...:INVESTMENT ALTERNATIVES * Types of assets that investors can invest in; financial assets and real assets * * Financial assets: are claims that organizations sell in order to finance their financial needs. Examples of financial assets are shares, bonds, certificate of deposits, unit trust. * Real assets: consists of tangible assets such as investment in real property, precious metal, gems, antiques, stamps, coins and work of arts. Real Asset vs Financial Assets Types | REAL ASSETS | FINANCIAL ASSET | Characteristics | Tangible asset/physical capital that generate income | Claims of organization sell in order to finance their financial needs t | Advantages | * It can be used to produce goods and service s * Owning a real tangible asset that has both investment and aesthetic value | * It has an efficient market for trading * High liquidity * Easy to transfer ownership | Disadvantage | * Lack of an efficient and limited market * Hard liquidate * High commission charged | * Must go through broker (middleman) to get access into the market | Example | * Real property ( house, land, machine, gold, antiques) | * Shares, bonds, certificate of deposit ,unit trust, commodity, derivative instruments | Savings * Form of fixed investment where principal amount and terminal amount is known. ADVANTAGES | DISADVANTAGES | * Provide security * Earn interest on savings * High liquidity | * Earn low income * Hard to...
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...Chapter 22: Financial Asset at Fair Value International Accounting Standards Board Investments are assets held by an entity for the accretion of wealth through distribution such as interest, royalties, dividends, and rentals, for capital appreciation or for other benefits to the investing entity such as those obtained in trading relationship s. PAS 32, paragraph 11 Financial instrument, any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. PFRS 9 paragraph 4.1.1 Financial assets are classified into three: A) Financial assets at fair value through profit or loss – both include equity securities and debt securities B) Financial assets at fair value through other comprehensive income - both include equity securities and debt securities C) ) Financial assets at amortized cost – include only debt securities PFRS 9 paragraph 5.1.1 provides that at initial recognition any entity shall measure a financial asset at fair value plus, in the case of financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. PFRS 9 paragraph 5.2.1 provides that after initial recognition an entity shall measure a financial asset at: A) Fair value through profit or loss (FVPL) B) Fair value through other comprehensive income (FVOCI) C) Amortized Cost Application Guidance B5.1.14 of PFRS 9 All other investments in quoted...
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... Effects of Risk Takers 2 In the late 2008, firms suffered immensely from investing in auction rate securities. ARS are bonds that the return rates rely on auctions that take place on every 7th week at a minimum. The company’s financial investor managers were under the impression that buying those types of bonds were the way to go. However, Outfitters decided to play it save and invest conservatively. As Benjamin Franklin quoted "Necessity never made a good bargain". In other words, do not invest funds that are needed prematurely, in hopes of an unrealistic high return. The Outfitter financial managers were patient with their finances. Because the Outfitters had a steady cash flow, they invested cautiously. The Outfitters outcome wasn’t as awful as some other firms. Although corporations are faced with challenges, patience is an asset. Firms like Countrywide Financial, Lehman Brothers, and American International Group all had issues with liquid assets. Because of this, they all invested heavily into ARS which in turn made their investment options unstable. When companies as large as these firms do not have enough cash in the bank or liquid assets, it puts them at an increase disadvantage to withstand a financial crisis. Case in point, when the economy went south in 2008, these companies were not able to inject cash back into their businesses because they had taken on too much debt. The bonds they had were worth less because of the high default ratio...
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...1. List the bonds in the order of its interest rate (yields to maturity) from highest to lowest. Explain your work. The order, highest to lowest, is: X, W, Y and Z Bonds with higher ratings are considered to be the most stable and least likely to default, therefore considered to be a lower risk. The lower the risk associated with the bond, the lower the interest rate/yield to maturity. In other words, corporate bond ratings have a reverse impact on their interest rate. So, the lower rated BBB bond will have higher interest rate than the AAA bond. Short-term interest rates are typically lower than long-term interest rates. The longer you are vested in a bond or security, they greater the yield is expected to be, thus Y is lower than X and W. A market that is more liquid allows for more flexibility for the investor enabling them to trade at lower costs creating an even lower risk for the investor. In order to attract investors into less liquid markets, the interest rate must be higher and worth the investment. Thus the yield to maturity is even lower on Z, than all others. 2. Explain how an economist could use the slope of the yield curve to analyze the probability that a recession will occur and why the spread may matter. The shape of the yield curve represents what the interest rates look like against the time to maturity. When the economy is in a generally “good” state, the shape of the yield curve will slope slightly upward. This shape is a representation that...
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...MN10466 – Accounting & Organisations Coursework The coursework requirement is to produce an essay of 2,000 words (excluding references). The title of the essay is: “Should financial statements be based on historical costs or fair values?” The starting point of the assignment will be the lectures given in Weeks 1-4. Some material will be provided on Moodle but you will be required to research the topic using books and journals that are available on-line via the library. e will put you into groups. A list will be on . It is your responsibility to get together, organise the work and produce the essay. If your group collapses follow the document ‘Appeal for Variation of Marks’ on Moodle. The completed assignment must be submitted by one group member via the Assignment Tool on Moodle in PDF format by 3pm on Wednesday 20th March 2013 Please submit one PDF including the cover sheet, two pages of feedback (to be completed by David Bence), the essay and the learning log. Use the Harvard (Bath) referencing style. See: http://www.bath.ac.uk/library/infoskills/referencing-plagiarism/ The Learning Log should be submitted at the end of your assignment. The leaning log should show the record of the group meetings, the attendance of group members, agreed allocation of work, a record of the tasks completed and a statement of the benefit obtained by the group from completing the essay. The learning log will not be marked but must be completed as part of the requirement...
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...1. Based on the unaudited financial statements above and the statement made by the loan officer, would the company qualify for the loan? The loan officer stated there would be no problem obtaining a loan to pay off the accounts payable accounts provided Venice InLine had a current ratio above 2.0, an acid-test ratio above 1.0, and net operating income that was at least four times the interest on the proposed loan. The current ratio measures the ability to pay sort-term debt. The acid-test ratio is calculated to show the short-term debt paying ability without relying on inventory. The operating income in excess of interest will also show the ability to pay. Based on these three tests, the company would not qualify for the loan because it does not meet the required ratio two of the three measurements. Below are the calculations. a. Current Ratio. The calculation for the current ratio is current assets divided by current liabilities. In this case, the calculation for the current year would be $290,000/$164,000. This equals a current ratio of 1.77. For the prior year, the calculation would be $302,000/$100,000 for a ratio of 3.02. Since the rate has dropped in the year, this would indicate deteriorating financial conditions, which we knew since the company could not make holiday deliveries. However, since the ratio is below 2.0 as required by the bank, the loan would not be approved for this measurement. b. Acid-test Ratio. The calculation for the acid-test ratio is (Cash...
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...CHAPTER 2: ASSET CLASSES AND FINANCIAL INSTRUMENTS PROBLEM SETS 1. Preferred stock is like long-term debt in that it typically promises a fixed payment each year. In this way, it is a perpetuity. Preferred stock is also like long-term debt in that it does not give the holder voting rights in the firm. Preferred stock is like equity in that the firm is under no contractual obligation to make the preferred stock dividend payments. Failure to make payments does not set off corporate bankruptcy. With respect to the priority of claims to the assets of the firm in the event of corporate bankruptcy, preferred stock has a higher priority than common equity but a lower priority than bonds. 2. Money market securities are called “cash equivalents” because of their great liquidity. The prices of money market securities are very stable, and they can be converted to cash (i.e., sold) on very short notice and with very low transaction costs. 3. (a) A repurchase agreement is an agreement whereby the seller of a security agrees to “repurchase” it from the buyer on an agreed upon date at an agreed upon price. Repos are typically used by securities dealers as a means for obtaining funds to purchase securities. 4. The spread will widen. Deterioration of the economy increases credit risk, that is, the likelihood of default. Investors will demand a greater premium on debt securities subject to default risk. 5. Corp. Bonds Preferred Stock Common Stock ...
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...Title Considerations Surrounding Major Financial Assets Assessment A: Researching Interest Rates Summarize the information on interest rates. There are many types of interest rate agreements, all with their own pros and cons. What may work for you may depend on yourselves circumstances. A fixed rate is a loan or mortgage with an interest rate that will remains adjusted for the entire term of the loan. A variable rate or also known as an adjustable rate is a loan with the interest rate on the note periodically adjusted based on an index, which shows the cost to the lender on the credit market. The loan may be offered at the lenders standard variable rate. Assessment B: Decision Making Process Identify the steps in the decision making process for major purchases. Step 1a: What do I need? Keep car? Step 1b: What do I need? Replace car? Step 2: What can I afford? Step 3a: New car? Step 3b: Used car? Step 4: Find an honest salesperson Step 5: Compare based on attributes, price Step 6: Decide how to finance loan Step 7: Negotiate terms of contract Assessment C: Considerations Surrounding Major Financial Assets Summarize the 6 main steps in buying a house. The first step in buying a home is making sure you’re financially stable; make sure there are no discrepancies in your credit report! Second step in buying a home is to find a licenced real estate agent to help avoid common mistakes Third step to buying a home your agent will...
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...called a adjustable rateis a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender's standard variable rate/base rate Assessment B: Decision Making Process Identify the steps in the decision making process for major purchases. Step 1a: What do I need? Replace car? Step 1b: What do I need? Keep car? Step 2: What can I afford? Step 3a: New car? Step 3b: Used car? Step 4: Decide how to finance loan Step 5: Compare based on attributes, price Step 6: Identify alternatives Step 7: Fix mistakes on credit report Assessment C: Considerations Surrounding Major Financial Assets Summarize the 6 main steps in buying a house. There are 6 steps with buying a home the first is you need to make sure all of your finances are in order this includes fix and check credit report and lower any loans you may have. Next, get a license real estate agent to help you find a home and suggest and offer. Once you have placed an offer and singed a contract you need to have the home inspected, make sure the home has no defects also checking the foundation, electrical, plumbing etc. Then you need to set financing options whether it is through your own bank or other sources. Finally you and the seller to come to term with a closing date and all closing cost. In this step you need to make sure you have your home title and...
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... General Rule and Overview Who Must File Information To Be Reported Section 6038D Penalty Repatriation of Funds Code Section 6038D added to the Internal Revenue Code as part of the Foreign Account Tax Compliance Act (FATCA) in 2010. Code Section 6038D requires certain individuals to annually report to the IRS information about their interest in specified foreign financial interest (“SFFAs”). Filing obligation is dependent of the aggregate value for the year of SFFAs and the applicable threshold. Reporting is required for assets held in taxable years beginning after March 18, 2010 on Form 8938. Form 8938 is attached to the taxpayer’s annual income tax return and is due on the same date (including extensions). Code section 6038D(a): “Any individual who, during any taxable year, holds any interest in a specified foreign financial asset … if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe).” Specified Individual: Dual Residents: ◦ U.S. citizens; ◦ Individuals who are U.S. residents for any portion of the relevant year; ◦ Nonresident aliens who are married to a U.S. citizen or U.S. resident and who elect under Code Section 6013(g) or Code Section 6013(h) to be treated as U.S. residents for certain federal tax purposes; ◦ Nonresident aliens who are bona fide residents of Puerto Rico; and ◦ Nonresident aliens who are bona fide residents of a so-called “Section...
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...3. Classification of Financial Instruments lassification of financial instruments and identification of their nature is one of the most important phases for compilation and presentation of monetary statistics. Like other classifications used in monetary statistics, it is also advisable here to follow international standards that would help to make statistics comparable across countries’ and ensure its unity. In carrying out classification, there will be a need to consider features of a country’s banking and financial system paying a due regard to their development prospects. C Financial instruments are financial contracts of different nature made between institutional units. These comprise the full range of financial claims and liabilities between institutional units, including contingent liabilities like guarantees, commitments, etc. Financial asset is defined as any contract from which a financial claim may derive for one party and a financial liability or participation in equity for another. Financial instrument can exist only between two institutional units. Where financial instruments are compounded, i.e. represent a set of several instruments, for compilation of statistics there will be a need to distinguish them into separate instruments so that each of them includes only a single pair of institutional units. Financial assets are contracts that do not contain contingency, i.e., irrespective of any conditions, generate financial claims having demonstrable value...
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...IFRS 7: Financial Instruments: Disclosures This IAS contains amendments resulting from the adoption of Commission Regulations (EC) No. 2238/2004 of 29 December 2004 , Nr. 2237/2004 of 29 December 2004, No. 2236/2004 of 29 December 2004 and No. 108/2006 of 11 January 2006. Objective 1. The objective of this IFRS is to require entities to provide disclosures in their financial statements that enable users to evaluate: (a) the significance of financial instruments for the entity’s financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks. 2. The principles in this IFRS complement the principles for recognising, measuring and presenting financial assets and financial liabilities in IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement. Scope 3. This IFRS shall be applied by all entities to all types of financial instruments, except: (a) those interests in subsidiaries, associates and joint ventures that are accounted for in accordance with IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates or IAS 31 Interests in Joint Ventures. However, in some cases, IAS 27, IAS 28 or IAS 31 permits an entity to account for an interest in a subsidiary, associate or joint venture using IAS 39; in...
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...Ultimately, it is true that real assets determine the material well being of an economy. Nevertheless, individuals can benefit when financial engineering creates new products that allow them to manage their portfolios of financial assets more efficiently. Because bundling and unbundling creates financial products with new properties and sensitivities to various sources of risk, it allows investors to hedge particular sources of risk more efficiently. 2. Securitization requires access to a large number of potential investors. To attract these investors, the capital market needs: 1. a safe system of business laws and low probability of confiscatory taxation/regulation; 2. a well-developed investment banking industry; 3. a well-developed system of brokerage and financial transactions, and; 4. well-developed media, particularly financial reporting. These characteristics are found in (indeed make for) a well-developed financial market. 3. Securitization leads to disintermediation; that is, securitization provides a means for market participants to bypass intermediaries. For example, mortgage-backed securities channel funds to the housing market without requiring that banks or thrift institutions make loans from their own portfolios. As securitization progresses, financial intermediaries must increase other activities such as providing short-term liquidity to consumers and small business, and financial services. 4. Financial assets make it easy for large firms...
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...Current and noncurrent assets Becoming an effective accountant requires knowledge of terminologies that provide a better understanding of financial responsibilities and business processes. Accountants must provide information about concepts, definitions, and accounting terms. To prepare budgets, forecasts, and other financial duties an accountant must also understand basic accounting principles. Assets provide businesses and investors with revenue that can increase income profits or cause assets to decline. This summary will compare and contrast two assets that businesses and investors use to determine the financial status of a company. Additional topics to discuss include the order of liquidity for current and noncurrent assets and the levels of asset in the balance sheet. Current assets Assets are a type of revenue that businesses manage to increase revenue and achieve value. Kimmel, Weygandt, and Kieso (2007) add “Different types of assets are given different names” (p. 10). Companies also describe assets as current and noncurrent assets. Current assets include cash, accounts receivable, and inventory. These assets are highly liquid because they convert into cash within a one-year operating cycle. Companies with large amounts of current assets need to implement internal controls to safeguard assets. Current assets are also used to conduct day-to-day operations in the workplace. Noncurrent assets Noncurrent assets are another source of revenue that companies...
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...it is true that real assets determine the material well being of an economy. Nevertheless, individuals can benefit when financial engineering creates new products that allow them to manage their portfolios of financial assets more efficiently. Because bundling and unbundling creates financial products with new properties and sensitivities to various sources of risk, it allows investors to hedge particular sources of risk more efficiently. 2. Securitization requires access to a large number of potential investors. To attract these investors, the capital market needs: 1. a safe system of business laws and low probability of confiscatory taxation/regulation; 2. a well-developed investment banking industry; 3. a well-developed system of brokerage and financial transactions, and; 4. well-developed media, particularly financial reporting. These characteristics are found in (indeed make for) a well-developed financial market. 3. Securitization leads to disintermediation; that is, securitization provides a means for market participants to bypass intermediaries. For example, mortgage-backed securities channel funds to the housing market without requiring that banks or thrift institutions make loans from their own portfolios. As secur itization progresses, financial intermediaries must increase other activities such as providing short-term liquidity to consumers and small business, and financial services. 4. Financial assets make it easy for large...
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