Financial Ratios and Statistics – FahStats

Archive for July, 2010

Most bonds pay interest every six months or semi-annual. The interest is paid to par and divided into 2 payments. If you own a $1000 bond at 7%, that means $70 per year – divided into $35 payments. Accrued interest occurs when the bond is sold in the secondary market.DefinitionAccrued interest is the back interest owed to the seller of a bond since his last official pay date.This amount does not effect the price or value of the bond. It is simply added onto the proceeds for the purchaser, and the seller will get that back. The accrued amount will be larger if the bond is being sold right before another interest pay date. Meaning, a bond that last paid on June 1st is not due to get paid again until December 1st, so if a bond is being sold in November – it will have roughly 5 months of interest that is owed.Types of bonds and how interest is accruedUS Government securities like Treasury Bonds and Treasury Notes calculate interest differently than Municipal or Corporate Bonds. Treasury Bills do not pay any interest, so there is no accruing with those. Government securities calculate interest based on actual days in a given month. Basically, they go off of a regular calendar year (365 days). You may think that is the normal way of paying interest, but most bonds do not pay that way.Corporate and municipal bonds pay based on 30 day months or 360 day year. This means all months are treated the same. January is 30 days, February is 30 days, etc. This will effect accrued interest amounts and the calculation of days owed and money owed to the seller.CalculationAccrued interest payments are calculated from the last pay date (including that date), up to but not including settlement date. The seller does not receive interest for the selling settlement date. The settlement means the buyer has officially taken over and thus – he or she begins earning from there.SettlementUS Government securities settle “T+1?, which means trade date plus 1 business day. If you buy a treasury note on Monday, it will settle on Tuesday. Municipal and corporate bonds settle T+3, trade date plus 3 business days. This is considered regular way settlement for both types. If the settlement period runs into a major holiday (Christmas Day, July 4th, etc), there will be an extra day added to the settlement time.ExampleUsing a corporate bond as an example, we can figure out the accrued interest amount for this issue.A $10,000 6% corporate bond pays interest every March 1st and October 1st. The investor sells the bond on Thursday January 10th for regular way settlement. How many days of accrued interest is owed? Feel free to figure this out before looking…Ok, the way we calculate the accrued interest here is we have to see when the bond was sold and look at the last pay date from it. The bond is being sold on January 10th, so the last pay date is October 1st. This is a corporate bond, so each month is treated as 30 days. 30 days are owed for October, 30 for November and 30 for December = 90 days. Then we have to figure out January. Since the bond is being sold (trade date) on Thursday January 10th, it will settle on Tuesday January 15th. No, it does not settle January 13th (even though it may look like it at first glance). The 3rd business day from Thursday January 10th is the following Tuesday January 15th. That is 3 business days for accrued interest purposes.Do not include the settlement date itself. The days owed for January is 14 days. Thus, the final answer to the above question is 104 days total of accrued interest.As I mentioned, accrued interest on bonds is not an investment factor indicator. It is only a part of the bond trading scene and part of the settlement process.Bond Yields and More

Successful retirement income planning is about more than just having a specific retirement account like a 401(k) or IRA. It is a process of managing multiple financial strategies simultaneously, namely saving and investing and protecting your assets, so that ultimately you can create income to support your retirement lifestyle.The stock market meltdown of 2008 and subsequent economic recession serve as a reminder of the potential risks to your portfolios and to your long term financial security. The Saving-Investing-Protecting process can help you reduce some of the risks. Start with your savings.Maintain a cash cushion. Having liquidity in your financial portfolio means having easy access to cash that you can use to cover your living expenses for short term emergencies or during extended economic downturns. Instead of creating debt or selling investments at a loss when the market is down, a cash cushion can offer a greater sense of control and stability during uncertain economic times.In the short term, consider maintaining cash to cover four to six months of expenses. Short term expenses may be things like unexpected home and auto repairs or out-of-pocket annual healthcare deductibles. As you focus on retirement, build your cash cushion to meet at least 12 months of your ongoing living expenses and strive for a bigger buffer to cover 24-36 months or more. Recovering from an economic downturn can take many months so your cash cushion may be needed for a longer stretch.So, how can you boost your cash savings in 2011?? Under the 2010 Tax Relief Act, payroll taxes in 2011 are cut from 6.2% to 4.2% of your wages, saving you 2% of income (on income up to $106,800.) As an example, if your current income is $60,000, your payroll tax cut amounts to $1,200 in savings this year.? Sock away any tax refund, bonuses, pay increases or other unexpected windfalls.? Do a household audit. Are there expenses you can reduce or eliminate – your home and cell phone plans, cable and internet packages, auto/homeowners insurance, etc? Talk with your service providers to see if switching plans or updating policies can save you money.? Count your coins. When you don’t spend a full dollar, save your change. Many banks have coin counting machines (with no fee) to save you time, and the money can go right into your account.There are a variety of savings vehicles available too. Remember, your cash cushion needs to be there for you at all times, so you’re not chasing returns here; safety and easy access are the priorities.Savings accounts, money markets and certificates of deposit (CD’s) are offered through banks and credit unions and are insured by the Federal Deposit Insurance Corp (or NCUA for credit unions) for up to $250,000. Money market accounts pay slightly higher rates but usually require a higher account minimum. CD’s also offer higher interest rates but money is required to be held for a longer term – 3 months to 5 years, with a penalty for early withdrawals.Treasury securities (T-bills, notes, bonds) and I/EE-savings bonds are backed by the U.S. government and can be purchased from treasurydirect.gov or local banks and credit unions. These instruments earn a fixed rate of interest during the specified holding period and are subject to early withdrawal penalties. The interest earned is exempt from state and local taxes.Get real with your retirement income planning in 2011 with a boost to your cash cushion. Recessions and stock market downturns are part of the economic landscape. Maintain your cash cushion to guard against the financial storms ahead and to better protect your long term financial security.

No one likes to be told they “can’t” do something. The feeling runs even deeper when the subject involves money. Managing to a budget is too often mistakenly perceived as a “can’t” list. A budget should not be viewed this way.Managing to a budget can be a powerful financial habit that will ensure you meet your financial goals and live a life of personal and financial freedom.Budgeting is not just for people struggling with debt and credit score issues. In fact, a large percentage of wealthy individuals would not be where they are today if they did not continually practice frugality.The one most important benefit of budgeting is that it provides “clarity” and a strong sense of security, knowing that you will be in total control of all money coming in and going out.This newly found sense of security comes from being able to make a conscious decision about every purchase – rather than having to experience the sick feeling one gets when you suddenly realize at the end of the month that you do not have enough money to pay your rent on time.Knowledge is power, and knowledge about your personal finances will empower you to make better decisions.People need to know and fully understand the massive benefits of budgeting money. Making a budget and using it as your financial guide will provide these 5 greatest benefits: Makes every dollar go farther – if you are trying to cope with limited financial resources, managing to a budget dramatically improves your ability to make ends meet. Working out of debt – for anyone laboring under the weight of a huge debt burden, budgeting your money is essential in order to be able to make extra payments to pay down the debt as quickly as possible. Achieving financial goals – ensuring you meet your financial goals and securing your financial future are greatly dependant on your ability to budget your money effectively. Simplicity of living – people who have a lot of money too often end up having too much stuff, which can result in an ever-growing amount of stress over managing finances. A budget is a constant reminder of all your responsibilities. When reviewing your budget, don’t just look for ways to save money – also look for ways to save time and limit your stress by simplifying your life and your finances. Security in later years – budgeting early and continually managing to a budget is a great way to ensure you’re the safety and security of your financial future. When you realize all of the amazing benefits that come from living on a budget, you might wonder, “Why doesn’t everyone do it?”. That’s a great question. The simple answer is that most people are not fully educated in financial matters. If they fully understood the true benefits of budgeting, less people would be dealing with the tragedy of carrying such overwhelming debt.Budgeting allows you to finally take control over your finances. You’ll immediately begin to make better money decisions that will allow you to become the person you always wanted to be.If you don’t already budget your money at least monthly, start today. Budgeting will help you to find the money to pay off your existing debt more quickly so that you can get on with the more exciting goal of growing your nest egg and creating real wealth.