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Treasury Inflation Protected Securities

Treasury Inflation Protected Securities

Treasury Inflation Protected Securities or TIPS for short are debt instruments that are issued by the U.S. government. TIPS are indexed with the Consumer Price Index (CPI), and adjust accordingly to the inflation rate presented in the CPI.

Treasury Inflation-Protected Securities (TIPS) Explained

Treasury TIPS means that the security will adjust for inflation or deflation on whether the CPI increases or decreases. Because of this extra protection from inflation rates, TIPS owners are forced to pay more in taxes, a major disadvantage, when the security matures or it is sold. Treasury tips are normally sold with 5, 10, or 30 year maturities in denominations of $1,000 or more.

Treasury Inflation Protected Securities (TIPS) Example

Timmy has just invested in a TIPS note which has a 4% rate of return and a 10 year maturity. The following results are how an inflation protected security react to inflation and the market.

If interest rates rise by 1% in the first year then the principal would change to $1,010 (1,000 * 1.01). Thus the coupon rate would be calculated by taking 4% * $1,010 which equals a coupon payment of $40.40.

If the interest rates were to rise again by 2% then the new principal would change to $1,020 ($1,000 * 1.02), and the coupon payment would be 4% * $1,020 which equals $40.8.

Note: The new coupon payment and interest will change in the same manner no matter if deflation or inflation occurs.

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treasury inflation protected securities
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treasury inflation protected securities

See Also:
Treasury Securities
Treasury Notes (t notes)

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Maturity Date Defined

See Also:
Coupon Rate Bond
Covenant Definition of a Bond Contract
Long Term Debt
Non-Investment Grade Bonds
Par Value of a Bond

Maturity Date Defined

In finance, maturity date defined is the date on which a debt instrument is due. For example, when a bond reaches maturity, the issuer must pay the bondholder the principle and the final interest payment. A debt instrument’s maturity is one of the factors that determine the price and yield of the instrument. Because of the time value of money and the increased risk of volatility, debt instruments with longer maturities often have higher yields.


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Maturity Date Defined

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Maturity Date Defined

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Currency Swap

See Also:
Currency Exchange Rates
Transaction Exposure
Exchange Traded Funds
Translation Exposure
Hedge Funds

Currency Swap Definition

Currency swaps are used to manage exchange rate risk. In a currency swap, two counterparties exchange the interest and principal payments on loans in different currencies. The counterparties agree to a set exchange rate, a set maturity, and a set schedule to pay interest and principal. By fixing the exchange rate for the transaction, both counterparties hedge the risk of unfavorable exchange rate fluctuations.

Currency Swap Example

For example, a British company may need to borrow US dollars. But the only rate it can get on a dollar loan is too high. At the same time, a US company needs to borrow pounds, but the only rate it can get on a loan in pounds is too high.

The British company, however, can borrow pounds at an attractive interest rate and the US company can borrow dollars at an attractive interest rate. So the two companies decide to enter into a currency swap agreement.

The US company borrows dollars cheaply and then lends them to the British company. Meanwhile, the British company borrows pounds cheaply and lends them to the US company. Through the swap agreement, both companies end up benefiting from the other company’s attractive home-currency borrowing rate. It is a win-win situation.

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Credit Life Insurance

See Also:
Employee Health Insurance Plan
Third Party Insurance
Personal Credit for Commercial Loan
How to avoid additional insurance premiums
Insulate Your Company from Rising Health Insurance Costs

Credit Life Insurance Definition

Individuals use credit life insurance policies to cover the outstanding debt on a loan. As the loan decreases, so does the plan until they both reach maturity, and the entire amount of the loan is due.

Credit Life Insurance Meaning

A credit life insurance policy is usually put on loans like a mortgage. Many adopt credit life insurance so their loved ones will not have to cover the cost of the mortgage or loan outstanding after their passing. The great thing for insurance companies is if the person lives to the maturity of the loan, then the amount gained through insurance payments is straight profit without having to account for any liabilities.

Credit Life Insurance Example

For example, George is 65 years of age. He just moved into a new house with a 15-year mortgage. But George has had health problems in the past. So he decides that he needs to invest in credit life insurance so that the mortgage burden will not be on his four kids. George ends up living throughout the entire loan; thus, the insurance plan has reached its maturity and won’t need to be exercised. It should be noted that if George had died during the time of the loan, then the insurance company would be required to pay out whatever amount that George owed on his mortgage. In this situation George’s debts would all be paid for without putting an unwanted burden on his kids.

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Coupon Rate Bond

See Also:
Common Stock
Company Valuation
Convertible Debt Instrument
Covenant Definition of a Bond Contract
Long Term Debt
Non-Investment Grade Bonds
Owner’s Equity
Par Value of a Bond
Preferred Stocks

Coupon Rate Bond

The coupon rate bond is the annual interest rate the issuer pays to the bondholder. The rate is expressed as a percentage of the bond’s face value. Bond coupon rates are quoted as annual rates, but the bond coupons are typically paid semi-annually.

For example, an investor holding a bond with a $1,000 face value and a 10% annual bond coupon will receive $100 in interest yearly until the bond matures. At maturity the investor will receive the principal, also called the face value or the par value, plus the final coupon payment. Similarly, an investor holding a bond with a $1,000 face value and a 10% semi-annual coupon will receive $50 in interest every six months until maturity.

Bond Coupon Definition

A bond coupon refers to the interest payments the bond issuer pays to the bondholder periodically until the bond matures. Bond coupon rates are quoted as annual rates, but the coupons are typically paid semi-annually. The term “coupon” stems from the days when bondholders would actually tear detachable coupons from the bond certificate and turn them in to the bond issuer on certain dates to redeem the interest payments.

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Company Life Cycle

See Also:
Dispersion
Capitalization
Market Positioning
Limited Partnership
Mergers and Acquisitions
Product Life Cycle

Company Life Cycle Definition

Broadly speaking, companies progress through a predictable series of phases called the company life cycle. The life cycle starts with the startup phase, moves into the rapid growth phase, followed by the maturity phase, and finally the last phase is decline. Furthermore, the duration of the individual stages varies widely across industries and differs between individual companies. As a result, the phases differ in terms of characteristics related to profitability and financing needs.

Stages of the Company Life Cycle

The startup phase is the first phase in the company life cycle. Companies in this stage are typically losing money, developing products, and struggling to secure a position in the marketplace.

Then the next phase in the company life cycle is the rapid growth phase. In this phase the company begins to generate profits. This phase is also characterized by rapid expansion and an increased need for and dependence upon outside financing to sustain the rapid growth.

The third phase is maturity. In this phase, growth and expansion is slow. Therefore, the need for outside sources of capital subsides. The company is generating enough profits and cash flows to invest in all available projects.

The final stage is decline. During this phase the company remains profitable but sales decline. The company has more cash than it needs for all available corporate projects.

Company Life Cycle Phases

The following includes the company life cycle phases:

1. Startup
2. Rapid Growth
3. Maturity
4. Decline

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company life cycle

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company life cycle

Source:

Higgins, Robert C. “Analysis for Financial Management”, McGraw-Hill Irwin, New York, NY, 2007.

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Commercial Paper

See Also:
Convertible Debt Instrument
NonInvestment Grade Bonds
Collateralized Debt Obligations
External Sources of Cash
Certificate of Deposit (CD)
What Your Banker Wants You To Know
Commercial Bank
Convertible Debt Instrument

Commercial Paper Definition

Commercial paper is a short-term debt instrument. Companies can borrow money by issuing it to investors.

It is unsecured, meaning collateral does not back it up. Values range from $25,000 and up. Furthermore, the typical value is $100,000. Maturities range from 2 days to 270 days, and the typical maturity is 30 days. As long as the maturity is less than 270 days, you do not have to register the debt with the SEC. It is often issued at a discount from par value, issued with interest payments, or both. Credit rating agencies rate commercial paper.

When to Issue Commercial Paper

Companies that issue commercial paper are typically large corporations with good credit. They issue it because the debt instruments have flexible maturities. They are also usually cheaper than bank loans. Finance the current assets and short-term obligations using the proceeds. Then issue it directly to investors or via a dealer.

Investors that invest in commercial paper, usually large-scale institutional investors such as mutual funds, consider it issued by a creditworthy corporation to be a safe investment. However, the returns earned on it are low.

commercial paper

 

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