and, upon the
payment of the debt, the mortgage becomes void.
Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent. see Private Mortgage Insurance, FHA Mortgage Insurance.
Mortgagee
The lender.
Mortgagor
The borrower or home owner.
Mortgage policy. See Loan policy.
Negative Amortization
Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid principal balance of the loan. The danger of
negative amortization is that the home buyer ends up owing more than the original amount of the loan.
Net Effective Income
The borrower's gross income minus federal tax.
Non Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. Note: The signed obligation to pay a debt, as a mortgage note.
Negotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically. see Adjustable Rate Mortgage.
Note. A written promise to pay a certain amount of money, at a certain time, or in a certain number of installments. It usually provides for payment of interest and its payment is at times
secured by a mortgage.
Open-end mortgage. A mortgage or deed of trust written so as to secure and permit advancing of funds in addition to the amount originally loaned.
Origination Fee
The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.
Option. The right, acquired for a consideration, to buy, sell, or lease land at a fixed price within a specified time.
Oversize policies.
Policies in which the amount (limit of risk) exceeds that which the agent is authorized to write without specific approval.
Owner's policy.
A title insurance policy insuring the owner against loss due to any defect of title not excepted to or excluded from the policy.
Partition.
Division of land, usually by a legal proceeding, among the parties who were formerly co-owners.
Payment Constant
The total annual payments divided by the mortgage balance expressed as a percentage.
Permanent Loan
A long term mortgage, usually ten years or more.
PITI
Principal, Interest, Taxes and Insurance. Also called monthly housing expense.
Planned unit development (PUD).
A project consisting of individually owned parcels of land together with common areas and facilities that are owned by an association of which the owners of all the parcels are members.
Plat (of survey).
A map of land made by a surveyor showing boundary lines, buildings, and other improvements on the land.
Points (Loan Discount Points)
Prepaid interest assessed at closing by the lender. Each point is equal to one percent of the loan amount.
Power of Attorney
A legal document authorizing one person to act on behalf of another. It does not mean that the other person IS an attorney or that they can represent them in court as an attorney.
Prepaid Expenses
Necessary to create an escrow account or to adjust the seller's existing account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance of their due date. This can enable the mortgage to be paid off much more quickly, with a major savings in
total interest costs.
Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form in 36 states and the District of Columbia.
Prepayment Risk
This is the risk to the Lender that the loan will be paid off before the end of the term. It is considered to be a risk because loans are often refinanced when interest rates drop. This means the
Lender gets their capital back but have to lend it out at a lower rate.
Prescription.
The doctrine by which easements are acquired by long, continuous, and exclusive use and possession of property.
Primary Mortgage Market
Lenders making mortgage loans directly to borrower's such as savings and loan association, commercial banks and mortgage companies. These lenders usually sell their mortgages into the
secondary mortgage markets such as FNMA of GNMA, etc. The original lender will usually still service the loan, that is, send the payment coupons or statements to the Borrower.
Principal
The amount of debt, not counting interest left on a loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment (as low as five percent in some cases). With the smaller down payment loans,
however, borrower's are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of one to five percent of your mortgage
amount and may require an additional monthly fee depending on your loan's structure.
Public records.
Records which by law impart constructive notice of matters relating to land.
Purchase money mortgage.
A mortgage given by the purchaser to the seller simultaneously with the purchase of real estate to secure the unpaid balance of the purchase price.
Quieting title.
The removal of a cloud on title by proper action in a court.
Quit Claim Deed
Type of deed that transfers all the rights that grantor (giver) may have, which might be none. Example, you could legally give someone a quit claim deed of your rights in the Brooklyn Bridge.
That does not mean that the person you give the deed to now owns the Brooklyn Bridge.
Realtor ©
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
Recession
The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses
equity in the home as security. This means the money for refinance is not disbursed till after the 3 days are up. The only exception would be an emergency.
Recording. The noting in the designated public office of the details of a properly executed legal document, such as a deed or mortgage, thereby making it a part of the public record, and
thus by law imparting constructive notice of that document.
Recording Fees
Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records. The record is given a official records book and page number
making it easy to find.
Redemption. The right of the owner in some states to reclaim title to property if the owner pays the debt to the mortgagee within a stipulated time after foreclosure.
Refinance
Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.
Reinsurance. The act of an insurer transferring a portion of the risk to other insurers. The original insurer is sole insurer for a portion of the risk and shares the risk in the excess amount with the
reinsurers. The first portion of the loss risk retained by the ceding company as its sole liability is called the "primary liability."
Reissue rate. A reduced rate of title insurance premium applicable in cases where the owner of the land has been previously insured in an owner's policy by the insurer within a certain time.
REIT. Real Estate Investment Trust, a business trust which deals principally with interest in land. REITs generally are strictly organized to conform to the requirements of provisions of the
Internal Revenue Code which give tax advantages to conforming REITs.
Release. A deed from the mortgagee or trustee of a deed of trust which releases specific property from the lien of the mortgage or deed of trust.
Remainder. An interest or estate in land in a person other than the grantor in which the right of possession and enjoyment of the land is postponed until the termination of some other interest
or estate in that land.
Renegotiable rate mortgage. A loan secured by a long-term mortgage of up to 30 years, which provides for renegotiation at equal stated intervals of the interest rate for a maximum variation
of 5 percent over the life of the mortgage.
Reserve. The portion of the title insurance company's retained earnings set aside for some specific purpose.
Liability reserve. A segregated or earmarked portion of retained earnings established to show the estimated amount of a known or potential future liability.
Reserve for undetermined title losses. The liability reserve established and maintained against unpaid losses and expenses related to every specific claim presented to the title insurance
company by a policyholder. The amount of reserve is established by careful estimates of probable liability. It is re-viewed periodically and changed when warranted.
Statutory reserve. The reserve requirement established by state statutes as the minimum which must be maintained by a title insurance company, either (1) by a company incorporated under
the laws of that state or (2) as a qualification for a company incorporated in another state to do business in the state.
RESPA
Short for the Real Estate Settlement Procedures Act.
(12 U.S.C. 2601) which, together with Regulation X promulgated pursuant to the Act, regulate real estate transfers involving a "federally related mortgage loan" by requiring, among other
things, certain disclosures to borrowers.
RESPA is a federal law that allows consumers to review information known or estimated settlement cost once after application and once prior to or at a settlement. The law requires lenders to
furnish the information after application only.
Restriction. Provision in deed or will or in a "Declaration of Condition, Reservations and Restrictions" which limits in some way the right to use land or convey its title. Examples are building
setback lines and limitations to residential uses.
Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower using using the borrower's equity in the home as Satisfaction of Mortgage (The document issued by the
mortgagee when the mortgage loan is paid in full.
Reversion. Provision in conveyance by which, upon the happening of an event or contingency, title to the land will return to the grantor or the successor in interest in the land.
Right of way. See Easement.
Riparian. Pertaining to the banks of a watercourse. The owner of land adjacent to a watercourse is called a riparian owner and the rights of the riparian owner related to that watercourse are
called riparian rights.
Sale and leaseback. A financial device which an owner of land may employ to raise money and still have the use of the land by selling the land to the financier and immediately leasing it
back for the period the owner wishes to use it.
Seasoned Mortgage
A mortgage that payments have been made on. The longer the seasoning and payment history of the mortgage, the greater the likelihood it will be paid in the future.
Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the first one. If the borrower does not make payments on the first mortgage, they can foreclose it and wipe out the
interest of the second mortgage holder.
Secondary Mortgage Market
The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders security.
Separate property. Property a husband or wife owns independently of the other.
Servicing
All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes insurance, property inspections and the like.
Service charge. A charge paid by the borrower to the lender for the lender's expenses in processing the loan.
Setback. See Building line.
Settlement / Settlement Costs
see Closing / Closing Costs
Shared appreciation mortgage. A loan having a fixed interest rate set below the market rate for the term of the loan which provides for contingent interest based upon a percentage of the
appreciation in the value of the security at the sale or transfer of the property, or the payment of the loan.
Simple Interest
Interest which is computed only on the principal balance.
Simultaneous issue. Simultaneous issuance of an owner's policy and a mortgagee policy, or an owner's policy and a leasehold policy, or owner's policy to different insureds. A reduced
premium rate is applicable in such cases.
Special warranty deed. A deed containing a covenant whereby the seller agrees to protect the buyer against being dispossessed because of any adverse claims to the land by the seller, or
anyone claiming through the seller.
Standard coverage policy. A form of title insurance which contains certain standard printed exceptions not included in the ALTA policies. This form of policy is used primarily in some of the
western states.
Starter. See Back title letter.
Subdivision. A tract of land surveyed and divided into lots for purposes of sale.
Subordination. The act of a creditor acknowledging in writing that the lien of the debt due from a debtor shall be inferior to the lien of the debt due another creditor from the same debtor.
Subrogation. The substitution of one person in the place of another with reference to a claim, demand, or right, so that the individual who is substituted succeeds to the rights of the other in
relation to the debt or claim and its rights, remedies, or securities.
Substitution loan and substitution rate. A loan made to the same borrower on the same land, or by the same lender on the same land, the title to which was insured by the insurer in
connection with the original loan. A reduced rate for premium is given in such cases.
Survey
A measure of land, land prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions and the location and dimensions of any
buildings.
Sweat Equity
Equity created by a purchasers work on a property purchased.
Take out loan. A permanent mortgage loan which a lender agrees to make to a borrower upon completion of improvements on the borrower's land. The proceeds of the loan are used
principally to pay off the construction loan.
Tandem plan. The purchase by the Government National Mortgage Association of certain mortgages at par for subsequent resale at market prices to the Federal National Mortgage
Association.
Tax deed. The deed given to a purchaser at a public sale of land for non-payment of taxes. It conveys to the purchaser only such title as the defaulting taxpayer had and does not convey
good title to that extent unless statutory procedures for the sale were strictly followed.
Tenancy by the entirety or entireties. A form of
ownership existing in many states where husband and wife together are treated as an entity.
Tenant. One who has right of possession of land by any kind of title. The word "tenant" used alone in modern times is used almost exclusively in the limited meaning of a tenant of a
leasehold estate.
Tenants in common. Persons who are co-owners of residential interest in the same land. At death of a co-tenant, interest passes by will or by laws of intestate succession.
Testate. Having made a will. One who makes a will is known as the testator or testatrix.
Time share ownership. A technique for dividing the title to a commercial property or a vacation home among many different owners, with each owner acquiring the right to occupy the
premises during a specified portion of each year.
Time share unit. An interest in a residential or commercial property which by contract or by conveyance of a real property interest allows a purchaser to occupy the unit during a particular
week or weeks for a stated number of years. There are two major forms of time share estate:
(a) Interval ownership. A time share estate where the unit purchaser is deeded an estate for years, giving a right to occupy the unit for a particular week during a stated number of years with
a remainder interest in fee as a tenant in common with all other purchasers of the unit.
(b) Time span ownership. A time share estate where the unit purchaser is deeded an undivided percentage interest in the unit as a tenant in common with all other purchasers and the right
to occupy the unit for a particular time period is governed by contractual provisions of the time share declaration.
Title
A document that gives evidence of an individual's ownership of property
Title Insurance
A policy, usually issued by a title insurance company which insures a home buyer or lender against errors in the title search. The cost of the policy is usually a function of the value of
property, and is often borne by the purchaser and /or seller.
Title plant. A compilation of records maintained by tide companies and containing information about specific parcels of land. This information would be ascertained otherwise only by a
search of the public records.
Title Search
An examination of municipal records to determine the legal ownership of the property. Usually is performed by a title company
Torrens system. A governmental title registration system wherein tide to land is evidenced by a certificate of title issued by a public official known as the registrar of title.
Truth-in-Lending
A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for a the loan.
Turnkey housing. Housing initially financed and built by private sponsors and purchased by housing authorities for use by low-income families under the public housing program.
Underwriting
The decision whether to make a loan to a potential home buyer based on credit, employment, assets and other factors and the matching of this risk to an appropriate rate and term or loan
amount.
Usury
Interest charged in excess of the legal rate established by law.
VA loan. A loan for purchase of land in which the Veteran's Administration guarantees the lender payment of a home mortgage by a qualified veteran.
Variable Rate Mortgage
see Adjustable Rate Mortgage
Vendor. Seller.
Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status and balance of his or her financial accounts.
Verification of Employment (VOE)
A document signed by the borrower's employer verifying his or her position and salary.
Vest. To become owned by.
Waiver of liens. See Lien waiver.
Warranty deed. A deed in which the grantor war-rants or guarantees that good title is being conveyed.
Wraparound mortgage. A mortgage which secures a debt which includes the balance due on an existing senior mortgage and an additional amount advanced by the wraparound mortgagee.
The wraparound mortgagee thereafter makes the amortizing payments on the senior mortgage. An example: A landowner has a mortgage securing a debt with an outstanding balance of
$2,000,000. A lender now advances the same mortgagor a new $1,000,000 and undertakes to make the remaining payments due on the $2,000,000 debt. A $3,000,000 wraparound
mortgage on the land is taken to secure this new $3,000,000 wraparound note.
Hard money lenders are lending companies offering a specialized type of real-estate backed loan. Hard money lenders provide short-term loans (also called a bridge loan) that provide funding
based on the value of real estate that has been collateralized for the loan. Hard money lenders typically have much higher interest rates than banks because they fund deals that do not
conform to bank standards.
Hard money lenders will offer a range of requirements on the loan-to-value percentage, type of real estate and minimum loan size for a hard money loan.
Hard money risk
Hard money loans are more expensive because they are not based upon traditional credit guidelines which protect investors and banks from high default rates. As hard money lenders may not
require the income verification that typical lenders require, they experience higher default rates (and, thus, charge a higher rate of interest). Individuals and companies may opt to take a hard
money loan when they cannot obtain typical mortgage financing because they do not have acceptable credit or other necessary documentation.
Hard money collateral
Hard money collateral is typically the real estate loaned on. However it can and does sometimes include other assets of the individual or business borrowing the hard money. In many cases a
hard money lender will offer a smaller loan size based upon a lower "Loan To Value Ratio". This means they may opt to loan no more than 65% of the property value. Therefore it is common
for real estate investors to offer additional real estate as collateral in order to obtain a larger loan amount. This is known as cross-collateralization.
Market
Hard money lenders may serve a regional market, or may offer loans nationwide. Some hard money lenders are represented by brokers who may take a percentage of the loan (called points) in
exchange for preparing and submitting the loan documentation (as well as finding a direct lender). Other hard money lenders deal directly with applicants. Other ways hard money lenders may
vary include: charging application fees (some charge, others charge fees only when closing); prepayment penalties (some or none); and a focus on investment properties or a willingness to
finance owner occupied property as well.
Several online directories offer links to multiple hard money lenders for brokers or borrowers seeking a lender.
Regulation
Several states' usury laws, including Tennessee and New Jersey, prevent hard money lenders from operating with their usual practices. Regulation of hard money not only differs by state, it
differs by the status of the borrower in terms of whether or not the loan is made to a business or to a consumer. Consumers generally have additional protections in individual states. They also
have more lending oversight and regulation benefits federally when the loan is issued by a commercial bank, that is federally chartered by the FDIC. Some of the most aggressive loan terms
are issued by commercial hard money lenders.
Commercial hard money lender
Commercial hard money is issued to a business entity or individual signing on behalf of a business entity or corporation. It can be secured against a commercial property or residential
investment property. It can also be secured against a residence in conjunction with a business property as a means of obtaining additional collateral for the lender. That type of additional
security is referred to as a blanket mortgage. The sources of asset based commercial hard money loans are generally the following:
1. Private Individuals
2. Mortgage Companies
3. Federal Banks
4. SBA Lenders
These commercial hard money lenders all have varying degrees of benefits as well as downfalls in terms of choosing a commercial hard money loan lender. For example, a private individual
may offer special terms, however may be unwilling to offer a work out plan as a matter of procedure, in the event the loan becomes delinquent. A federally-chartered bank may offer a
competitive loan rate in comparison to an individual, however may demand a high pre-payment penalty fee, costing the borrower more money if they decide to sell or refinance the loan
within one to five years.
Source: Wikepedia
Commercial hard money is a term describing a commercial loan that is generally non bankable. The company usually does not meet the standard banking criteria, but has real estate and or
assets that are sufficient to collateralize the loan to the investors/lenders.
Commercial hard money rates
Commercial hard money rates are generally higher than other rates. The industry standard range is between 11% and 16%. Typically borrowers pay between 3 and 6 points (percent of the loan
amount borrowed).
Commercial hard money collateral
Commercial hard money collateral is generally real estate. It can be more than one property and it can also include other assets. When there is not sufficient equity in the property to meet the
lenders loan to value ratio criteria, the borrower may pledge other real estate and "cross collateralize" the loan. Most commercial hard money lenders will not lend beyond 65% of the property
value. Cross collateral loans allow loans to be made at higher amounts when the owner has more than one property to be pledged.
Property value will usually be determined by the lender, who may use a conservative approach to valuation of the property. For instance they may determine the value based on the ability to
sell it in thirty days or less.
Commercial Hard Money Lenders
There are various commercial lenders that are willing to make loans against real estate collateral regardless of the credit history of the borrower. They are asset based loans and depend
primarily on real estate value. Only a very few banks will make a commercial hard money loan. Mostly private investment groups and finance companies are making commercial hard money
loans.
A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. After the Great Depression, the U.S. Congress required that
banks only engage in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S. law, some use
the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. In some other jurisdictions, the strict
separation of investment and commercial banking never applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial services direct
to consumers. Many banks offer both commercial and retail banking services.
Possible meanings
Commercial bank has two possible meanings:
Commercial bank is the term used for a normal bank to distinguish it from an investment bank.
This is what people normally call a "bank". The term "commercial" was used to distinguish it from an investment bank. Since the two types of banks no longer have to be separate companies,
some have used the term "commercial bank" to refer to banks which focus mainly on companies. In some English-speaking countries outside North America, the term "trading bank" was and is
used to denote a commercial bank. During the great depression and after the stock market crash of 1929, the U.S. Congress passed the Glass-Steagall Act 1933-35 (Khambata 1996) requiring
that commercial banks only engage in banking activities (accepting deposits and making loans, as well as other fee based services), whereas investment banks were limited to capital markets
activities. This separation is no longer mandatory.
It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time (or term) deposits. It makes loans to businesses and consumers. It also
buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds.
Commercial banking can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of
the public (retail banking).
Origin of the word
The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green
tablecloth.[1] However, there are traces of banking activity even in ancient times.
In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called
a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only
legal tender in Rome- that of the Imperial Mint. [2]
The role of commercial banks
Commercial banks engaged in the following activities:
processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other means
issuing bank drafts and bank cheques
accepting money on term deposit
lending money by way of overdraft, installment loan or otherwise
providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures
safekeeping of documents and other items in safe deposit boxes
currency exchange
sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a “financial supermarket”
Types of loans granted by commercial banks
Secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral (i.e., security) for the loan.
Mortgage loan
A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under this arrangement, the money is used to purchase property. Commercial banks, however, are
given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it,
to recover sums owing to it.
In the past, commercial banks have not been greatly interested in real estate loans and have placed only a relatively small percentage of their assets in mortgages. As their name implies, such
financial institutions secured their earning primarily from commercial and consumer loans and left the major task of home financing to others. However, due to changes in banking laws and
policies, commercial banks are increasingly active in home financing.
Changes in banking laws now allow commercial banks to make home mortgage loans on a more liberal basis than ever before. In acquiring mortgages on real estate, these institutions follow
two main practices. First, some of the banks maintain active and well-organized departments whose primary function is to compete actively for real estate loans. In areas lacking specialized
real estate financial institutions, these banks become the source for residential and farm mortgage loans. Second, the banks acquire mortgages by simply purchasing them from mortgage
bankers or dealers.
In addition, dealer service companies, which were originally used to obtain car loans for permanent lenders such as commercial banks, wanted to broaden their activity beyond their local
area. In recent years, however, such companies have concentrated on acquiring mobile home loans in volume for both commercial banks and savings and loan associations. Service
companies obtain these loans from retail dealers, usually on a nonrecourse basis. Almost all bank/service company agreements contain a credit insurance policy that protects the lender if the
consumer defaults.
Unsecured loan
Unsecured loans are monetary loans that are not secured against the borrowers assets (i.e., no collateral is involved). These may be available from financial institutions under many different
guises or marketing packages:
credit card debt, personal loans, bank overdrafts, credit facilities or lines of credit, corporate bonds
A Corporate Bond is a bond issued by a corporation. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The
term "commercial paper" is sometimes used for instruments with a shorter maturity.)
Sometimes, the term "corporate bonds" is used to include all bonds except those issued by governments in their own currencies. Strictly speaking, however, it only applies to those issued by
corporations. The bonds of local authorities and supranational organizations do not fit in either category.
Corporate bonds are often listed on major exchanges (bonds there are called "listed" bonds) and ECNs like MarketAxess, and the coupon (i.e. interest payment) is usually taxable. Sometimes
this coupon can be zero with a high redemption value. However, despite being listed on exchanges, the vast majority of trading volume in corporate bonds in most developed markets takes
place in decentralized, dealer-based, over-the-counter markets.
Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. Other bonds, known as convertible bonds, allow investors to convert the
bond into equity.
One can obtain an unfunded synthetic exposure to corporate bonds via credit default swaps.
Types
Corporate debt falls into several broad categories:
secured debt vs unsecured debt
senior debt vs subordinated debt
Generally, the higher one's position in the company's capital structure, the stronger one's claims to the company's assets in the event of a default.
Risk analysis
Compared to government bonds, corporate bonds generally have a higher risk of default. This risk depends, of course, upon the particular corporation issuing the bond, the current market
conditions and governments to which the bond issuer is being compared and the rating of the company. Corporate bond holders are compensated for this risk by receiving a higher yield than
government bonds.
Consequently, this default risk can be quantified using spread analysis, which seeks to determine the difference in yield between a given corporate bond and a risk-free treasury bond of the
same maturity. Common statistics used include Z-spread and option adjusted spread (OAS).
A mortgage loan is a loan secured by real property through the use of a mortgage (a legal instrument). However, the word mortgage alone, in everyday usage, is most often used to mean
mortgage loan.
A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through
intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.
Mortgage loan basics
Basic concepts and legal regulation
According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest as security or collateral for a loan. Therefore, a
mortgage is an encumbrance on property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic
term for a loan secured by such real property.
As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time; typically 30 years. All types of real property can, and usually are, secured
with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.
Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential property. For commercial mortgages see the separate article. Although the
terminology and precise forms will differ from country to country, the basic components tend to be similar:
Property: the physical residence being financed. The exact form of ownership will vary from country to country, and may restrict the types of lending that are possible.
Mortgage: the security created on the property by the lender, which will usually include certain restrictions on the use or disposal of the property (such as paying any outstanding debt before
selling the property).
Borrower: the person borrowing who either has or is creating an ownership interest in the property.
Lender: any lender, but usually a bank or other financial institution.
Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size.
Interest: a financial charge for use of the lender's money.
Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the
loan is arguably no different from any other type of loan.
Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly
(through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct
lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific
characteristics of the legal or financial system.
Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most
basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original
loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country.
Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds). The price at which the lenders
borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments
from the borrower, often in the form of a security (by means of a securitization). In the United States, the largest firms securitizing loans are Fannie Mae and Freddie Mac, which are
government sponsored enterprises.
Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the
creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays
that may be involved in certain circumstances.
Mortgage loan types
There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal
requirements.
Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.
Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require
full repayment of any remaining balance at a certain date, or even negative amortization.
Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to
increase or decrease the amount paid.
Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.
The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In many countries,
floating rate mortgages are the norm and will simply be referred to as mortgages; in the United States, fixed rate mortgages are typically considered "standard." Combinations of fixed and
floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period.
Historical U.S. Prime RatesIn a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. In the U.S., the term is usually up to 30 years
(15 and 30 being the most common), although longer terms may be offered in certain circumstances. For a fixed rate mortgage, payments for principal and interest should not change over the
life of the loan, although ancillary costs (such as property taxes and insurance) can and do change.
In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market
index. Common indices in the U.S. include the Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"); other indices are in use but are less popular.
Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the
risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market
conditions, including the yield curve.
Additionally, lenders in many markets rely on credit reports and credit scores derived from them. The higher the score, the more creditworthy the borrower is assumed to be. Favorable interest
rates are offered to buyers with high scores. Lower scores indicate higher risk for the lender, and higher rates will generally be charged to reflect the (expected) higher default rates.
A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some
point short of that term. This payment is sometimes referred to as a "balloon payment" or bullet payment. The interest rate for a balloon loan can be either fixed or floating. The most common
way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due.
Other loan types:
Assumed mortgage
Balloon mortgage
Blanket loan
Bridge loan
Budget loan
Buydown mortgage
Commercial loan
Endowment mortgage
Equity loan
Flexible mortgage
Foreign National mortgage
Graduated payment mortgage loan
Hard money loan
Jumbo mortgages
Offset mortgage
Package loan
Participation mortgage
Reverse mortgage
Repayment mortgage
Seasoned mortgage
Term loan or Interest-only loan
Wraparound mortgage
Negative amortization loan
Non-conforming mortgage
Loan to value and downpayments
Upon making a mortgage loan for purchase of a property, lenders usually require that the borrower make a downpayment, that is, contribute a portion of the cost of the property. This
downpayment may be expressed as a portion of the value of the property (see below for a definition of this term). The loan to value ratio (or LTV) is the size of the loan against the value of the
property. Therefore, a mortgage loan where the purchaser has made a downpayment of 20% has a loan to value ratio of 80%. For loans made against properties that the borrower already
owns, the loan to value ratio will be imputed against the estimated value of the property.
The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will
be insufficient to cover the remaining principal of the loan.
Value: appraised, estimated, and actual
Since the value of the property is an important factor in understanding the risk of the loan, determining the value is a key factor in mortgage lending. The value may be determined in various
ways, but the most common are:
Actual or transaction value: this is usually taken to be the purchase price of the property. If the property is not being purchased at the time of borrowing, this information may not be available.
Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value by a licensed professional is common. There is often a requirement for the lender to obtain an official
appraisal.
Estimated value: lenders or other parties may use their own internal estimates, particularly in jurisdictions where no official appraisal procedure exists, but also in some other circumstances.
Equity or homeowner's equity
The concept of equity in a property refers to the value of the property minus the outstanding debt, subject to the definition of the value of the property. Therefore, a borrower who owns a
property whose estimated value is $400,000 but with outstanding mortgage loans of $300,000 is said to have homeowner's equity of $100,000.
Payment and debt ratios
In most countries, a number of more or less standard measures of creditworthiness may be used. Common measures include payment to income (mortgage payments as a percentage of gross
or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various net worth measures. In many countries, credit scores are used in
lieu of or to supplement these measures. There will also be requirements for documentation of the creditworthiness, such as income tax returns, pay stubs, etc; the specifics will vary from
location to location. Many countries have lower requirements for certain borrowers, or "no-doc" / "low-doc" lending standards that may be acceptable in certain circumstances.
Standard or conforming mortgages
Many countries have a notion of standard or conforming mortgages that define a perceived acceptable level of risk, which may be formal or informal, and may be reinforced by laws,
government intervention, or market practice. For example, a standard mortgage may be considered to be one with no more than 70-80% LTV and no more than one-third of gross income
going to mortgage debt.
A standard or conforming mortgage is a key concept as it often defines whether or not the mortgage can be easily sold or securitized, or, if non-standard, may affect the price at which it may
be sold. In the United States, a conforming mortgage is one which meets the established rules and procedures of the two major government-sponsored entities in the housing finance market
(including some legal requirements). In contrast, lenders who decide to make nonconforming loans are exercising a higher risk tolerance and do so knowing that they face more challenge in
reselling the loan. Many countries have similar concepts or agencies that define what are "standard" mortgages. Regulated lenders (such as banks) may be subject to limits or higher risk
weightings for non-standard mortgages. For example, banks in Canada face restrictions on lending more than 75% of the property value; beyond this level, mortgage insurance is generally
required (as of April 2007, there is a proposal to raise this limit to 80%).
Repaying the capital
There are various ways to repay a mortgage loan; repayment depends on locality, tax laws and prevailing culture.
Capital and interest
The most common way to repay a loan is to make regular payments of the capital (also called principal) and interest over a set term. This is commonly referred to as (self) amortization in the U.
S. and as a repayment mortgage in the UK. A mortgage is a form of annuity (from the perspective of the lender), and the calculation of the periodic payments is based on the time value of
money formulas. Certain details may be specific to different locations: interest may be calculated on the basis of a 360-day year, for example; interest may be compounded daily, yearly, or
semi-annually; prepayment penalties may apply; and other factors. There may be legal restrictions on certain matters, and consumer protection laws may specify or prohibit certain practices.
Depending on the size of the loan and the prevailing practice in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to 30 years is the usual maximum
term (although shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically made monthly, contain a capital (repayment of the principal) and an
interest element. The amount of capital included in each payment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital.
Towards the end of the mortgage the payments are mostly capital and a smaller portion interest. In this way the payment amount determined at outset is calculated to ensure the loan is repaid
at a specified date in the future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not change.
Interest only
The main alternative to capital and interest mortgage is an interest only mortgage, where the capital is not repaid throughout the term. This type of mortgage is common in the UK, especially
when associated with a regular investment plan. With this arrangement regular contributions are made to a separate investment plan designed to build up a lump sum to repay the mortgage at
maturity. This type of arrangement is called an investment-backed mortgage or is often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a
Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage. Historically, investment-backed mortgages offered various tax advantages over
repayment mortgages, although this is no longer the case in the UK. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient return to
clear the debt.
Until recently it was not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property market will rise sufficiently for the loan
to be repaid by trading down at retirement (or when rent on the property and inflation combine to surpass the interest rate).
No capital or interest
For older borrowers (typically in retirement), it may be possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up with the capital, increasing the
debt each year.
These arrangements are variously called reverse mortgages, lifetime mortgages or equity release mortgages, depending on the country. The loans are typically not repaid until the borrowers
die, hence the age restriction. For further details, see equity release.
Interest and partial capital
In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding capital balance is due
at some point short of that term. In the UK, a part repayment mortgage is quite common, especially where the original mortgage was investment-backed and on moving house further borrowing
is arranged on a capital and interest (repayment) basis.
Foreclosure and non-recourse lending
In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions - principally, non-payment of the mortgage loan - obtain. Subject to local legal requirements, the
property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some jurisdictions, mortgage loans are non-recourse loans: if the funds
recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the
borrower remains responsible for any remaining debt. In virtually all jurisdictions, specific procedures for foreclosure and sale of the mortgaged property apply, and may be tightly regulated by
the relevant government; in some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of
lenders to foreclose is extremely limited, and mortgage market development has been notably slower.
Mortgage lending: United States
United States mortgage process
In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting an application and documentation related to his/her financial
history and/or credit history to the underwriter. Many banks now offer "no-doc" or "low-doc" loans in which the borrower is required to submit only minimal financial information. These loans
carry a higher interest rate and are available only to borrowers with excellent credit. Sometimes, a third party is involved, such as a mortgage broker. This entity takes the borrower's information
and reviews a number of lenders, selecting the ones that will best meet the needs of the consumer.
Loans are often sold on the open market to larger investors by the originating mortgage company. Many of the guidelines that they follow are suited to satisfy investors. Some companies,
called correspondent lenders, sell all or most of their closed loans to these investors, accepting some risks for issuing them. They often offer niche loans at higher prices that the investor does
not wish to originate.
If the underwriter is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called stipulations. The meeting of such
conditions can be a daunting experience for the consumer, but it is crucial for the lending institution to ensure the information being submitted is accurate and meets specific guidelines. This
is done to give the lender a reasonable guarantee that the borrower can and will repay the loan. If a third party is involved in the loan, it will help the borrower to clear such conditions.
The following documents are typically required for traditional underwriter review. Over the past several years, use of "automated underwriting" statistical models has reduced the amount of
documentation required from many borrowers. Such automated underwriting engines include Freddie Mac's "Loan Prospector" and Fannie Mae's "Desktop Underwriter". For borrowers who
have excellent credit and very acceptable debt positions, there may be virtually no documentation of income or assets required at all. Many of these documents are also not required for no-
doc and low-doc loans.
Credit Report
1003 — Uniform Residential Loan Application
1004 — Uniform Residential Appraisal Report
1005 — Verification Of Employment (VOE)
1006 — Verification Of Deposit (VOD)
1007 — Single Family Comparable Rent Schedule
1008 — Transmittal Summary
Copy of deed of current home
Federal income tax records for last two years
Verification of Mortgage (VOM) or Verification of Payment (VOP)
Borrower's Authorization
Purchase Sales Agreement
1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) - used if borrower is self-employed
Predatory mortgage lending
There is concern in the U.S. that consumers are often victims of predatory mortgage lending [2]. The main concern is that mortgage brokers and lenders, operating legally, are finding
loopholes in the law to obtain additional profit. The typical scenario is that terms of the loan are beyond the means of the borrower. The borrower makes a number of interest and principal
payments, and then defaults. The lender then takes the property and recovers the amount of the loan, and also keeps the interest and principal payments, as well as loan origination fees.
Option ARM
An option ARM provides the option to pay as little as the equivalent of an amortized payment based on a 1% interest rate, (please note this is not the actual interest rate). As a result, the
difference between the monthly payment and the interest on the loan is added to the loan principal; the loan at this point has negative amortization. In this respect, an option ARM provides a
form of equity withdrawal (as in a cash-out refinancing) but over a period of time.
The option ARM gives a number of payment choices each month (for example, the equivalent of an amortized payment where the interest rate 1%, interest only based on actual interest rate,
actual 30 year amortized payment, actual 15 year amortized payment). The interest rate may adjust every month in accordance with the index to which the loan is tied and the terms of the
specific loan. These loans may be useful for people who have a lot of equity in their home and want to lower monthly costs; for investors, allowing them the flexibility to choose which payment
to make every month; or for those with irregular incomes (such as those working on commission or for whom bonuses comprise a large portion of income).
One of the important features of this type of loan is that the minimum payments are often fixed for each year for an initial term of up to 5 years. The minimum payment may rise each year a
little (payment size increases of 7.5% are common) but remain the same for another year. For example, a minimum payment for year 1 may be $1,000 per month each month all year long. In
year 2 the minimum payment for each month is $1,075 each month. This is a gradual increase in the minimum payment. The interest rate may fluctuate each month, which means that the
extent of any negative amortization cannot be predicted beyond worst-case scenario as dictated by the terms of the loan.
Option ARM mortgages have been criticized on the basis that some borrowers are not aware of the implications of negative amortization; that eventually option ARMs reset to higher payment
levels (an event called "recast" to amortize the loan), and borrowers may not be capable of making the higher monthly payments; and that option ARMs have been used to qualify mortgages
for individuals whose incomes cannot support payments higher than the minimum level.
Costs
Lenders may charge various fees when giving a mortgage to a mortgagor. These include entry fees, exit fees, administration fees and lenders mortgage insurance. There are also settlement
fees (closing costs) the settlement company will charge. In addition, if a third party handles the loan, it may charge other fees as well.
The United States mortgage finance industry
Mortgage lending is a major category of the business of finance in the United States. Mortgages are commercial paper and can be conveyed and assigned freely to other holders. In the U.S.,
the Federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the
Government National Mortgage Association (known as Ginnie Mae), the Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation
(known as Freddie Mac). These programs work by buying a large number of mortgages from banks and issuing (at a slightly lower interest rate) "mortgage-backed bonds" to investors, which are
known as mortgage-backed securities (MBS).
This allows the banks to quickly relend the money to other borrowers (including in the form of mortgages) and thereby to create more mortgages than the banks could with the amount they
have on deposit. This in turn allows the public to use these mortgages to purchase homes, something the government wishes to encourage. The investors, meanwhile, gain low-risk income at a
higher interest rate (essentially the mortgage rate, minus the cuts of the bank and GSE) than they could gain from most other bonds.
Securitization is a momentous change in the way that mortgage bond markets function, and has grown rapidly in the last 10 years as a result of the wider dissemination of technology in the
mortgage lending world. For borrowers with superior credit, government loans and ideal profiles, this securitization keeps rates almost artificially low, since the pools of funds used to create new
loans can be refreshed more quickly than in years past, allowing for more rapid outflow of capital from investors to borrowers without as many personal business ties as the past.
The greatly increased rate of lending led (among other factors) to the United States housing bubble of 2000-2006. The growth of lightly regulated derivative instruments based on mortgage-
backed securities, such as collateralized debt obligations and credit default swaps, is widely reported as a major causative factor behind the 2007 subprime mortgage financial crisis.
Second-layer lenders in the US
A group called second-layer lenders became an important force in the residential mortgage market in the latter half of the 1960s. These federal credit agencies, which include the Federal
Home Loan Mortgage Corp., the Federal National Mortgage Association, and the Government National Mortgage Association, conduct secondary market activities in the buying and selling of
loans and provide credit to primary lenders in the form of borrowed money. They do not have direct contact with the individual consumer.
Federal Home Loan Mortgage Corporation
The Federal Home Loan Mortgage Corporation, sometimes known as Freddie Mac, was established in 1970. This corporation is designed to promote the flow of capital into the housing market
by establishing an active secondary market in mortgages[1]. It may by law deal only with government-supervised lenders such as savings and loan associations, savings banks, and commercial
banks; its programs cover conventional whole mortgage loans, participations in conventional loans, and FHA and VA loans.
Federal National Mortgage Association
The Federal National Mortgage Association, known in financial circles as Fannie Mae, was chartered as a government corporation in 1938, rechartered as a federal agency in 1954, and
became a government-sponsored, stockholder-owned corporation in 1968[1]. Fannie Mae, which has been described as "a private corporation with a public purpose", basically provides a
secondary market for residential loans. It fulfills this function by buying, servicing, and selling loans that, since 1970, have included FHA-insured, VA-guaranteed, and conventional loans.
However, purchases outrun sales by such a wide margin that some observers view this association as a lender with a permanent loan portfolio rather than a powerful secondary market
corporation.
Government National Mortgage Association
The Government National Mortgage Association, which is often referred to as Ginnie Mae, operates within the Department of Housing and Urban Development. In addition to performing the
special assistance, management, and liquidation functions that once belonged to Fannie Mae, Ginnie Mae has an important additional function — that of issuing guarantees of securities
backed by government-insured or guaranteed mortgages. Such mortgage-backed securities are fully guaranteed by the U.S. government as to timely payment of both principal and interest[1].
Competition among US lenders for loanable funds
To be able to provide homebuyers and builders with the funds needed, financial institutions must compete for deposits. Consumer lending institutions compete for loanable funds not only
among themselves but also with the federal government and private corporations. Called disintermediation, this process involves the movement of dollars from savings accounts into direct
market instruments: U.S. Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of
money market funds whose higher interest rates attracted consumer deposits.[2]
To compete for deposits, US savings institutions offer many different types of plans[2]:
Passbook or ordinary accounts — permit any amount to be added to or withdrawn from the account at any time.
NOW and Super NOW accounts — function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts.
Money market accounts — carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance.
Certificate accounts — subject to loss of some or all interest on withdrawals before maturity.
Notice accounts — the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal.
Individual retirement accounts (IRAs) and Keogh accounts—a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal.
Checking accounts — offered by some institutions under definite restrictions.
Club accounts and other savings accounts—designed to help people save regularly to meet certain goals.
Mortgages in the UK
Main article: UK mortgage terminology
The mortgage loans industry and market
There are currently over 200 significant separate financial organizations supplying mortgage loans to house buyers in Britain. The major lenders include building societies, banks, specialized
mortgage corporations, insurance companies, and pension funds. Over the years, the share of the new mortgage loans market held by building societies has declined. Between 1977 and
1987, it fell drastically from 96% to 66% while that of banks and other institutions rose from 3% to 36%. The banks and other institutions that made major inroads into the mortgage market
during this period were helped by such factors as:
relative managerial efficiency;
advanced technology, organizational capabilities, and expertise in marketing;
extensive branch networks; and
capacities to tap cheaper international sources of funds for lending.[3]
By the early 1990s, UK building societies had succeeded in greatly slowing if not reversing the decline in their market share. In 1990, the societies held over 60% of all mortgage loans but
took over 75% of the new mortgage market – mainly at the expense of specialized mortgage loans corporations. Building societies also increased their share of the personal savings deposits
market in the early 1990s at the expense of the banks – attracting 51% of this market in 1990 compared with 42% in 1989.[4] One study found that in the five years 1987-1992, the building
societies collectively outperformed the UK clearing banks on practically all the major growth and performance measures. The societies' share of the new mortgage loans market of 75% in
1990-91 was similar to the share level achieved in 1985. Profitability as measured by return on capital was 17.8% for the top 20 societies in 1991, compared with only 8.5% for the big four
banks. Finally, bad debt provisions relative to advances were only 0.4% for the top 20 societies compared with 2.8% for the four banks.[5]
Though the building societies did subsequently recover a significant amount of the mortgage lending business lost to the banks, they still only had about two-thirds of the total market at the
end of the 1980s. However, banks and building societies were by now becoming increasingly similar in terms of their structures and functions. When the Abbey National building society
converted into a bank in 1989, this could be regarded either as a major diversification of a building society into retail banking – or as significantly increasing the presence of banks in the
residential mortgage loans market. Research organization Industrial Systems Research has observed that trends towards the increased integration of the financial services sector have made
comparison and analysis of the market shares of different types of institution increasingly problematical. It identifies as major factors making for consistently higher levels of growth and
performance on the part of some mortgage lenders in the UK over the years:
the introduction of new technologies, mergers, structural reorganization and the realization of economies of scale, and generally increased efficiency in production and marketing operations
– insofar as these things enable lenders to reduce their costs and offer more price-competitive and innovative loans and savings products;
buoyant retail savings receipts, and reduced reliance on relatively expensive wholesale markets for funds (especially when interest rates generally are being maintained at high levels
internationally);
lower levels of arrears, possessions, bad debts, and provisioning than competitors;
increased flexibility and earnings from secondary sources and activities as a result of political-legal deregulation; and
being specialized or concentrating on traditional core, relatively profitable mortgage lending and savings deposit operations.[6]
Mortgage types
The UK mortgage market is one of the most innovative and competitive in the world. Unlike some other countries, there is little intervention in the market by the state or state funded entities
and virtually all borrowing is funded by either mutual organisations (building societies and credit unions) or proprietary lenders (typically banks). Since 1982, when the market was substantially
deregulated, there has been substantial innovation and diversification of strategies employed by lenders to attract borrowers. This has led to a wide range of mortgage types.
As lenders derive their funds either from the money markets or from deposits, most mortgages revert to a variable rate, either the lender's standard variable rate or a tracker rate, which will tend
to be linked to the underlying Bank of England (BoE) repo rate (or sometimes LIBOR). Initially they will tend to offer an incentive deal to attract new borrowers. This may be:
A fixed rate; where the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and/or
have more onerous early repayment charges and are therefore less popular than shorter term fixed rates.
A capped rate; where similar to a fixed rate, the interest rate cannot rise above the cap but can vary beneath the cap. Sometimes there is a collar associated with this type of rate which
imposes a minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.
A discount rate; where there is set margin reduction in the standard variable rate (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the discount is expressed as a margin
over the base rate (e.g. BoE base rate plus 0.5% for 2 years) and sometimes the rate is stepped (e.g. 3% in year 1, 2% in year 2, 1% in year three).
A cashback mortgage; where a lump sum is provided (typically) as a percentage of the advance e.g. 5% of the loan.
To make matters more confusing these rates are often combined: For example, 4.5% 2 year fixed then a 3 year tracker at BoE rate plus 0.89%.
With each incentive the lender may be offering a rate at less than the market cost of the borrowing. Therefore, they typically impose a penalty if the borrower repays the loan within the
incentive period or a longer period (referred to as an extended tie-in). These penalties used to be called a redemption penalty or tie-in, however since the onset of Financial Services Authority
regulation they are referred to as an early repayment charge.
Self Cert Mortgage
Mortgage lenders usually use salaries declared on wage slips to work out a borrower's annual income and will usually lend up to a fixed multiple of the borrower's annual income. Self
Certification Mortgages, informally known as "self cert" mortgages, are available to employed and self employed people who have a deposit to buy a house but lack the sufficient
documentation to prove their income.
This type of mortgage can be beneficial to people whose income comes from multiple sources, whose salary consists largely or exclusively of commissions or bonuses, or whose accounts may
not show a true reflection of their earnings. Self cert mortgages have two disadvantages: the interest rates charged are usually higher than for normal mortgages and the loan to value ratio is
usually lower.
100% Mortgages
Normally when a bank lends a customer money they want to protect their money as much as possible; they do this by asking the borrower to fund a certain percentage of the property purchase
in the form of a deposit.
100% mortgages are mortgages that require no deposit (100% loan to value). These are sometimes offered to first time buyers, but almost always carry a higher interest rate on the loan.
Together/Plus Mortgages
A development of the theme of 100% mortgages is represented by Together/Plus type mortgages, which have been launched by a number of lenders in recent years.
Together/Plus Mortgages represent loans of 100% or more of the property value - typically up to a maximum of 125%. Such loans are normally (but not universally) structured as a package of a
95% mortgage and an unsecured loan of up to 30% of the property value. This structure is mandated by lenders' capital requirements which require additional capital for loans of 100% or
more of the property value.
UK mortgage process
UK lenders usually charge a valuation fee, which pays for a chartered surveyor to visit the property and ensure it is worth enough to cover the mortgage amount. This is not a full survey so it
may not identify all the defects that a house buyer needs to know about. Also, it does not usually form a contract between the surveyor and the buyer, so the buyer has no right to sue if the
survey fails to detect a major problem. For an extra fee, the surveyor can usually carry out a building survey or a (cheaper) "homebuyers survey" at the same time.[7]
Mortgage insurance
Mortgage insurance is an insurance policy designed to protect the mortgagee (lender) from any default by the mortgagor (borrower). It is used commonly in loans with a loan-to-value ratio over
80%, and employed in the event of foreclosure and repossession.
This policy is typically paid for by the borrower as a component to final nominal (note) rate, or in one lump sum up front, or as a separate and itemized component of monthly mortgage
payment. In the last case, mortgage insurance can be dropped when the lender informs the borrower, or its subsequent assigns, that the property has appreciated, the loan has been paid down,
or any combination of both to relegate the loan-to-value under 80%.
In the event of repossession, banks, investors, etc. must resort to selling the property to recoup their original investment (the money lent), and are able to dispose of hard assets (such as real
estate) more quickly by reductions in price. Therefore, the mortgage insurance acts as a hedge should the repossessing authority recover less than full and fair market value for any hard asset.
Islamic mortgages
Main article: Islamic economic jurisprudence
The Sharia law of Islam prohibits the payment or receipt of interest, which means that practising Muslims cannot use conventional mortgages. However, real estate is far too expensive for most
people to buy outright using cash: Islamic mortgages solve this problem by having the property change hands twice. In one variation, the bank will buy the house outright and then act as a
landlord. The homebuyer, in addition to paying rent, will pay a contribution towards the purchase of the property. When the last payment is made, the property changes hands.[citation needed]
Typically, this may lead to a higher final price for the buyers. This is because in some countries (such as the United Kingdom and India) there is a Stamp Duty which is a tax charged by the
government on a change of ownership. Because ownership changes twice in an Islamic mortgage, a stamp tax may be charged twice. Many other jurisdictions have similar transaction taxes
on change of ownership which may be levied. In the United Kingdom, the dual application of Stamp Duty in such transactions was removed in the Finance Act 2003 in order to facilitate
Islamic mortgages.[8]
An alternative scheme involves the bank reselling the property according to an installment plan, at a price higher than the original price.
All of these methods are still compensating the lender as if they were charging interest, but the loans are structured in a way that in name they are not, but they share the financial risks
involved in the transaction with the homebuyer.[citation needed]
Other terminologies
Like any other legal system, the mortgage business sometimes uses confusing jargon. Below are some terms explained in brief. If a term is not explained here it may be related to the legal
mortgage rather than to the loan.
Advance This is the money you have borrowed plus all the additional fees.
Base rate In UK, this is the base interest rate set by the Bank of England. In the United States, this value is set by the Federal Reserve and is known as the Discount Rate.
Bridging loan This is a temporary loan that enables the borrower to purchase a new property before the borrower is able to sell another current property.
Disbursements These are all the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc.
Early redemption charge / Pre-payment penalty / Redemption penalty This is the amount of money due if the mortgage is paid in full before the time finished.
equity This is the market value of the property minus all loans outstanding on it.
First time buyer This is the term given to a person buying property for the first time.
Loan origination fee A charge levied by a creditor for underwriting a loan. The fee often is expressed in points. A point is 1 percent of the loan amount.
Sealing fee This is a fee made when the lender releases the legal charge over the property.
Subject to contract This is an agreement between seller and buyer before the actual contract is made.
General, or related to more than one nation
Commercial mortgage
Nonrecourse debt
Refinancing
Shared appreciation mortgage
No Income No Asset (NINA)
Annual percentage rate
Foreign currency mortgage
Related to the United Kingdom
Buy to let
Remortgage
UK mortgage terminology
Related to the United States
Commercial lender (US) - a term for a lender collateralizing non-residential properties.
Fixed rate mortgage calculations (USA)
pre-qualification - U.S. mortgage terminology
pre-approval - U.S. mortgage terminology
FHA loan - Relating to the U.S. Federal Housing Administration
VA loan - Relating to the U.S. Veterans Administration.
eMortgages
Location Efficient Mortgage - a type of mortgage for urban areas
Predatory mortgage lending
Other nations
Danish mortgage market
Legal details
Deed - legal aspects
Mechanics lien - a legal concept
Perfection - applicable legal filing requirements
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Goodwill
A class of intangible assets such as a company's name and reputation.
Goodwill shows up on a company's books when it acquires another company, and naturally has to pay more for it than the listed book value of its assets. The excess paid is categorized as
Goodwill, added to the acquiring company's balance sheet as an asset, and then depreciated over a period of years.
Depreciation: Method to account for assets whose value is considered to decrease over time.
The total amount that assets have depreciated by during a reporting period is shown on the cash flow statement, and also makes up part of the expenses shown on the income statement. The
amount that assets have depreciated to by the end date of the period is shown on the balance sheet.
Gordon Growth Model
Valuation formula holding that the total return of a stock investment will equal its dividend yield plus its dividend growth rate:
R = D/P + G
where D is next year's annual dividend;
P is the current share price;
G is the growth rate.
Stock Valuation based on Earnings
Stock valuation based on earnings starts out with one giant logical leap: you assume that each dollar of earnings per share of a company is really worth one actual dollar of income to you as a
stockholder. This is theoretically because you expect the company to use that dollar in a beneficial way: for example, they could use it to pay you a dividend; or they could invest it in their
own growth, which would cause future earnings to be even greater.
You also generally assume that the company will go through several distinct phases, starting with a "growth" phase where earnings are increasing at a predictable rate, followed by a "mature"
phase where earnings level off to a constant level.
To find the value of a stock, you need to calculate all of these future earnings (out to infinity!), and then use your own desired rate of return as a discount rate to find their present value. The
infinite sum of these present values is the fair market value of the stock; or more accurately, it's the maximum price you should be willing to pay.
To get the formula, we'll define some variables:
E = this year's Earnings per Share
G = growth rate of earnings (written as a decimal)
N = number of years earnings will grow
We're assuming that earnings will start to grow for N years, and then level off:
Year Earnings
1 E(1 + G)
2 E(1 + G)2
N E(1 + G)N
N + 1 E(1 + G)N
N + 2 E(1 + G)N
Now we'll write R for our desired rate of return, and use it to find the present values of all of these earnings:
Year Present Value of Earnings
1 E(1 + G)/(1 + R)
2 E(1 + G)2/(1 + R)2
N E(1 + G)N/(1 + R)N
N + 1 E(1 + G)N/(1 + R)N+1
N + 2 E(1 + G)N/(1 + R)N+2
What we've got here is two geometric series; one going from 1 to N, and the other going from N + 1 to infinity. The result is basically too ugly to bother writing out; it's more sensible just to use
the formula for the geometric series in a spreadsheet or computer program. When people do write it out, they usually write it this way:
P = E1Q + E2Q2 + ... + ENQN + ENQN x Q/(1 - Q)
where E2 is the earnings in year 2 (or whatever) and Q is the so-called "discount factor" 1/(1 + R).
Zero-Growth Case
One special case is actually interesting to write out though. If you assume that the stock is already in the "mature", zero-growth years -- ie, that N is zero -- the geometric series formula will
simplify to:
P = E / R
or, equivalently,
P / E = 1 / R
So if you take a desired return of 11%, you find that the theoretical "fair" P/E ratio of the zero-growth stock is 1/.11 = 9.09, which sounds reasonable.
Constant-Growth Case
A second special case that people use is the "constant growth forever" case, meaning N is infinity. The formula in this case simplifies to
P = E1 / (R - G)
where E1 is earnings over the next 12 months.
This approach can be dangerous. Constant growth forever means the company is going to get infinitely big, which is a hard concept to fit into a common sense understanding of valuation. The
formula will give you a number as long as the growth rate G is less than the discount rate R; but you can force it to give you a ridiculously huge number if you make G very close to R. This
graph won't let you try that - the blue bars could blow through the top of your screen and hurt somebody - but you can see it happen in the discounted cash flows calculator in the stock
valuation article.
How much is a share of stock really worth? Not just in terms of analysts' opinions, but logically, based on facts?
In theory, the answer is simple: a company is worth the total amount of cash it will generate over its lifetime, discounted to its present value. (And don't panic if you don't really understand that
last sentence, because the next page explains it. You do not need any background to read this article.)
This is a simple discounted cash flows calculator, along with some popular variations and shortcuts, to make stock valuation make sense. But before we get started.... When you use any kind of
value formula, it's a good idea to remember Warren Buffett's advice, that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price". The idea is to find
a company whose prospects you really believe in, and then use a valuation technique as a reality check, to make sure the purchase price is acceptable. And try to make your valuation
estimates realistic and conservative: you're trying to protect yourself from overpaying, not justify your surplus of enthusiasm.
Gross Domestic Product (GDP)
Total annual output of the U.S. economy, measured by its final purchase price.
GDP is divided into four categories, according to the final purchaser:
GDP = Consumer Spending
+ Business and Residential Investment
+ Government Spending
- Trade Deficit.
(See the interactive GDP Diagram.)
The gross domestic product includes enough sub-components that just looking at trends in the bottom line GDP number can give you a misleading idea of what the economy is actually doing.
One example: if a retailer successfully sells a product, the sale will count toward "consumer spending" at its retail price; if the retailer fails and the product bloats its inventory, it will count
toward "business investment" at its wholesale price (i.e. the price the retailer paid for it). Later, when the retailer works off the bloat, the decline in inventory will contribute a negative number
toward business investment, officially lowering GDP. In other words, the GDP calculation can make the start of a recession look better, and the recovery stage look weaker, than they really are.
GDP data is available from the Bureau of Economic Analysis (www.bea.gov).
Also see the definition of Gross National Product.
Government Spending
Spending by the federal, state, and local governments, accounting for about 20% of the GDP. See fiscal policy, and the interactive GDP Diagram.
Fiscal Policy
All policy by the government involving the collection and spending of revenue; ie "tax and spend" policy. In particular, fiscal policy refers to efforts by the government to stimulate the
economy directly, through spending. Compare monetary policy.
Monetary Policy
Actions by the Federal Reserve to control the money supply.
In particular, monetary policy refers to efforts to fight inflation or otherwise control or stimulate the economy by controlling the availability of spending money to companies and consumers.
Compare fiscal policy.
Components of the Gross Domestic Product
If the word on the street during the late 1990s was that the business cycle was dead, the lesson of the early 2000s is that Economics Happens. So in the spirit of too little, too late, here is a "big
picture" overview of the entire U.S. economy.
Gross National Product (GNP)
Total output of the U.S. economy; see the definition of Gross Domestic Product for details. GNP and GDP tend to be used as synonyms, although GDP is definitely the preferred measure among
economists and is gaining popularity in general conversation as well; the two measures are fairly close numerically. The difference is that GDP measures all production within the U.S., by
whoever happens to be working here; GNP measures the production of all Americans, wherever they happen to be working. (Maybe you can remember the "N" in GNP stands for "anywhere").
Gross Margin
Ratio of gross profit to sales revenue. (Also sometimes used as a synonym for gross profit).
For a manufacturer, gross margin is a measure of a company's efficiency in turning raw materials into income; for a retailer it measures their markup over wholesale.
Most companies would like a gross margin that's as large as possible. An exception is the discount retailer; part of their game is to make their operations and financing so efficient that they can
afford to keep their markup tiny.
Gross Profit: Sales revenue minus sales costs. Also called "sales profit".
Gross Revenue
"Raw" sales income; the amount customers actually pay the company when they make their purchases.
When a company sells products, it has to make allowances for some portion of its sales for products expected to be returned, lost in delivery, or otherwise requiring the company to refund the
customers' money. The "official" revenue number, known as sales revenue, equals gross revenue minus these allowances.
Gross revenue is generally not an interesting number for investors. One case where it is interesting is when you're tracking the progress of a startup company. It's possible that at the very
beginning they'll be doing such a tiny amount of business that actual sales will be less than the allowances for refunds, meaning that sales revenue will technically be a negative number. In
this case the company will issue news releases about its gross revenue, so investors will at least know that a few customers have been showing up and laying out some cash.
Sales Revenue
Income from sales of goods and services, minus the cost associated with things like returned or undeliverable merchandise. Also called "Sales", "Net Sales", "Net Revenue", and just plain
"Revenue".
Income Fund Definition
The definition of an income fund is a
mutual or other fund that has it's core
investments in established dividend paying
stocks and fixed income. These funds and
the stocks within it pay regular dividends.
They are more predictable, but offer less of
a chance for high capital gains later on.
These funds normally perform within a
range in up and down years for the stock
market. An income fund can fit into any
portfolio, but it is best for people who would
like or need income and who do not want to
take on too much risk in the future.
Mutual Fund Investment.
An open end fund that
is purchased and
redeemed with an
investment company is
a mutual fund. These
investments are issuing
new shares and are
normally bought paying
a sales charge to the
company or a selling
group member firm.
There are mutual funds
invested in every sector
of the market and every
investment objective.
The type of fund you
choose should reflect
your income needs, risk
tolerance and your
current and projected
future financial situation
Trust Account. A type of account where a
custodian or investment advisor manages
and oversees an investment account for
someone else, usually a minor