Archive for the ‘Economics’ Category
What is a Debenture?
In finance, a debenture is a long-term debt instrument used by governments and large companies to obtain funds. It is similar to a bond except the securitization conditions are different. A debenture is unsecured in the sense that there are no liens or pledges on specific assets. It is however, secured by all properties not otherwise pledged. In the case of bankruptcy debenture holders are considered general creditors.
The advantage of debentures to the issuer is they leave specific assets unencumbered, and thereby leave them open for subsequent financing.
In practice the distinction between bond and debenture is not always maintained. Bonds are sometimes called debentures and vice-versa.
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What is a Loan?
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular instalments, to the lender. This service is generally provided at a cost, referred to as interest on the debt.
Acting as a provider of loans is one of the principal task for financial institutions. For banks loans are generally funded by deposits. For other institutions issuing of debt contracts, such as bonds is a typical source of funding.
Other types of debt include mortgages, credit card debt, bonds, and lines of credit. A mortgage is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The bank, however, is given the title to the house until the mortgage is paid off in full. If the borrower defaults on the loan, the bank can reposess the house and sell it, to get their money back.
The abuse in the granting of loans is known as predatory lending. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over them.
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What is Currency?
A currency is a unit of money (or monetary unit). Typically, each country has given monopoly to a single currency, controlled by a state owned central bank, although exceptions from this rule exist. Several countries can use the same name, each for their own currency (e.g. Canadian dollars and US dollars), several countries can use the same currency (e.g. the Euro), or a country can declare the currency of another country to be legal tender.
Each currency typically has one fraction currency, valued at 1/100 of the main currency: 100 cents = 1 dollar, 100 centimes = 1 franc. However, some currencies use a fraction of 1/10 (and a very few some other value such as 1/5 or 1/20), or do not have a minor unit currency at all. These fractions are NOT listed below.
What is a Standard of Deferred Payment?
A standard of deferred payment is the accepted way (in a given market) to settle a debt. For example, while the gold standard reigned, gold or any currency convertible to gold at a fixed rate constituted such a standard. As of 2003, the US dollar and the euro are the most generally accepted standards for international settlements.
However, for certain kinds of transactions (such as for illegal goods like narcotics or weapons), gold or diamonds may be preferred as the medium of exchange — there being no recourse in case of counterfeit currency being used — and there is rarely any deferral of payment: if there is, it will most likely be stated in dollars.
This is distinct from the store of value function which relates to the saving, storing, and retrieval of value, and from the unit of account function which requires fungibility so accounts in any amount can be readily settled. It is also distinct from the medium of exchange function which requires durability when used in trade, and a minimum of opportunity to cheat others — as the diamond or gold example makes obvious.
When currency is stable, money can serve all four functions. When it isn’t, or when complex and volatile forms of financial capital are involved, it becomes important to identify a single standard of deferred payment to avoid cheating by selecting a denominator of debt that one knows is dropping in value.
Historically, there have been many times when creditors have had to hide from debtors to avoid being paid off in near worthless currency.
Time-based currency such as Ithaca Hours establishes fixed amounts of human labour as the only standard of deferred payment.
What is a Predatory Lending?
In the strictest and legal sense, predatory lending refers to secured loans such as home or car loans which are made by the lender with the intention that the borrower will not repay the loan, allowing the lender to seize the car or home and sell it for a profit. Colloquially, the term has been expanded to refer to the practice of convincing borrowers to agree to unfair and abusive loan terms. Such loans could take place either through outright deception or through aggressive sales tactics, taking advantage of borrowers’ lack of understanding of extremely complicated transactions. For instance, predatory loans for the purchase of a home could lead to foreclosure. Opponents of predatory lending often include transactions such as tax refund anticipation loans (or RALs), pay day loans, and credit cards, along with mortgage lending, in the term. The terminology is thus loaded, where proponents and opponents often intentionally blur the line between the two definitions in order to make their case sound better.
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What is a financial Bond?
In finance and economics, a bond or debenture is a debt instrument that obligates the issuer to pay to the bondholder the principal (the original amount of the loan) plus interest. Thus, a bond is essentially an I.O.U. (I owe you contract) issued by a private or governmental corporation. The corporation “borrows” the face amount of the bond from its buyer, pays interest on that debt while it is outstanding, and then “redeems” the bond by paying back the debt.
Bonds are securities but differ from shares of stock in that stock is an ownership interest (termed “equity”), but bonds are merely “debt”: Therefore a stockholder is an owner, but a bond-holder is merely a creditor.
What is a Bank?
A bank is a financial institution that provides banking and other financial services. By the term bank is generally understood an institution that holds a banking license. Banking licenses are granted by financial supervision authorities and provides rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provides certain banking services without meeting the legal definition of a bank, a so called Non-bank.
The word bank is derived from the Italian banca, which is derived from German and means bench. The terms bankrupt and “broke” are similarly derived from banca rotta, which refers to an out of business bank, having its bench physically broken. Money lenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table.
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What are Financial Economics?
In financial economics, a financial institution acts as an agent that provides financial services for its clients. Financial institutions generally fall under financial regulation from a government authority. Common types of financial institutions include banks, building societies, credit unions, stock brokerages, and similar business.
Financial institutions provide a service of moving funds from investors, those with excess funds, to companies, those in need of funds. These financial institutions make it easy and affordable for small investors to invest.
What is Interest?
In finance, interest is a surcharge on the repayment of debt (borrowed money). The fact that lenders demand interest for loans in capitalist countries can be explained by one or more of the following:
- time preference
- the time value of money
- the opportunity cost of money
- macroeconomic price changes (inflation)
- the risk of default on the loan (bankruptcy)
Mathematically, interest generally falls in one of the following two categories:
- simple interest, in which outstanding balances grow linearly with time. In each period, the total balance grows by some fraction of the principal (that is, of the original investment).
- compound interest, in which outstanding balances grow geometrically with time and exponentially with time in the limit as the rate of compounding becomes instantaneous. In each period, the total balance grows by some fraction of the sum of the principal and the interest paid on all previous periods.
In either case, the fraction by which the balances grow is called the interest rate.
Simple interest is seldom used in practice. In most cases this is because the interest earned in previous periods is assumed to remain in the account. Only when the interest earned is immediately withdrawn from the account should simple interest be used. When interest is not collected as it is accrued (as with a certificate of deposit, where the payment is in a lump sum), the interest increases the amount of money subject to interest. In this case simple interest would not reflect the opportunity cost that the lender experiences. With compound interest, the frequency of compounding influences the total amount of interest paid over the life of the loan. An interesting note from mathematics is that the formula for calculating continuously compounded interest, namely
is the same as the formula for calculating e, an important mathematical constant and the base of the natural logarithm.
Economists sometimes referred to interest as rent on money. As with any rental, the market price (or rate) is subject to change to reflect market conditions. Interest rates are very closely watched market indicators, and have a dramatic effect on finance and economics.
Interest involves the future, which is uncertain. Some interest bearing investments are riskier than others. The greater the risk of the security, the more interest investors expect to receive.
Different parties will be offered different rates on debt obligations (such as loans). The measure of credit worthiness of an individual is called a credit rating or credit score. Other entities (such as governments and companies) will acquire a bond rating if they are active in bond markets.
The collection of interest was forbidden by Christian and other religions under laws of usury. This is still the case with Islam which results in a special type of Islamic banking. Gesell researched the destabilizing effect of interest (an asset will increase beyond any limit over time) in his Freiwirtschaft theory, which includes negative interest rates.
What is Money?
Money is an intermediary that serves as a medium of exchange, unit of account, standard of deferred payment and a store of value. Money is one of the central topics studied in economics. There have been many historical arguments regarding the combination of these four functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. These arguments are covered in financial capital which is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender.