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Fiscal vs Monetary Policy

Fiscal vs Monetary Policy

What is Fiscal Policy?

Fiscal policy is essentially how the government decides to collect and spend money to impact the economy. This is studied in Macroeconomics to better understand the relationship between the economy and governmental influence. The study of fiscal policy is useful in speculating the reaction to changes in the government’s budget. It is also a frequent topic during presidential elections, because fiscal policy affects numerous industries.

For businesses, fiscal policy can be very important. Some businesses are directly impacted by government interaction in the economy. For example, businesses that have government agencies as their clients depend upon a fiscal policy that includes their services. Furthermore, other businesses are impacted by fluctuating taxes. Some industries are more exposed than others to taxes. So it is very important that the leadership of businesses takes these macro-elements into consideration.

Expansionary Fiscal Policy

There are three phases of fiscal policy that the government switches between depending on the outlook of the economy. Use the term expansionary fiscal policy when the government is spending more than it is receiving. Generally, this stimulates the economy during a recession or downturn. At the onset of a recession, high government spending with no rise in taxes is common. Then increased taxes and decreased spending follows. If this phase of fiscal policy does not work, it can leave the government in a greater deficit without a recovered economy.

Contractionary Fiscal Policy

Contractionary fiscal policy is the opposite of expansionary. It involves spending less than the government collects in taxes. Rather than attempting to stimulate the economy, this phase restrains the economy. This includes controlling inflation and paying down debt. Another tool of contractionary fiscal policy is raising taxes. When the government raises taxes, households have less disposable income while the government has more to spend.

Neutral fiscal policy is the phase between expansionary and contractionary fiscal policies. This is a period of time when the government’s spending is approximately the same as its collections. This phase is often a transition period between expansionary and contractionary policies, so it is a time of speculation and uncertain governmental policies.

What is Monetary Policy?

Use monetary policy to describe the decisions over a nation’s money supply. In the United States, the Federal Reserve has this duty. The key decisions affecting monetary policy are setting interest rates, setting bank reserve requirements, and buying/selling government securities. Thus, the same agency as fiscal policy does not control the monetary policy.

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Fiscal vs Monetary Policy

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Fiscal vs Monetary Policy

See Also:
Generally Accepted Accounting Principles (GAAP)
Economic Drivers to Watch

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Treasury Securities

See Also:
Fixed Income Securities
Zero Coupon Bonds
What is Inflation?
Coupon Rate Bond
Non-Investment Grade Bonds (Unsecured Debentures)

Treasury Securities Definition

Treasury Securities consist of debt instruments issued by the U.S. government by the Bureau of Public Debt. Therefore, the market for these instruments is very liquid. Oftentimes, consider them to be basically risk free. This is because the United States Government backs them by the good faith.

Treasury Securities Explained

Treasury securities, as said above, are very liquid and essentially risk free. The U.S. government sells them at treasury securities‘ auctions. A treasury security auction is generally held a week after the announcement for a new issuance of securities. There is also a large secondary market for them where they are traded on a day to day basis. Rates vary from instrument to instrument, and are generally in relation to a treasury security’s maturity. There are currently four types of these instruments. See the following instruments listed from most liquid to least as well as shortest maturity to the longest maturity:

1) Treasury Bills (t bills)

2) Treasury Notes (t notes)

3) Treasury Bonds (t bonds)

4) Treasury Inflation Protected Securities (TIPS)

Note: There is one more type of security that exists from stripping the coupons and principal away from the treasury security as a whole. They are also known as Treasury STRIPS.


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Top Down Approach

See Also:
Bottom Up Approach
How to Prepare an Investor Package
Common Stock Definition
Debt Service Coverage Ratio (DSCR)
Consumer Price Index (CPI)
Prepare an Investor Package

Top Down Approach Definition

A top down approach definition is the act of seeking out securities by first looking at global economics, industry, and then individual companies. Finally, an investor finds an excellent security to invest in.

Top Down Approach Meaning

There are several different factors that are involved in a top down approach meaning. The top down approach analysis tries to incorporate all of these factors to try and find a best fit on a security that an investor is seeking.

Top Down Approach Factors

Those factors include the following:

1. Look at the Global Economy

A top down investor will first look at the global economy as a whole when conducting a top down approach. Different global economies affect a firm’s pricing and competition. Currency exchanges can have a large effect on this competition and should also be considered. If a firm is experiencing a lot of difficulty in competing in a country it conducts a lot of business in it may not be the best fit for an investor to buy the security.

2. Look at the Local Government and Economic Environment

The next step in the top down approach model is for an investor to look at the local government and economic environment of the best fit country. The best indicators to test the surface are by looking at the gross domestic product (GDP), unemployment rates, inflation, interest rates, and the budget deficit of the local government.

3. Indicate a Specific Industry

All of the factors above indicate a specific industry in which the investor might need to choose based upon the type of investment needed. Some industries perform better in certain economic environments than others. Based upon the conditions in steps one and two, you can choose the right industry. Industries might vary in their growth, volatility, and life cycles.

4. Choose a Specific Company

Finally, the last step is for an investor to choose a specific company within the industry. Investors want to pick a company considered in excellent condition. Perform this by doing a thorough financial analysis. In addition, gain opinions of several analysts who are familiar with the industry.

Top Down Approach Example

For example, the world economy is currently in a recession. However, Dwight has some money sitting in a bank account that he would like to invest in order to earn some sort of return. Dwight decides that he is going to follow a top down approach to investing to decide what security he should invest in and add to his portfolio.

Dwight first decides that he would like to invest domestically in the United States. This is because he believes the U.S. will bounce back sooner than most other countries. He then decides that he would like to invest in the oil and gas industry; it has historically been known to be a relatively recession proof industry and less volatile. After observing several different companies Dwight decides that he wants to invest in Chevco Inc.. Chevco Inc. has historically performed better than its peers even in recessions.

Note that using this approach does not always account for the desired return or deviation that an investor may want to take on or receive.

top down approach, Top Down Approach Definition, Top Down Approach Meaning

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Securities and Exchange Commission (SEC)

See Also:
New York Stock Exchange (NYSE)
Generally Accepted Accounting Principles (GAAP)
American Institute of Certified Public Accountants – AICPA
Financial Accounting Standards Board (FASB)
Full Disclosure Principle
Corporate Veil
Investment Banks
Treasury Stock
Accounting Fraud Targeted

Securities and Exchange Commission (SEC) Definition

The Securities and Exchange Commission (SEC) is a U.S. government agency that is responsible for protecting the well being of investors. The SEC performs this function by regulating securities whether it is public company stocks, bonds, or any other security issued into the U.S. market.

Securities and Exchange Commission (SEC) Meaning

The Securities and Exchange Commission was created in 1934 to try and rid the market of unfair or corrupt practices. This meant that all publicly traded companies had to present audited financial statements, and meet all other requirements that the SEC established. The idea is to protect the everyday investor who does not have extensive knowledge of markets or securities. Five commissioners operate the SEC, and the President of the United States appoints them. Furthermore, a requirement is that there can only be three members at the most from a single political party. The President also appoints one of these members to be a chairman; however, no one is able to fire them once the President appoints these commissioners. This allows the commissioners to operate in the best interest of the people without worrying about losing his/her job.

Four Divisions of SEC

The SEC has four main divisions Corporation Finance, Trading and Markets, Investment Management, and Enforcement. Each of these has a separate responsibility towards certain securities and how they are offered into the market. Overall, the Securities and Exchange Commission duties have been performed up to par. However, there have been times in which fraud or insider trading has been routed out meaning that the SEC must amend what it is doing to try and avoid the same problems in the future and protect investors.

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Subordinated Debt

See Also:
Mezzanine Debt Financing (Mezzanine Loans)
Collateralized Debt Obligations
Outstanding Debt
Self-Liquidating Loans
Loan Term
What Your Banker Wants You to Know
Alternative Forms of Financing

Subordinated Debt Definition

Subordinated debt is a security which has a residual claim upon a company’s assets, after the senior debt holders have had their claims satisfied.

Meaning of Subordinated

Subordinated debt is usually taken on by a company who cannot reach better financing opportunities. Whereas, subordinated debentures often contain a higher interest rate due to the risky nature of the securities to investors. Investors would simply refuse to take on a security that has a residual claim on the assets unless the company were willing to pay more. This is also why many companies use this as a last option in financing because of the high costs involved.

Subordinated Example

For example, Parent Co. made an acquisition of Subsidiary Co. a year ago in a leveraged buyout (LBO) for $100 million. They were able to gain a loan from the bank with low interest rates at 5% for $75 million, and was offered a Line of Credit for $50 million. Parent Co. has recently had some trouble cutting costs and getting Subsidiary to run smoothly. Thus, they have used up the rest of its line of credit.

Parent Co. is looking to go public with an IPO soon. But they need financing now to stretch the company until it is able to provide a public offering. Therefore, Parent Co. receives subordinated debt at a rate of 8% for another $50 million. This is at a higher cost to the company/. But they can use it to postpone the debt woes until the company is able to make a public offering in the market. They can then use equity money to pay off the subordinated securities as well as the line of credit.

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Securities Act of 1933

See Also:
Primary Market
Securities Exchange Act of 1934
Investment Banks
Secondary Market
Initial Public Offering (IPO)

Securities Act of 1933

The Securities Act of 1933 was a landmark decision in the United States to regulate the issuance of newly issued shares into the market – an initial public offering. The act is also there for companies to register before the issuance as to ensure reliability.

Securities Act of 1933 Meaning

The Securities Act of 1933 followed the stock market crash in 1929. It was a movement to regulate the markets as to not mislead investors. Furthermore, the idea requires due diligence so that the best possible information would hit the market. The 1933 Securities Act was also meant to do away with insider information. By requiring this information to be provided pre-issuance investors presented with the opportunity to buy shares of the firm, during the investment banker’s road show, can make well informed decisions. The due diligence required by the 1933 Securities Act is to have a full audit and compliance with Generally Accepted Accounting Principles (GAAP). Without registration and a following of the 1933 Securities Act rules a firm cannot be listed on a U.S. stock exchange until the requirements are satisfied.

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Secondary Market Definition

See Also:
Securities Exchange Act of 1934
Secondary Market
Primary Market
Securities Act of 1933
New York Stock Exchange (NYSE)

Secondary Market Definition

A secondary market definition is the trading of already issued securities – the primary market. Furthermore, the Securities Exchange Act of 1934 regulates these securities.

Secondary Market Meaning

Many know secondary markets better than the primary markets. This is because the secondary markets are more readily available to the average investor. They are also often in the form of exchanges. The New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotations (NASDAQ) are examples of this type of exchange. Then, these are regulated by the Securities and Exchange Commission (SEC) under the 1934 Act of Securities Exchange. Furthermore, this is to ensure the accuracy of the companies whose securities are trading on the market.

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