Tuesday, June 30, 2009

the nature of liability (1)

Liabilities may be defending as debt or obligations arising from past transaction or events, and requiring settlement at future data. All liabilities have certain characteristics in common, however the specific terms of different liabilities and the rights of the creditors vary greatly.
Distinctions among debt and equity businesses have two basic sources of financing: Liabilities differ from owner's Equity in several respects. The feature which most clearly distinguishes the claims of creditors from owner's equity is that all liabilities eventually mature- that is, they come due. Owner's equity does not the data upon which the maturity comes due is called the maturity date.
Although all liabilities mature, their maturity dates different. Some liabilities are so short in term that they are paid before the financial statements reach the users desk. Long term liabilities, in contrast, may not mature for many years, the maturity dates of key liabilities may be a critical factor in the solvency of business.
The claims of creditors have legal priority over the claims. If a business ceases operations and liquidates, creditors must be paid in full before any distributions are made to the owners. The relative security of creditor's claims, however, can vary among the creditors. Sometimes the borrower pledges title to specific assets as collateral for a loan.

Monday, June 29, 2009

A patent: intangible assets

A patent is one of intangible assets, this is right of exclusive use granted by the U.S patent office. Previously patents were valid for 17 years, but the length of time is now 20 years for all new patents. Patents are amortized over the shorter of the patent is legal life or economic useful life of the patent. It is very possible that the economic useful life of the patent is shorter than the legal life of the patent because of changes technologies. When we purchase the patents, we should record the patent in the book at purchase price. This is price should a mortised over the useful life of the patent.
For internally development patents, the amortized amount is generally limited to registration fees and legal fees foe filing the patent.
If a company successfully defends a patent, the cost of the legal defense is added to the intangible asset account and is a mortised over the remaining book value of the patent must be expended immediately, and the legal costs also need to be expended immediately. This is because the court ruling has essentially stated that there is no patent, and if there is no patent, there is no asset.

Sunday, June 28, 2009

Intangible assets

Intangible assets are those assets of the company that are not physical or that cannot be touched. The accounting for intangible assets is very similar to that for PPE in many forms, for examples:
- initial recording of the item
- amortization of intangible asset equivalent to depreciation of tangible assets
- adjusting the value of the asset to recognize any permanent decreases in its value

Financial statement and financial reporting

Financial are the principle means through which financial information is communicated to those outside an enterprise.
The main financial statements are:
1- The balance sheet
2- The income statement
3- The statement of cash flow
4- The statement of changes in owner's equity
Appropriate footnote disclosures are an integral part of each of these four basic financial statements.
But some financial information is better provided, or can be provided, or can be provided only, by means of financial reporting other than formal financial statements, either because it is required by authoritative pronouncement , regulatory rule, or custom, or because management wishes to disclose it voluntarily. Financial reporting other than financial statement (and related footnotes) may take various forms and relate to various forms and relate to various matters. Common examples are contained in corporate annual reports filed with government agencies, news releases, management's forecasts or plan or expectations, and descriptions of an enterprise is social or environmental impact.
The primary but not exclusive focus of this textbook is on the development of financial information that is reported in the basic financial statement and related disclosures.

real estate dept without a mortgage

It is possible to have a secured real estate loan without mortgage through the use of contract for deed, or land contrast. As the name suggests, this is a contrast for sale of a property with the special provision that the actual delivery of a deed conveying ownership will occur well after the buyer takes possession of the property. The idea of the contract for deed is that a seller can finance the sale through installment payments and, by retaining title, have recourse in case of default. This arrangement contrasts with the standard real estate sale where both conveyance of possession and conveyance of title occur at the closing. With the contract for deed, the deed is conveyed only after the bulk of the installment payments have been made.With a contract for deed, the effect of default varies. Many courts have given greater recognition to the claims of buyer under contracts for deeds, especially when a personal residence is involved. Then the court may require that a defaulted contract for deed be treated as a mortgage, requiring a foreclosure proceeding. In general, the rights, obligations, and recourses of the parties in contract for deed depend significantly on the jurisdiction and the nature of the property involved.
The contract for deed has served a number of purposes in real estate, some controversial. On the positive side, it can facilitate financing in situations deemed too risky for standard mortgage financing. For example, it can secure payments by a "speculator" interested in holding land for potential conversion from agricultural use to urban development. A farmer can sell the land on contract for deed. In case of default, the farmer still has title to the land, and may be able to easily reclaim it outright. There can be a negative side to the contract for deed as well. It frequently involves unsophisticated buyers who tend to overlook the need for legal and financial advice. Without a title search, the buyer has no way to know whether the seller can actually deliver clear title. Further, unless the contract is recorded in public records, there is little to prevent the seller from subsequently mortgaging the property to someone else, placing the buyer at risk?
In this situation an unprincipled seller can easily exploit a naïve and uninformed buyer. Sales commonly were made through contracts for deed, allowing the seller to easily reclaim the abandoned property for eventual resale to another victim. In the current use of the contract for deed in the sale of marginal homes, there again is little to prevent sellers from exploiting the lack of knowledge and experience of marginal homebuyers.

Saturday, June 27, 2009

Pension funds and real estate

Pension funds have long been recognized as a major potential source of real estate equity capital. Moreover, real estate markets are often characterized by a lack of information necessary for performing the quantitative investment analysis that pension funds or their advisors generally undertake. The value of real estate owned by pension funds is estimated to be $149 billion. . Pension funds must decide whether to make their real estate investment directly or to pursue their investment strategy by investing REITs or commingled real estate funds.

how is investment value calculated?

the investment value calculation begins where the market value calculations ends. The calculation of market value will have already taken into account the general, or average, investment conditions in the market. to the extent that a particular investors‘s situation is different, the price the investors is willing to pay will differ from market value. for example, investors may vary with respect to their expectations of future rents and vacancies. the amount and cost of equity and debt financing also will generally vary across investors and this may affect how much a particular investors is willing to pay for a particular property. Thus, explicit assumptions about how the acquisitions is to be financed should be included in an investment valuation. finally, expected income tax consequences usually are significant;thus,many investors choose to incorporate future income tax consequences into their analysis of a proposed investment.

sources of commercial real estate equity capital

Investors can hold ownership (equity) positions in commercial real estate through either direct private investment or real estate securities. With direct private investment, individuals and institutional investors purchase and hold title to the properties. Purchasing individual properties directly in the private market gives investors complete control of the asset: who leases it, who manages it, how much debt financing is used, and when it is sold. With securities, in contrast, individuals and institutions invest funds in separate ownership entity which, in turn, purchases and holds title to the real estate. Securitized investment, therefore pool money from multiple investors. Securitized investments are purchased and resold in either "public" or "private" markets. We define public markets as those in which securities are bought and sold on a centralized public exchange, such as the New York Stock Exchange. Private markets are characterized by individually negotiated transactions that take place without the aid of a centralized market. Exchange-traded assets provide investors with a relatively high degree of liquidity and relatively low transaction costs. In contrast, private markets are generally characterized by high transaction costs and low liquidity

ways of getting loan for acquiring property

When a buyer acquires a property having an existing mortgage loan, the question of personal liability arises. As long as the buyer does not add his or her signature to the note, the buyer takes on no personal liability, although the property still serves as security for the loan and can be foreclosed in the event of default. In this case the buyer is said to purchase the property "Subject to" the existing loan. The seller remains personally liable for the debt and is said to "stand in study" for the obligation. This means that in case of default, a lender who fails to obtain satisfactions from the current owner or from the property can go 'up the line" to the original borrower. The seller or original borrower may not be comfortable with this contingent liability from the loan. A solution is to have the buyer add this or her signature to the original note, and obtain from the lender a release of liability from the note. in this case the buyer is said to assume the old loan, that is, to assume liability for the note.
An important characteristic of loan is whether or not a subsequent owner of the property can preserve it. This feature is commonly referred to as assumability. As we noted in the discussion of the due-on-sale clause, it is a major distinguishing feature between the broad types of home loans.

investment value and appraisal

So far we have considered the value of a real estate asset to particular individual, which we have called have investment value. But often we need to know what value a real estate asset may have to an unknown typical investor or purchaser; that is, we need to know the most probable selling price. This is essential, for example, in determining the financial feasibility of development project. It also is important for an owner in determining whether an asset should be held or sold (market price exceeds investor‘s present value), and it is critical to lenders who are concerned with the possibility of needing to sell a property if the borrower fails to pay back the loan. Further, it can be necessary in incremental investment decisions to know how much an improvement to a property affects its future market price in order to estimate its full future benefits. The problem in real estate is that, because of scarce transaction, markets seldom reveal prices easily.
The solution to this problem is called appraisal. Appraisal provides an estimate of the most probable selling price of property. It differs from the investment perspective in that it seeks to reveal what some 'typical," unidentified investor is likely to pay for a property rather than what value the property has to specific owner. But in predicting the probable price to this nameless investor, appraised value really is a form of generalized investment valuation, which also provides a crucial element in making individual investment decisions.

incremental investment value with financing

In thinking about investment value, one important aspect is how the investment is financed. for example, suppose a homeowner is considering a new air-conditioning and heating system to reduce utility costs. Perhaps the replacement system costs $2,000 and the homeowner will finance 75 percent of the cost with a home equity mortgage loan. then it is important to account for the effect of the loan on the investment outcome. the first effect is that the investment cost now is $500 instead of $2,000. But offsetting this advantage,is that the savings in utility costs now go partially to repay the loan, thus reducing the future net benefits for the first few years, and therefore reducing the incremental value. Usually such a loan will enhance the attractiveness of the investment, but it must be evaluated on case-by-case basic.

Friday, June 26, 2009

investment value and time

Real estate investment decisions, like all investment decisions, involve present costs and the value of future benefits (usually quantified as cash flow), however, in finding the value of future benefits we cannot simply add them up. A moment is thought makes it clear that benefits 10 years from now, for example, are not as valuable as the same benefits received immediately. So we must have a way of converting future benefits to their equivalent value in immediate cash. the generally accepted method for doing this conversion is Known as discounting. This procedure is fundamental to good investment valuation when a long time horizon is involved, such as in real estate. Discounting is explained in this blog. Suffice it to say now that the value of future benefits from a real estate investment must be equated through discounting to an equivalent current value, which can then be compared to the immediate cost.

Nondepository lenders in the primary market

The depository lenders discussed in the previous section historically dominated the home mortgage origination business before the 1980s.Using savings deposits; these institutions funded loan-term home mortgage loans and then held the whole loans as investment. That is, they were portfolio lenders. However, as financial institutions in the United States suffered trough the 1980s and early 1990s, mortgage companies emerged as the central element for a new System of home mortgage originations. Mortgage companies have accounted for over 50 percent of all conventional home mortgage originations since 1993. Their share of the FHA\VA originations market (discussed below) is even larger-exceeding 80 percent.
Mortgage companies vary widely in the scope of their activities. Mortgage bankers are full-service mortgage companies: they process, close, provide funding, and sell the loans they originate in the secondary mortgage market. They also typically service the loans they sold. However, some mortgage companies specialize in the details of loan origination. These firms are referred to as mortgage brokers, Brokers do not provide the funding for the loan, nor do they typically service the loan after selling them. Instead, they serve strictly as an intermediary between those who demand mortgage funds and those who supply the funds

Thursday, June 25, 2009

tax exempt properties

Most communities contain a number of tax-exempt properties. Such properties include government-owned properties and others exempted state law or the state constitution. This category typically includes universities, schools, hospitals, places of worship,and other property of religious organization. Exempt properties lower the tax base of the community, thus raising the taxes of other property owners.

mechanics of the property tax

the property taxes are typically collected through a single country office, several tax jurisdictions within the country where the property several tax jurisdictions within the country where the property is located may levy taxes. A property owner, for example,may property taxes to support the budgets of a country, a city, a school district, and a special taxing district. estimating a particular property owner 's total liability requires a general understanding of how tax rates are deter mined.

Tuesday, June 23, 2009

the mortgage(2)

ِAcceleration Clause
In the event a borrower defaults on the loan obligation, an acceleration clause enables the lender to declare the entire loan balance due and payable. If this were not so, the default would apply only to the amount overdue. As a result, the cost of legal action against the borrower would almost always exceed what could be recovered. It would never pay to sue in case of default, and the mortgage would be a meaningless.

the mortgage

the mortgage is special contract by which the borrower conveys to the lender a security interest in the mortgage property. because the property is being pledged by action of the borrower, the borrower is referred to as the mortgagor, or Grantor of the mortgage claim. the lender, who receives the mortgage claim, is known as the mortgagee. Under traditional English common law, a mortgage temporarily conveyed title of the property to the mortgagee. this title theory tradition has been largely replaced by the more modern lien theory. Under the lien theory, the mortgage gives the lender the right to rely on the property as security for the debt obligation defined in the note, but this right only can be exercised in the event of default on the note.
Because the mortgage conveys a complex claim for a long period of time, it must anticipate numerous possible future complications. Most of the clauses in a mortgage are for this purpose.

The idea of investment (2)

Not every decision is worth treating as an investment. Decisions such as what music CD to listen to, what flavor of ice cream to choose, what to wear for the day, or how to organize an immediate work task lack one or more components of the investment value problem. For example, these decisions commonly lack a significant cost at the time they are made. Moreover, the time horizon is very short, and the decision can be reevaluated and revised very quickly, so one is not forced to live with the choice over along time.
But many decisions in daily life do involve an investment. The decision to purchase an expensive television set or stereo certainly is an investment. There are significant costs up front, typically the benefits are spread over several years, and the choice cannot be "undone" (after some days) without significant costs. Similarly, purchasing expensive furniture or clothing is an investment. So also is the decision to upgrade a computer, replace a car, or change apartments. The choice to attend a college or university is major life investment, as is the choice among schools and programs of study. Selecting a certain college course, to the exclusion of another, is an investment. The decision to change jobs can be a major investment, especially as one progress further along a career path and perhaps also takes on increasing family and personal responsibilities. A commitment to fair, honest, and generous business practices is understood by wise businesspersons to be an investment in future business relationships. In all of the cases above, the immediate cost of an action must be weighed against the (investment) value of future resulting benefits

the idea of investment value

we often speak of some sacrifice that we make as "investment in the future." parents give up their time and resources now so that their children may go to college later. students (sometimes) give up concerts, parties, or other recreation to improve their academic outcomes later. In both cases the individuals are judging that the value of what is gained exceeds the immediate cost being paid. It is in this sense that we use the term investment. Any decision that involves significant costs now for the sake of future benefits requires a judgment about the value of the future benefits. we refer to such a decision as an investment decision and the value of the expected future benefits as investment value. the important of this concept is that every investment decision involves the same two elements: the initial costs and the value of the future benefits. Making good investment decisions is important because, by their nature, they cannot be undone easily or without cost. there are more of these investment decisions than one commonly thinks, as we will show below.
Not every decision is worth treating as an investment. Decisions such as what music CD to listen to, what flavor of ice cream to choose, what to wear for the day, or how to organize an immediate work task lack one or more components of the investment value problem. For example, these decisions commonly lack a significant cost at the time they are made. Moreover , the time horizon is very short, and the decision can be reevaluated and revised very quickly, so one is not forced to live with the choice over along time.
But many decision in daily life do involve an investment. the decision to purchase an expensive television set or stereo certainly is an investment. there are significant costs up front, typically the benefits are spread over several years, and the choice cannot be " undone" (after some days) without significant costs. Similarly, purchasing expensive furniture or clothing is an investment. so also is the decision to upgrade a computer, replace a car, or change apartments. the choice to attend a college or university is major life investment, as is the choice among schools and programs of study. Selecting a certain college course, to the exclusion of another, is an investment. The decision to change jobs can be a major investment, especially as one progresses further along a career path and perhaps also takes on increasing family and personal responsibilities. A commitment to fair, honest, and generous business practices is understood by wise businesspersons to be an investment in future business relationships.In all of the cases above , the immediate cost of an action must be weighed against the (investment) value of future resulting benefits.

Monday, June 22, 2009

the role of government in real estate markets(2)

In addition, states typically set the basic framework of requirements for local government land use control, and even intervene in the realm of land use controls for special purposes such as protection of environmentally sensitive lands.states affect the provision of public services important to a community, including schools, transportation systems, social services, law enforcement, and others.
the national government influences real estate in many ways. income tax policy can greatly affect the value of real estate, and therefore the incentive to invest in it. Housing subsidy programs can have enormous effects on the level and type of housing construction. federal flood insurance programs can influence development in coastal and wetlands regions. federal financial reporting and disclosure requirements, and governments-related financial agencies such as the federal reserve system,the federal deposit insurance corporation(FDIC),and Fannie Mae and Freddie Mac all have profound effects on the the operation of the real estate capital markets.Further, consumer protection laws affect few a sects of household activity more than they impact housing purchases and financing. In addition, laws protecting the environment and endangered species have significantly affected the use of real estate..national fair housing laws and other civil rights legislation are very important influences on housing markets.

the role of government in real estate markets

government effects real estate markets in a host of ways. local government has perhaps the largest influence on real estate. It effects the supply and cost of real estate through zoning codes and other land use regulations,fees on new land development, and building codes that restrict methods of construction . further, local government affects rental rates in user markets through property taxes. finally, it profoundly effects the supply and quality of real estate estate by its provision of roads, bridge , mass transit, utilities, flood control, schools, social services, and other infrastructure of the community. (the influence of local government through land use controls, property tax policy.)
state government has perhaps the least effect on real estate,although it still is important. through licensing of professionals and agents, states constrain entry into real estate related occupations. through statewide building codes, they can affect building design cost. through disclosure laws and fair housing laws, states affect the operating of housing markets.

real estate is a tangible asset

viewed purely as a tangible asset, real estate constitutes the physical components of location and space. In this context, real estate is defined as the land and its permanent improvements. Improvements on land include any fixed structures such as buildings,fences,walls,and decks.Improvements to the land include the components necessary to make the land suitable for building construction or other uses. These improvements are often referred to as infrastructure, and consist of the streets, walkways, storm water drainage systems, and other systems such as water, sewer, electric, and telephone utilities that may be required for land use. Subject to legal and practical limits, it should be noted that real estate includes not only the surface of the earth, but also the area above and below the surface.
In practice the term land may include more than simply the earth; it may also include the improvements to the land. for example, the term land is often used to refer to a building site, or lot, and includes the infrastructure but not any structure. In contrast,land is also commonly used to refer to a larger area that does not include any improvements. This is sometimes identified as raw land. these distinctions may seem unimportant, but they become especially important when the value of land is considered.
Tangible assets include both real property and personal property. In professional practice ,the terms real property and real estate are treated as interchangeable. personal property refers to things that are movable and not permanently affixed to land. For example, a motor home is personal property, while a custom "site-built" house is real property. A mobile home may be real or personal property, depending on how it is secured to the land and legally recognized by the jurisdiction in which it is located.

real estate counseling

real Estate "counselors" are in the business of giving advice about property.unlike the investment advisory firms employed by institutional investors, counselors are the experts that small, noninstitutional , investors often seek when answers to real estate questions are required. counselors must know every phase of real estate business because they use knowledge in nearly every consultation. the services they offer include counseling regarding acquisitions and dispositions,alternative uses,market and feasibility studies, industrial relocation, litigation,land use,mediation,arbitration, tenant representation,workouts,and more.There are relatively few brokers specializing in counseling, but the field will grow as investors and owners realize the value of expert advice in developing, acquiring,managing,and disposing of commercial property. Unlike real estate brokers,counselors who belong to the Counselors of real estate do not work on a commission basis. Rather they collect a fixed fee for services or work at an hourly rate.the Counselors of real estate (www.cre.org) represent the professional consulting affiliate of the National Association of Realtors, offering the CRE designation.

Sunday, June 21, 2009

real estate markets and participants

In the united states and other countries,market competition serves to distribute resources among the various users . the market is forces of demand and supply interact within the economy to determine the price at which goods, capital,and services are exchanged and to whom they are allocated.Real estate resources are allocated among its various users-individuals,households,businesses,and institution-in real estate market. Real estate values derive from the interaction of three different sectors in the economy: the "real" world, or user markets: the financial world, or capital markets: and government. A discussion of each sector in this process is presented below.

home loan originator

A home loan originator (loan officer or broker) is the sales arm of the home financing industry . An effective loan originator is one who can help to make a home purchase happen.he or she assists brokers and buyers in overcoming the single largest obstacle to completing a successful home purchase:obtaining financing."loan officers"work directly for lending institution."Brokers" are agents for various lending lending institutions.loan originators spend most of their day calling on industry salespersons or meeting with them and their clients. they are active in a variety of industry and community affairs both because they are "people oriented" and because the resulting interactions are the seedbed of their business opportunities. Much of their work occurs in the hours when households are buying homes,which often includes evenings and weekends. originators have a wide range of educational and experience backgrounds.Most have an undergraduate colllege degree,frequently in business. Compensation for originators can be good.for brokers it is achieved primarily through transaction-based commissions, though some firms may provide a 'draw" against future earnings or a modest salary at outset. loan officers,in contrast,are primarily salaried, with more modest upside potential.Residential lending is a blend of sales work and technical expertise.while the broker and loan officer must have a solid Knowledge of their products and of complex loan application and closing processes,their core business remains understanding,assisting,and influencing clients.

Saturday, June 20, 2009

How large is the U.S. commercial real estate market ?

before discussing the roles and importance of the various real estate owners and the lenders, it is important to emphasize that commercial real estate players a significant role in the U.s. (and other) economies. the estimated market value of investable commercial real estate(as of September 2002) is $4.6 trillion. to put this into perspective, this $4.6 trillion estimate along with the market value of other asset classes in U.S. capital market. Exchange-traded corporate equities (stock) is the dominant asset class with a total stock market capitalization of $13.3 trillion. with an estimated market value of approximately $12,. trillion,owner-occupied housing rivals the corporate equity market in size. Corporate and foreign bonds and U.S. government securities provide investors with an additional $5.9 trillion and $5.5 trillion,respectively,in investable asset. At $4.6 trillion in market value,commercial real estate compares favorably in size to the corporate bond and government securities markets;moreover,it is approximately three times the size of both the municipal securities and commercial paper market.clearly,the commercial real estate market is significant component of investable wealth in the United states.

market and feasibility Analysis for real estate

most real estate development projects and many real estate appraisal assignments require supporting market research.development projects usually also require an economic and financial feasibility analysis. this type of research may be offered by a variety of firms,including sophisticated appraisal firms,accounting or consulting.while the type of firm can vary,the qualifications of the researchers will be similar. they usually will have a degree in economic geography,economics,or a closely related field. Often they will have an MBA or master is degree in economic,real estate,or geography.
with the exception of real estate practices of large accounting firms,the firms providing market research and feasibility analysis are structured similarly to appraisal firms and tend to be compensated in the same manner. they will be paid on fee basis rather than a commission. Real estate researchers may need to be familiar with several kinds of quantitative tools,including a general Knowledge of computers, geographic information system(GIS),multivariate statistical analysis, and database management.like all real estate consulting and advisory services,the typical market researcher works out of the office a substantial portion of the time,in contact with other persons of the real estate industry.

mortgage Brokers

mortgage lending has become increasingly complex.As a result,the demand for Knowledgeable mortgage brokers has increased significantly.As mentioned previously,a mortgage brokers operate differently from a mortgage banker in that a broker does not actually make loans. Instead, a mortgage broker specializes in serving as an intermediary between the borrower(the customer) and the lender (the client).Many mortgage Brokers serve as correspondents for large mortgage bankers who desire to do business in an area but do not feel the volume of business justifies the expense of staffing a local office. as compensation, the broker receive a fee for taking the loan application and portion of the origination fee if and when the loan closes. Many industry analysts expect the role of mortgage brokers to continue to grow in conjunction with the explosion in information technology. As brokers gain access to instantaneous interest rate quotes from multitudes of mortgage originators, their ability to find the lowest-cost option for borrowers should increase the value of their services.
In this growth of mortgage brokers also lies some concern. it has been argued that mortgage brokerage frequently can be part-time activity wherein the broker generates a fee through a one time involvement with the borrower. Under theses conditions, problems could arise. first, the broker could be only marginally Knowledgeable. second, and more importantly,there is the risk of moral hazard. the broker is offering a complex service on a one-time basis to borrowers,many of who may be poorly informed. since the broker often has no continuing involvement with the loan or borrower, this creates an incentive for exploitation .

mortgage bankers

mortgage bankers land funds for home financing.they are not financial intermediaries, however,because they do not accept deposits.they combine a small portion of equity with vast amounts of borrowed capital to originate loans. they then sell the loans as rapidly as possible to institutional investors and secondary mortgage market participants. Thus,they are not portfolio lenders. the home loans originated by mortgage bankers are usually either FHA or VA loans or are conforming loans that meet the purchase requirements of Fannie Mae and Freddie Mac. the guarantee or insurance and underwriting standards for these loan mitigate much of the default risk of home mortgage loans for lenders,allowing the loans to be more easily sold to investors in the secondary market.
The mortgage banking process creates two valuable financial assets:the loan and the rights to service the loan.the loan always is sold,but through a variety of ways.Since the servicing rights are the profit center of mortgage banking, they may be retained or sold,depending partly on the size of the firm.

credit unions and mortgage

credit unions also are a form of thrift, with over 11,000 operating in the united states. their charters restrict them to serving a group of people who can show a common bond such as employees of corporation, government unit,labor union,or trade association.In years past,credit union played only a marginal role in home mortgage lending. However,they have been able to expand the definition of their "common bond" of membership in recent years,enabling many to grow considerably in size and diversity of services. This has brought them to greater activity in home mortgage lending. Most credit union today can offer home mortgage loans and home equity credit lines. However, their role is likely to be as a mortgage broker (discussed below) rather than as traditional depository lender. Altogether,their share of total home mortgage lending appears to remain around 3 percent.

Friday, June 19, 2009

market misjudgments in real estate(3)

these stories are only some of the more spectacular examples of market misjudgments in real estate. virtually every community has its album of stories of landowners, large and small, who built their dream project,only to have it die financially for lack of an adequate market. Frequently, the developer disappears from the industry and little attention is ever again paid to the failure.
market misjudgments in real estate too often are enduring and disastrous because the commitment is large, permanent, and immobile. Further,many developers have learned trough bitter and financially devastating experience that if the market they had counted on is not there when their project is completed, it is beyond their power to create it.

market misjudgments in real estate(2)

the problem of market misjudgments is not limited t office buildings.In st.Louis the pruitt-Igoe public housing project was completed in 1954 and heralded worldwide as a model for a generation of postwar public housing projects that followed. Unfortunately, this 33-balding complex for 10,000 occupants was found to be ill-designed for the needs of the occupants and uninhabitable,setting a pattern for similar projects in the year that followed when it was completely demolished and replaced. In 1962 Robert Simon launched the new community of Reston,virgini,in suburban washington,D.C., which was heralded by architects and planners of the western world as a model example of new town. By 1967 he had lost control of the struggling community due to inadequate prospects for cash flow. in 1971 Walt Disney world in Orlando,florida,opened to its first year with sensational success,receiving some 12 million visitors. Nearby,at the intersection of I-4 and the Florida turnpike, sometimes referred to as the "bull ُs -eye" of Florida real estate, gulf oil company is development subsidiary launched Florida center,another in its series of "new communities" as it had done many times throughout the world. Only this time Gulf was building for the local market rather than its own employees. But the local market never came, and the project collapsed with gigantic financial losses. About the same time, the residential condominium was discovered in Florida and elsewhere. In the first half of the 1970s,close to a quarter million condominium units were launched. but the market turned out to want far fewer than that number. Thousands of units were either never completed or, in some cases, torn down shortly after being constructed to make the land available for more viable uses.

market misjudgments in real estate(1)

In the early 1970s most downtowns of the united state witnessed the completion of office buildings that set new records in size, height,and cost.Unfortunately \,many of the very buildings that defined new skylines for U.S. cities also defined new levels of financial loss because they fell far short in occupancy. In Atlanta,Miami,Minneapolis ,and many other cities, the largest building on the downtown skyline was also the largest economic disaster. On the island of Manhattan,alone,the office market became so overbuilt that the resulting value of the new structures fell to approximately a billion dollars below their cost of construction. What is most intriguing about this office market disaster of the mid-1970s was its repetition in even larger terms little more than a decade later.By the end of the 1980s the average occupancy of major office buildings across the united states was falling toward a devastating 80 percent after a new building boom added more than 30 percent to an already ample supply.

the production of real estate assets

the real estate values (prices) determined by the interaction of user markets and capital markets become a guide to real estate producers (builders,developers and conversion specialists). when market prices exceed the cost of productions, producers are more inclined to build , thereby simultaneously adding to the supply of space and to the stock of investable real estate assets.
Real estate production historically has been a volatile process because real estate price and costs tend to be volatile.The increase in supply by producers tends to lower rents in the user markets and to lower property values(prices),which reduces the feasibility of additional new construction.Thus,building booms and slumps often characterize real estate production.To compound the volatility further,real estate values also can be affected by shocks to the capital markets.For example,if interest rates rise,property values will generally fall,again rendering construction less profitable.Finally,construction costs can be very volatile.Organized labor disputes in cities such as New York or Boston,or unexpected events causing shortages in lumber or other building materials,can severely damage the financial viability of a major real estate development.

value investing real estate

the world of real estate is rich with investment decisions,but not all of these truly concern real estate. True real estate decisions are about acquiring, financing,using,improving,and disposing of actual real estate assets (Land and its permanent structures). in contrast to these decisions are management or operational choices that coincidentally arise from involvement with real estate. for example, a residential real estate brokerage company must make a host of decisions about operating the business-personnel recruitment and compensation, marketing methods and strategic, equipment decisions,and organizational decisions. But these decisions are not early about real estate . Rather, they are the kind of decisions that any organizations must make to reach its goals , and are not our concern here.

real estate attorney

real estate attorneys play important roles in real estate and real estate finance, including drafting documents,assisting with the contracts of individual financing, and handing the complex problem of default. the following excerpt describes their broad role in the industry:
Real estate lawyers act as advisers to those who are buying or selling property, or to those involved in other matters related to real estate. they help process much of the paperwork involved in land transfers or other real estate transactions. attorneys provide counsel to clients regarding their legal rights and obligations, and may suggest specific courses of action in buying or selling property or handling related matters. In this role. they research the intent of relevant laws and judicial decisions, and then apply the law to their client is specific circumstances and needs...Real estate lawyers spend the majority of their time outside the courtroom. they conduct research , meet with clients, process documents and assess the legal positions of their clients in terms of the situation at hand while some attorneys specialize entirely in real estate, others make it a segment of their practice . in both cases, further specialization is possible... real estate attorneys work with a great variety of people..they.. interact with other professionals involved in real estate business including appraisers,real estate agents and brokers, mortgage loan officers, tax attorneys, and other specialists.
Like all attorneys, those who practice in real estate must have the requisite law school training,and must be admitted to the bar in the states where they practice.

real estate and the economy

real estate generates nearly a third of united states gross domestic product(GDP),Creates Jobs for nearly 9 million American, and is the source for 70 percent of local government revenues. the total contribution of the housing sector alone approaches 20 percent of GDP. because of the significant influence of real estate on the nation is economy,investors on wall street closely monitor real estate construction, construction permit activity, and real estate sales figures. Housing starts and sales are widely viewed as lending economic indicators.

career opportunities in real Estate

one of exciting things about pursuing a career in real estate is that many options are available. career paths can accommodate white-collar executives working for corporations,banks,advisory firms,or in the mortgages industry, analytical personality types working in real estate appraisal or consulting jobs; sales people working in brokerage,leasing,or property management;or entrepreneurs interested in developing new properties or in renovation of historical buildings.career opportunities also exist in the public sector with employers like the department of housing and urban Development (HUD), The general service administration (GSA), the Bureau of reclamation, the U.S.postal service, and with the numerous country tax assessors,to name just a few. As you familiarize yourself with the material presented in this blog, the type of work associated with the job opportunities listed above will become increasingly clear.however, it is important that you begin to read some of the real estate articles that appear in newspapers,magazines,and journals.you should also begin searching for and book marking interesting real estate websites. .

costs of mortgage financing

the use of mortgage debt,in addition to equity capital,to finance an income property investment has four essential tax consequences. first, the periodic"price" the investor pays for borrowing- that is, the interest-is generally deductible in the year in which it is paid. However, the repayment of principle is not. Second, the annual deprecation deduction is not affected by the mix of debt and equity financing that is used because the entire acquisition price (minus the land) is deductible. Third, mortgage funds, used for purchases or refinancings, are not taxable as income when received.
Finally, up-front financing costs (e.g., loan origination fees, discount points, appraisal fees) for investment properties are not fully deductible in the year in which they are paid. Instead, these costs must be amortized over life of the loan. For example, if up-front financing costs on a 30-year loan total $3,000, the investor may deduct $100 a year when calculating taxable income from operations. if the loan is prepaid before the end of year 30 (perhaps because the property is sold), the remaining up-front financing costs are fully deductible in the year in which the loan obligation is extinguished. if our example loan is prepaid in year 5, then $2,600[$3000-(4.00$)] can be deducted from taxable income in year 5.

objectives of financial reporting.

the financial reporting should provide information that is useful to present and potential investor and creditors and other users in making rational investment, credit, and similar decision. the information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence. the financial reporting help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from sale, redemption, or maturity of securities or loans. Since investors and creditors cash flows are related to enterprise cash flows, financial reporting should provide information to help investors, creditors, and other assess the amounts,timing,and uncertainty of prospective net cash inflow to the related enterprise.the financial reporting should provide information about economic resource of enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners equity), and the effects of transactions, events and circumstances that change its resources and claims to those resources.

Thursday, June 18, 2009

valuing the inventory when it purchased

inventory should be recorded in the book at the amount that includes all of the costs paid for getting the inventory ready and available for sale. this includes not only the cost of the inventory itself, but also shipping costs to receive the inventory, insurance, taxes and tariffs, duties,storage and any other costs without which the company could not sell the inventory to the customer.
the journal entry to record the purchase of inventory will be as follow;
Dr inventory (all costs required)
Cr cash (all costs required)
If more than one type of inventory is purchased for only one purchase price, the cost needs to be allocated amongst the different inventories purchased, using a pro rate distribution based upon the fair value of the different items purchased.
If company receives any discounts related to the purchase of the inventory, the discounted price that it pays is the amount that should be recorded as the value of the inventory .
If the goods are shipped FOB Destination (this is covered later , but it means that the goods are considered sold only when they reach the destination), the costs of shipping are incurred by the seller and not the buyer. these shipping out costs are considered to be a selling expense by the seller and are not included in either the inventory or the costs of goods sold figure. this also means that the only cost to record as inventory by the purchaser of goods (which were shipped FOB Destination) is the cost of the goods themselves. this is because all shipping related charges were paid by the seller and were most certainly included in the single invoice amount.
Internal links
1- this link about inventory and financial statement
2- this link about classifications of inventory

classifications of inventory

for manufacturing company there are three different classifications of inventory.these are:
1- Raw materials- the individual parts and pieces that will be assembled to make the finished goods.
2- Work-in-progress- units of inventory for which production has started, but has not yet been completed.
3- finished goods- units that have been completed , but not yet sold.

Internal links :
1- this link about inventory and financial statement
2- this link about valuing the inventory when it purchased

inventory and financial statement

inventory is one of the most important and possibly largest item on the balance sheet for company that either produce or sells goods. inventory not only shows up on the balance sheet as an asset, but it is also an important item on the income statement as part of calculation of the cost of goods sold. for a merchandising company, cost of goods sold is usually one of the largest expense items on the income statement. because of this, inventory is a critical account in the accounting process.

internal links;
1- this link about classifications of inventory
2- this link about valuing the inventory when it purchased

Tuesday, June 16, 2009

bank deposits in the commercial bank balance sheet

on the liability side in the commercial bank balance sheet ,total bank deposits are separated into (1)demand deposits (2) time deposits and (3) deposits of public funds. (these "public funds" are demand deposits if held by the federal government, but the deposits of state and local governments may be either demand or time deposits.)Demand deposits of individuals and business are included in our definition of money, whereas time deposits are referred to as near-money. state and local government deposits of public funds on demand in commercial banks are also included in the federal system is definition of money, though federal government deposits in commercial banks are not.
from this point of view of te individual bank, in increase in its deposits provides added funds with which it can increase its earning asset, such as loans and investments. this appearance of causality from deposits to earning assets, however, is somewhat misleading,because for the banking system as a whole the direction of change is the reverse. whenever cash reserves of the banking system are increased, usually as a result of more reserves supplied by the monetary policy of the federal reserve system, the banks are thereby enabled to acquire more earning assets. when the banks are adding to their total portfolio of loans and investments, their liabilities (demand deposits and time deposits) are also increasing. hence, the supply of money and near-money increases as a direct result of the extension of bank credit by the bank system.

securities held by banks

the second item in the commercial bank balance sheet , "government securities" includes all debt obligations of the federal government held by banks. this term is not restricted to bonds, but includes treasury bills and treasury notes, as well. banks consider short-term government securities to be secondary reserves, because they can be readily turned into cash.
"other bonds and securities " primarily refers to municipal bonds, or tax exempts, which are the debt obligations issued by states, toll-road authorities, counties, school districts, water districts, and the like, as well as those debt securities sold by cities and towns. "loan and discounts" is an item of great concern to banks, because making loans is a prime function of bank. Although banks obtain some of their income from interest received on U.S. government securities, municipal securities, and service charges, the bulk of their earnings comes from the loan they make. loans, however, do involve some risk, so that they are sometimes referred to collectively as risk assets.

cash held by banks

A bank's "cash" include (1) vault cash,or coins and paper currency actually held in the vaults of the bank, (2) deposits in the regional federal reserve bank, if the bank is a member of the system, and (3) deposits in other commercial banks. Only the first two categories may be considered as legal reserves by member banks in the federal reserve System, though all three 'cash' categories are considered as primary reserve available to each bank in meeting any requirements for ready money .

Monday, June 15, 2009

the commercial bank balance sheet

like all business firms, commercial bank use balance sheets on which the total value of assets must equal the total value of liabilities plus net worth. the major kinds of bank assets and liabilities are shown on the sample balance sheet of the first national bank of yourtown. the classification of assets and liabilities is actually taken from the annual report of major commercial bank. Other banks have a somewhat different method of presenting balance sheet items; for example, demand deposits and time deposits may simply be presented as one item, deposits.
the major items of concern are the first four on the asset side and the first three on the liability side. Before we examine the nature of these items, the student should be reminded that no particular item on the asset side is matched by a corresponding item on the liability side. it is necessary, however, in using a balance sheet to change the total amount of assets, say, if the total amount of liabilities plus net worth changes, and vice versa. the balance sheet must always balance, because total assets always equal total liabilities plus net worth.

treasury bills in bank secondary reserves

Bills have ready market ability and,because of their narrow bid-asked trading spreads, can usually be sold without any loss even if held only a short time.As a rule, the higher the yield of bill at purchase, or the shorter the maturity of the bill at purchase,the wider can be the subsequent market fluctuation over a given period without the bank that sells the bill incurring a loss on the transaction. the greater safety from possible adverse market fluctuations in price that treasury bills give the bank holding them helps account for the popularity of Treasury bills give the bank holding them helps account for the popularity of treasury bills as a major component of bank secondary reserves. the greater trading activity in the short end of the government securities market, as compared with the long end of this market, also means that bills can readily be marked at any time.
other secondary reserves assets.in addition to treasury bills and other short-term treasury obligations, it is possible for commercial bank to use federal Agency issues, public housing Authority notes, banker's acceptances, and commercial paper in its secondary reserves. these other money market assets do not ave quite as much shiftability as do treasury bills, though they usually have higher yields than treasury bills. the reduced shiftability of these assets, however, makes them attractive only if seasonal, or other, liquidity requirements can be forecast with some degree of accuracy. there may be more reluctance to sell such other secondary reserve assets freely, because the spreads between the bid and asked prices on marketable agency issues and the Housing Authority notes, to take two example, are both wider than is true for Treasury bills. there is thus somewhat more market risk for these other money market assets.

municipal bonds

state and local government issue municipal bonds to obtain long-term funds for such things as highways and schools. the interest payments holders of these bonds receive are exempt from federal income tax (although some state and local governments do collect income tax on municipal bond interest earnings). this makes municipal bonds an attractive investment for lenders in high-income tax brackets.
for example, a person in a 36 percent tax bracket earning 10 percent taxable interest gets to keep only 6.4 percent after tax. A tax-free municipal bond paying 6.5 percent or more would be an attractive investment in this case. A secondary market exists for municipal bonds issued by large cities and states, but it is less active than the corporate and federal government bond markets. the bonds issued by smaller municipalities do not trade on a secondary market, which makes it very difficult for a holder to liquidate a bond prior to maturity .

financial accounting

financial accounting has been characterized as " the branch of accounting that focuses on the general-purpose reported on financial position and results of operations known as financial statements. "these statements provide "a continual history quantified in money terms of economic resources and obligations of a business enterprise and of economic activities that change these resources and obligations "financial accounting is the process that culminates in the preparation of financial reports relative to the enterprise as a whole for use by PARTIES both internal and external to the enterprise. In contrast, managerial accounting is the process of identification, measurement, accumulation, analysis,preparation, interpretation, and communication of financial information used by management to plan, evaluate, and control within an organization and to assure appropriate use of, and accountability for,its resources.

Sunday, June 14, 2009

what is accounting ?

many people think accounting is a service activity or descriptive\analytic discipline or information system , but accounting is all three.
As a service activity accounting provides interested parties with quantitative financial information that helps them to make decisions about deployment and use of resources in business and nonbusiness entities and in the economy.
AS a descriptive\analytic discipline it identifies the great mass of events and transaction that characterize economic activity and, through measurement, classification, and summarization, reduces those data to relatively few,highly significant, and interrelated items that, when properly assembled and reported, describe the financial condition and results of operation of specific economic entity.
As an information system it collects and communicates economic information about a business enterprise or other entity to aside variety of persons whose decisions and actions are related to the activity.
Each of these three descriptions of accounting-different as they may seem-contains the three essential characteristics of accounting.
(1)Identification, measurement,and communication of financial information about
(2)Economic entities to
(3) Interested persons.
these characteristics have been peculiar to accounting for hundreds of years. Yet, in the last fifty years economic entities have increased so greatly in size and complexity, and the interested persons have increased so greatly in number and diversity, that the responsibility placed on accounting profession is greater today than ever before.

monetary indicators and monetary policy tools

a change in bank Rate by the bank of England, or a change in the discount rate by the federal reserve banks in the 1920 's, was commonly thought to be the major policy tool used by central banks in those countries, and in other countries as well .In this period,three fundamental propositions underlay much of the theory of central banking;(1)a change in the central bank interest rate would assure a generally corresponding change in interest rates at commercial banks;(2)a change in the level of interest rates could be summarized as being a change in "the"interest rate,because it was assumed that there would be a synchronous change on yields on comparable debt instruments of all maturities;and(3)whenever interest rates changed as a result of central bank action,there would be changes in the amount of funds offered by lenders and changes in saving by consumers out of income.
Some 50 years later,in the 1970s,a much greater stress was placed on controlling the growth of the money supply with less emphasis being placed on deliberate variations in central bank lending rates, e.g.,the discount rate. The preferred instrument of monetary policy is now open market operations and direct control over the growth in bank reserves,and the growth in the money supply is implemented through the purchase and sale of government securities.
A change in the discount rate is now looked upon as a "signal"of the intentions of the monetary authorities to carry out a particular monetary policy of credit ease or credit restraint rather than a major tool in and of itself.Furthermore,the use of market interest rates as an indicator of monetary policy is subject to considerable measurement error because of the impact on such interest rates of many influences other than monetary policy, e.g.,a change in the budget deficit or a variation in business loan demand.
Furthermore,there is increasing empirical evidence that changing rates of growth of the money supply do have a significant impact on both the price level and the rate of growth of real output.Hence,more observers put increasing emphasis on judging the intentions of the monetary authorities by weekly,monthly,quarterly,and annual data on the growth of the money supply.Although some variation in the growth of the money supply may be the result of some forces other than those of monetary policy,ultimately the control of the growth of the money supply is in the hands of the monetary authorities.However,insofar as the central bank controls the money supply,it is through its control over bank reserves.
internal links:
1- this link about monetary policy tools

Department of housing and Urban Development (HUD)obligations

Department of housing and Urban Development (HUD), also issues securities which, unlike securities issued by other federal instrumentalities, are originally obligations of local governmental authorities, but are indirectly guaranteed by the credit of federal Government. prior to 1965, such housing offering were handled by the public Housing Administration (PHA). such obligation take the from either of short-term notes with original maturities 1 year or less, or of longer-term bonds with maturities running as high as 40 year. These HUD obligations are essentially the debt of various local public housing authorities created by statutes in the various states. Nevertheless, HUD, under a contractual financial arrangement, agrees to provide sufficient money for the local authorities to pay interest and principle when due, if this proves to be necessary.
Department of housing and Development, in turn,can secure funds, if needed,from the treasure of the united states. these HUD obligations could also be mentioned under municipal securities, because interest income from them is exempt from federal income tax.On march 21,1973,HUD sold $319.5 million of such tax-exempt bonds, which was the largest amount sold in 22 years.(such bonds were first sold in 1951). The 1973 bond sale involved 39 separate bonds by local housing authorities in 21 states and the virgin Island of other federal instrumentalities , are approved for bank investment. the comptroller of the Currency has rules that national banks may invest in such obligations of federal instrumentalities and government-sponsored credit agencies without regard to statutory limitations applicable to investment securities.

Saturday, June 13, 2009

the Tax-Exempt feature for banks

One important factor accounting for this great interest in municipals on the part of banks is the higher rate of income tax that banks have had to pay in the postwar period as compared with the prewar period. Greater investment in municipal securities is one way of reducing this tax liability and securing a higher net return.the average market yield on all general obligations of state and local securities was only 5.68 per cent in 1977 as compared with 7.06 per cent on long-term federal government securities. nevertheless, the after-tax yield on these municipal securities was substantially higher than the after-tax yield on government securities, and even higher than return on loans.
Mutual savings banks,savings and loan association are exempt from federal income taxation until their capital funds exceed 12 per cent of liabilities and so these institution have shown little interest in tax-exempts. (This special tax treatment for these thrift institutions, incidentally, is a major reason why banks have charged unfair competition as the reason for the rapid growth of these competitors.) Life insurance companies, also, enjoy relatively low marginal and average tax rates, but nevertheless acquire municipals, though they do not play the relatively important role in the investment portfolio of life insurance companies that they do for commercial banks.


in only three years, from the end of 1969 till 1972,commercial banks more than doubled their holdings of "other securities," which are primarily notes and bonds of government agencies and government-sponsored credit agencies. At the end of 1969 such bank holdings of "other securities," totaled only $12.1 billion, whereas by the end of 1972 this category of bank-held securities reached a total of $27.6 billion. Furthermore, the percentage of such "other securities" rose from only 9 per cent of total securities held by all banks to more than 16 per cent in the same period. This category of bank investments includes such miscellaneous items as loan to farmers directly guaranteed by the CCC,Export-Import Bank Portfolio Fund Participation, and corporate stock. But For the most part this category of investments consists of bonds and debentures issued by various instrumentalities of the federal government or government-sponsored credit agencies.

federal home loan banks

Another government-sponsored credit agency that taps the money and capital markets for funds from time is the Federal home Loan Bank System, which was established in 1932 to help the sagging home-building industry, and became privately owned, though still government-sponsored, after world war II. it is composed of 12 home loan Banks, which have about 4600 savings and loan associations as members that can secure credit from the parent banks.(At the end of 1976, $16,8 billion had been loaned to the member savings and Loan Associations,with tree fourths of the loans having a maturity over one year.) It is Thus organized Similarly to the Federal Reserve System, which has commercial bank members who can borrow from their regional banks. Unlike the federal reserve System, however, the federal home loan bank system issues notes and Bonds in the financial markets, which may be purchased by Commercial Banks for their Investment portfolio. to attract buying interest, the Federal home loan bank board (FHLB)offering of notes or bonds are at a higher Yield than Comparable Treasury issues, Since they are not fully guaranteed by the Treasury.

protection of the depositor by FDIC

IN addition to protecting depositors against loss, the FDIC makes such deposits promptly available in the event of bank failure. In most cases, In 10 days to 2 weeks after the closing of the bank the depositors receive a substantial proportion of their insured deposit directly from the FDIC. If the distressed bank has been placed in receivership, the remainder of the depositor claim is paid after certain assets of the bank have been liquidated.

establishment of the federal deposit insurance corporation

with the establishment of the FDIC in 1933, an important concerned not only with the safety of depositors, but with the overall stability of the banking industry, came into existence. when the FDIC was organized, all member banks of the federal Reserve System were required to join. Noninsured state banks were given the option to apply to the corporation for admission to insurance. A sufficient number of these state banks, along with those banks in the federal Reserve System, did apply for insurance, so that more than 90 per cent of all commercial banks have been covered by this depositor insurance since January 1,1934. since November 27,1974, each account has been insured up to $40000.
Most commercial bank are insured In 1977, the FDIC insured 14,425 commercial banks with total assets 0f $1,040 billion. Only 293 small banks with total assets of $33 billion were noninsured.
Bank Application for insured status Most newly established banks apply, even before they open their doors, for such deposit insurance. When a bank applies to the FDIC for insured status, the FDIC considers the following factors: the financial history and condition of the bank, the adequacy of its capital structure, its future earnings prospects, the general character of its management, the convenience and needs of the community to be served by the bank, and the consistency of the bank's corporate powers with the purposes of the Federal Deposit Insurance law. Although most banks applying for insurance are likely to be newly organized banks, some banks already in operation, but hitherto not insured, also make such application. in 1976, for example,the FDIC approved application for deposit insurance of 112 banks and denied only 10 application. (four were subsequently approved following amendments to the applications.) IN 1977, there were 104 applications; only six were denied.

Friday, June 12, 2009

the federal deposits insurance corporation

Individual member banks may satisfy some of their liquidity needs by borrowing from their regional Reserve Banks. These commercial banks, and others as well, may also use the newer techniques of liquidity management and borrow excess reserves from other banks in the federal funds market. As already noted, they may also secure added deposits by issuing certificates of deposit, or even secure funds from their bank holding company, which may have floated an issue of commercial paper. But if the banks having thus secured additional funds proceed to make unwise loans or acquire investments that subsequently decline in price in the market, the bank itself may go into bankruptcy with grievous loss to its many depositors.
prior to the banking Act of 1933, which established the federal Deposit insurance Corporation (FDIC) as of January 1,1934 each bank had to take its own steps to safeguard its depositors. The various reserve requirements established by state laws, the national banking Act of 1863, and finally the federal Reserve Act of 1913, all had as underlying philosophy the idea that depositors would be protected by banks carrying reserves, as well as by preventing an overextension of bank credit in speculative ventures. After 1913, the possibility of rediscounting eligible paper by the member banks at the various federal reserve Banks also seemed to offer reassurance to depositors that, if they wished to withdraw their money,the member banks could secure the needed cash.
Nevertheless, these safeguards did not prove sufficient. the high casualty rate of commercial banks in the 1920 's and 1930's has already been described. In the widespread bank runs of the depression days of the early 1930's , even sound banks were sometimes forced to close their doors because of an inability to meet the heavy cash withdrawals of their panicky depositors. As a result, bankers have gained the reputation for being conservative and cautious in their lending and investing activities. Many senior bankers in their own lifetimes have seen what happened to less prudent bankers. Each bank, therefore, and properly so, has felt it necessary to be concerned with its own liquidity requirements and hence with the safety of its deposits.

estimating a bond's Expected holding-period Return

Once the important of market values is recognized, the presence of a new kind of risk becomes obvious. and the idea of truly risk less investment becomes a relative matter .
Assume that an investor is interested in a holding period of five years. What sort of investment would be riskless for these purposes? obviously, one with no default risk, which promises a payment at the end of five years and at no other time.Any other investment will involve some risk. the five year holding period return from a bond that provides semiannual coupon payments will depend on the prices at which such payments can be used to purchase additional units of the bond (or some other instruments). The return on a bond with a maturity in excess of five years. The return on a shorter-maturity bond will depend on the instruments that are available when the proceeds must be reinvested, and their prices at those times.
since bond prices depend in large part on interest rates, this source of uncertainty is sometimes termed interest-rate risk.in many cases it is far more important than default risk. Moreover, it makes even U.s. government debt risky, unless there is perfect correspondence between the investor's desire for cash and the payments promised by the bond in question.
interest-rate risk should be incorporated in any analysis of expected holding-period return. for U.S. government securities this requires estimates of possible future interest rates and their associated probabilities. for other securities the likely future differentials for various levels of risk must also be taken into account.

guarantee loans or Mortgage pools by the federal government

that active of federal government to effect on the credit markets but doesn't contemporaneously affect the federal budget is the guaranteed mortgage pool. Guaranteed mortgage pools are loans that the federal government insures wholly or partly, or guarantees the payments of principle or interest, or both. like the off-budget agencies and federally sponsored agencies, federal loan guarantees do not show up in the federal budget. the bulk of loan guarantees has been used to support housing. in recent years, however, guarantees have been used increasingly for other purposes, such as the loan guarantees involving Chrysler and the city of new york

Thursday, June 11, 2009

primary and secondary financial markets

financial transactions occur in both primary and secondary financial markets. A primary is one in which a new security is bought and sold. A secondary market is one in which existing securities are exchanged;secondary markets are important to primary markets because they make the instruments traded in the latter markets more liquid. A primary financial market exists for U.S. government securities, corporate bonds, and corporate stock. Newly issued securities constitute additions to the supply of credit. when the U.S. treasury sells $1 billion of newly created bonds. they purchased in what is called the primary securities market. primary markets also exist for newly issued stocks and bonds of nongovernment corporations.

the federal financing bank

the most important off-budget agency is the federal financing bank (FFB), which began operation in 1974. Today it provides most of the financing for off-budget agencies and also for certain on-budget agencies. the FFB lends by three methods:
1- purchasing agency debt (bond)
2- purchasing loans and loan assets
3- purchasing loan guarantees
All these purchases are financed with funds borrowed directly from the Treasury. the original purpose of the FFB was to coordinate and to consolidate the borrowing of a number of federal agencies. The FFB was designed to act as an intermediary- buying securities issued by off-budget agencies and paying for them with funds borrowed from the Treasury. Funds lent by the FFB to off-budget agencies do not show up in the budget totals voted and authorized Congress.
federal agencies often guarantee loans to insure the lender against any loss resulting from default by the borrower. some of the most famous cases of loan guarantees involved the city of new york, CHRYSLER, and LOCKHEED. when the FFB purchases a guaranteed loan at the request of federal agency, that purchase is ultimately paid for by te treasury which will probably sell securities to cover the expense. such an action is an indirect loan from the treasury to the private-sector borrower, but it is a "loan" that will not show an anywhere in the federal budget or deficit. Nonetheless,total borrowing by the Treasury has increased to finance the purchase.

The Federal Government

In its fiscal year the U.S. federal government spent over $400 billion more than it received in revenues; in 1991 the deficit figure was $320.9 billion. Those deficits presumably represented the amount of credit demanded by the federal government in those years. Currently the federal government borrows over 40 percent of all the funds borrowed on U.S. capital markets. Actually, however, the impact of federal government activity on the financial markets is even greater. the federal government is presence in the financial markets has three other sources: (1) activities of "off-budget" agencies,(2) operation of government-sponsored enterprises,and (3)provision of federally guaranteed loans.

Hedging instruments

An instrument that permits an individual or firm to ensure against asset price fluctuations is hedging instruments. these instruments include option and future. Option are financial contracts that grant the holder the right to buy and\or sell specified securities or goods in specific amounts and at specific prices for a specific period of time. Futures are financial contracts under which a person or firm agrees to provide a specific quantity of a security or a commodity at a specific price at some future time. By using options and future contracts, a person or firm can smooth out the risk of price fluctuations for purchase or sale of some other financial instruments,such as an exchange of another nation is currency in the foreign exchange market. Both options and futures are used extensively in foreign currency transactions.

Monday, June 8, 2009

financial disintermediation

The reverse of the financial intermediation process is financial disintermediation.Savers take funds out of deposit accounts and invest directly in,say,a bond issued by the U.S.government.In other words,rather than allowing the financial intermediary to use the saver,s deposited funds to purchase U.S.Treasury bonds,the saver does it directly.
Why disintermediation Occurs? Individuals remove their savings from financial institutions when the direct purchase of financial claims issued by households,corporations,and governments will bring a higher rate of return than a savings account in a financial intermediary.If,for example,a savings account in a thrift institution offers 5.25 percent interest,while securities issued by the U.S.government offer 12 percent interest,some savers will reduce the funds they maintain in thrifts or commercial bank saving deposits and increase their holdings of U.S.government securities.
Not surprisingly, the amount of disintermediation that occurs depends, in large part, on differences between interest rates offered by financial intermediaries and those offered by such ultimate borrowers as corporations and governments. the most rapid rate of disintermediation in the United States has occurred when nominal rates of interest have risen rapidly because of high rates of inflation (and therefore high anticipated future rates of inflation). this was possible because the regulations of the federal government prevented financial intermediaries from offering higher interest rates on normal savings-type accounts. other interest rates were unregulated and rose with the rate of inflation.
Conditions for disintermediation existed in 1969,1973,and 1974. During those periods, people predictably withdrew their savings deposits from thrifts and financial institutions and purchased financial assets directly;the rate of savings deposit growth fell dramatically during these episodes.
In 1975, as a reaction to the process of disintermediation, a new financial intermediary sprang up-money market mutual funds. these institutions were unregulated, and they offered interest rates on savings that were competitive with market interest rates. although this financial innovation helped to stem the tide of disintermediation, it didn't help the thrifts.
By the end of 1977, yields on U.S. Treasury bills (short-term bonds issued by the U.S. treasury) again rose above the maximum interest rates that commercial banks and thrift institution were legally permitted to pay on passbook savings deposits. In order to forestall another loss of savings deposits to the disintermediation process and to the mutual funds-an event that would have threatened the very existence of thrift institutions-federal regulators of depository institutions authorized a new category of 6-month time deposit called money market certificates. commercial banks, savings and loans. and mutual savings banks were permitted to offer these certificates after June 1,1978. This new liability and others have made the thrift institutions more competitive in the market for saving funds Of special importance in reversing the intra-intermediary movement of funds from thrift to money market mutual funds accounts is the money market deposits accounts, an instruments that competes directly with money market mutual funds.

determining the prime rate

determining the prime rate is part of the decision-making process involved in managing a bank is balance sheet. three major types of market rates are considered in making this particular decision; (1)rates on nonloan bank assets, e.g., yields on U.S. government securities, (2) rates on bank-acquired liabilities,i.e., the rate banks pay when they "buy" deposits in the form of certificate of deposit,(3) rate on corporate dept claims issued in place of bank borrowing, e.g., Yields in commercial paper market. the effect of a change in the demand for nonprime loans, as well as prime loans, must also be considered when the prime rate is changed, since a change in this key bank lending rate often leads to changes in other bank lending rates. Even before the floating prime rate was introduced, when the prime rates was set administratively, it tended to be related to money market rates, though not quite so closely as after the floating principle was established.

Sunday, June 7, 2009


financial intermediaries do more than play the role of intermediaries between ultimate lenders (savers) and ultimate borrowers. They also perform a valuable role by offering savers an asset that is really a well-diversified portfolio of assets. for example, if a small saver were required to deal directly with with ultimate borrowers, such as perhaps a home buyer seeking mortgage money, the small saver essentially would be ' putting all his or her eggs in one basket" the small saver would end up with only one asset- a mortgage contract on one piece of property. having such a limited number of assets increase the risk of default and of losing the entire asset portfolio. the financial intermediary, such as a saving and loan association, can offer the small saver a reduction in risk through diversification. This is accomplished by pooling the excess funds of numerous small savers in order to purchase a large variety of assets from numerous ultimate borrowers. As a result, the small saver might end up with, say, $20,000 in a savings deposit, but implicitly the savers has ' purchased' a small fraction of each of thousands of mortgage contracts looked at another way, financial intermediaries allow savers to purchase assets that are relatively safe and more liquid and that also earn interest. for example, when a saver deposits money in his or her account at the local credit union, that saver is implicitly purchasing shares in the credit union. the financial intermediaries in turn purchase assets, such as mortgages and land, which are sold by the ultimate borrowers .

Wednesday, June 3, 2009

approaches to security valuation

It is reasonable enough to say that market prices of"comparable investments"should be used to determine the value of a security.But when are two investments truly comparable?
An obvious case arises when investments provide identical payments in every possible contingency.If an investment,s outcome is affected by relatively few events,it may be possible to purchase a set of other investments,each of which pays off in only one of the relevant contingencies.A properly selected mix of such investments may thus be completely comparable to the one to be valued.
A much more common approach to valuation is less detailed but more useful. Two alternatives are considered comparable if they offer similar expected returns and contribute equally to portfolio risk.Central to this view is the need to assess the probabilities of various contingencies.