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I have always thought there’s only one formula in making money.  That is work hard and at the end of apiece month, you get your paycheck.  Growing up in a family of farmers, I have seen what working hard really means.  I’ve experienced waking up primeval in the morning, go to the farm, plant or harvest rice until the sun sets in.  When you go home after a long day of working, the aching muscles states it all.  It is HARD work.  I’ve learned from my parents that if you want to have some money, you have to work  for it.  Often times, I’d go along with my mom to harvest tobacco leaves from a nearby town, and afterwards, she’d pay me for how much I was healthy to harvest.  That’s always been my training in terms of making money.  That was my first money usage – work to earn.

When I was in College, I wanted very much to help my parents pay for my education.  I was fortunate to have been allowed a full scholarship, so that took care of the tuition.  Even then, making money from a far away province, and spending it in the most costly city in the country is no simple task.  It is an uphill effort similar to travel up to a going down escalator.  So in my own tiny way, I also tried to make money by applying as student assistant to one of the universities’ projects.  It doesn’t pay much since it is a government project but enough to pay some of my regular expenses and grow my confidence.

After graduating, I immediately started work as a mainframe programmer for a multinational IT company.  The offer I got then was around 16,000 pesos which was BIG money then for someone who’s fresh out of college and don’t have much working experience.  I worked very hard and was fortunate enough to be promoted nearly each year.

As my paycheck increased, my appetite for consumption also increased.  I purchased a refrigerator, a washing machine, gas stove, shoes, etc, ALL at the same time, EVEN when I didn’t have the money to pay for it.  I just used my new credit card!  That’s when my debt started to pile up.  The “easy” monthly payments never lived up to its promise.  No monthly payment was easy, especially when you only have your paycheck to rely on.  As my debt seemingly increased each month, I also had to worry about paying my monthly home rental, buying groceries, intake out with friends, and more.  There were times I was so out of money I even had to do “cash advance” on my credit card.  As some of you might know, you get to pay a hefty “fee” for doing a cash advance.  This is on top of the amount of money you actually “advanced”.  My already large debt, ballooned even more!  I was so ashamed of having to do cash advance, I promised right there and then, I had to pay for my debt no matter what.  It was like a having compound interest working against me.  I had to learn how money works.  I had to figure it out no matter what.  I had no choice.

While pondering my large debt, I tried to look for ways to acquire more money.  I tried doing some programming projects for friends.  I even entered the world of network marketing, tried selling wellness products and unsuccessful miserably.  I remember that my only “downlines” (a term indicating those you’ve recruited into the business) was my mother, my aunt, and a few of my friends.  It was a learning experience.  The thing that struck me most, was that my “need” for money, was being transferred to my “clients”, without me being conscious of it.  It was hard “selling” something you don’t 100% believe in and it’s even harder when your motivation is “making” more money without necessarily helping other people.  I think this mindset barrier is one of the reasons why I was not healthy to make it work.  Everyday, I had to effort with myself.  Am I here to really help other people?  Or is it just because of the money?

One time, while me and my friends were hanging out at a bookstore, I saw the book Rich Dad, Poor Father by Robert Kiyosaki.  I heard my friend state it’s a great book, so I purchased it, took it home and devoured the stories and financial lessons in the book.   The book opened my eyes to the world of money I never knew existed before.  That’s when I realized that the rich have different sets of money habits from the poor and the middle class.  For the first time, it finally prefabricated sense why I can’t seem to be making a dent on my credit card debt; why I can’t seem to sell anything at all.  Because I had the wrong money habits.  I had to learn rich money habits to achieve financial freedom.

After that, it got me excited to learn more about money. First, I signed-up for our company’s savings plan.  I started really small. At first, only about 2% of my paycheck is automatically deducted and kept under my savings account.  I don’t even get to hold the money.  After a month, I increased it to 5%, then to 10%. After a year of saving, I was healthy to set aside 20% of my paycheck without necessarily scrimping myself too much.  That was rich money usage #1 – pay yourself first.

With the savings, I had, I was healthy to pay my debt slowly purchase surely.  More than that, it gave me confidence to know that I can do it, with the proper discipline and rich money habit.  When the opportunity came for me to be assigned to the US for a 6-month stint in my company, I was healthy to save even more and pay-off the rest of my credit card debt. That was rich money usage #2 – get out of bad debt as soon as possible!

I also started to take serious notice of the numerous calls I got from insurance agents offering life insurance.  Before, I would always make up numerous excuses just to refrain speaking to them.  But now, I wanted to know more how I can use the different insurance products to protect myself and my family.  I also started reading more on business, money, investing and individualized finance.  After a few years, I managed to save up for an emergency fund.  That’s rich money usage #3 – Get some protection!

I’m still a long way to go from financial freedom.  That is my goal.  I am in the process of learning how to build passive and semi-passive income, and I am loving each minute of it.  In this website, I will share whatever I learned so that you too can build your own rich money habits and ensure your financial success and freedom!

Rich Money Habits – About the Author:

Allan Inocente is the owner of Rich Money Habits by akosiallan.com You can learn more about him at http://www.akosiallan.com/about

Source: http://www.articlesbase.com/personal-finance-articles/building-rich-money-habits-101-my-personal-finance-story-1374764.html

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Your #1 Austin Owner Financed Home Specialists

Selling a home or other Austin, TX real estate with owner financing might be unfamiliar territory for many, but anyone who plans to sell property against the current background of tough lending conditions might want to brush up on the basics.

Understanding the concept of owner financing is easy: the seller assumes the role of a bank and finances the buyer’s purchase.

The decision to wage owner financing, however, can be much more difficult; even though providing owner financing could mean the difference in being healthy to sell a house, it could also mean a great amount of risk for the seller if the buyer eventually defaults on the loan.

As the U. S. struggles with a sluggish real estate market, owner financing presents a way for buyers and sellers to close deals that might not be doable with conventional financing.

There are some deals that just simply can't get done (with conventional lending) because the credit markets are too tough for a particular buyer to remember or because the type of transaction is perceived to be too risky.
There could also be a situation in which a buyer might not have adequate capital for a down payment. Partial owner financing, in that case, can help fill in the gaps in closing a deal.

In addition, the benefits of owner financing can appeal to sellers who are trying to unload property. Closing a deal on a house, for example, might take considerably less time with owner financing than with conventional financing. While a conventional lender will scrutinize the collateral property to determine the level of risk, a seller who is already familiar with their property can form his or her own risk assessment relatively quickly.

Owner financing might also be an captivating choice for investment, potentially offering high rates of return. A seller can negotiate an interest rate that the buyer will pay them that is more favorable than would be acquirable for other sorts of investments.

Furthermore, seller financing can wage some tax benefits by spreading out a massive acquire over time (check with your accountant or CPA).

If the seller structures the loan as an installment sale, there can be certain tax advantages to the seller as well in terms of the timing of recognition on the capital gain. The seller would need to discuss the details with a tax advisor.
Seller financing can be used to pay for a property either in full or in part. The terms of a full loan look similar to those of a conventional loan; however, a seller has a great deal of freedom in setting the terms, such as the interest rate and the duration of the payment period.

For instance, a seller might wish to wage owner financing as a short-term arrangement of five years, after which the borrower is expected to refinance the loan, presumably with conventional financing.

While sellers can be more flexible than banks in considering prospective buyers, they should nevertheless think like a bank when reviewing potential buyers. Analyzing documents and reports such as tax paperwork, proof of employment and credit history is prudent in determining a buyer’s capability to pay off the loan.

A seller who provides owner financing will need to get the mortgage recorded in accordance with the specific execution and acknowledgement stipulations of the Say of Texas. Sellers should also work with a title insurance company to perform a title search and buy title insurance to secure the right priority for the mortgage.

A title insurance company can also serve as a good resource for understanding how much it will cost to record the mortgage. In Texas, the cost to record a mortgage or deed of trust is minimal, consisting of a basic administrative fee added to an amount that varies according to the number of pages.
Generally, the overall cost to seller finance will depend on how many documents are involved and how sophisticated those documents need to be. The size of the property and the intensity of due diligence procedures bourgeois into these costs.

If it’s a easy scenario, such as a small tiny residential deal, it might be under a thousand bucks. If you wage seller financing for a sophisticated apartment building or strip center it can be multiple thousands of dollars. If you’re in the Austin, TX area, Forte Properties is your #1 choice for owner financed home transactions.

Documentation is perhaps the least of a seller’s worries. For most sellers, the initial decision to wage owner financing can be the most significant hurdle they encounter.

Documentation-that’s not a huge deal. It’s done all the time, there are a lot of good lawyers that do it. It’s deciding to do it, and deciding on how to manage the risks inherent in providing owner financing when you’re a casual seller-that’s the biggest difficulty. Again, if you are interested in owner financing whether you are a home buyer or seller, Forte Properties in Austin, TX can help you each step of the way.

In most cases, sellers like to have cash instead of a promise by the buyer to pay them later. In addition, sellers who think about owner financing need to comprehend the risk that the buyer might not pay you in whole or in part, or might have financial distress situation arise down the road, where after a year or two the payment stream to you is disrupted by their financial distress.
Because sellers do not have the same resources as conventional lenders, financing a buyer can be even more intimidating. While banks can absorb the risk of nonpayment by spreading it crossways their entire loan portfolios, an individual seller isn’t typically healthy to do that. Furthermore, it’s more difficult for a seller to select the ideal loan terms in accordance with the perceived risk/return.

There’s no science to that because you’re not a conventional lender. Because of the serious risks involved with seller financing, sellers should do their homework ahead of time and decide whether it is an option within their level of risk tolerance. Preferably, a seller should make this decision primeval in the process of selling a property, well before any offer is on the table.
You need to decide that up front so that you can package your materials in contemplation of what you’re willing to do relative to seller financing.
Lawyers who are familiar with financing and financial documents can be critical resources in the time preceding and immediately after making the decision to offer owner financing. A lawyer can help a seller comprehend the ramifications of owner financing and design the appropriate paperwork.

Sellers just need to be prepared for what happens if the deal goes south. Sellers can then adjust the language and terms in their loan documents accordingly, such as setting a higher interest rate that’s reflective of the higher risk, or requiring individualized guarantees and other forms of credit enhancements.

As the popularity of owner financing has increased, the Texas Association of Realtors has witnessed an increase in the use of its promulgated Seller Financing Addendum. If you are considering a Austin, TX buy involving owner financing (either as a buyer or seller), you should consult Austin’s #1 Owner Finance Specialists Forte Properties at http://www. GreatHomesTexas. com. They have a team of real estate professionals in various facets of the real estate market and are very familiar with the Seller Financing Addendum and all other documents required when buying or selling homes with owner financing.

The Standard Model of Finance in Projects

In contrast, the performance of Project financial managers was harder to observe.

Project financial managers were not solely responsible for the performance of the companies they worked for, and many Project financial managers did not have as much autonomy. Many of them were only providing a support function in an industrial corporation that was deriving its profits mostly from some oligopoly advantage or from some patented product. They did not have such clear and powerful incentives to adopt new practices.

The Standard Model is the synthesis of several component models that are well known in their own right and that describe how buyers and sellers behave and how financial markets work. These components form a unified whole that gives precise numerical answers to all major questions and that fits together in a logical and mathematically complete way. The Standard Model is so successful that in many sub-fields of finance, researchers no longer try to posit new models to supplant it; instead, they study the mechanisms in the financial markets that have not yet been explained with the methodologies of the Standard Model.

This chapter gives an overview and an example of apiece of the principles that together constitute the Standard Model of financial management. Then it gives examples of financial decisions that Project managers face, showing how the formulas of the Standard Model work synergistically to guide the managers to the correct decisions. Before describing the principles, however, we need to state the preconditions for the Standard Model to deliver its benefits.

Legal and Social Infrastructure

Every business operates in a legal and social environment, and the Standard Model assumes that a sophisticated framework of institutions is in place and is functioning properly. In view of the current financial scandals, it is relevant to state several essential characteristics that a country’s financial system has to have.

There has to be rule of law. White collar criminals have to grappling prosecution, conviction, and long slammer sentences. They also have to grappling financial penalties massive enough to wipe out all their wealth and leave them permanently impoverished. There has to be vigilant regulation of securities markets to prevent manipulation. The rights of minority shareholders have to be paramount. If minority shareholders do not get the returns they are entitled to, the country’s capital market will be defective. It will only allot capital to borrowers who can give strong guarantees. It will not allot capital to risky projects, and it will not bankroll very many startups or young entrepreneurs with good ideas.

This institutional framework is simple to describe but hard to create. As current events have shown, the framework is always in danger of assault. Stealing is always a temptation, and apiece time society becomes complacent, a new generation of scoundrels finds ways of undermining the systems of checks and balances.

The First Principle: Portfolio Diversification

The starting point for the Standard Model is risk aversion and the tradeoff between risk and return. Most market participants are risk averse, and savers have good reasons to be especially risk averse. In the aggregate, the people who supply savings to the markets are more risk averse than the would-be users of other people’s savings. This mismatch has been a prime mover for financial innovation and is a major part of the raison d’etre for financial intermediation. Intermediaries work to cure the mismatch and acquire profits when they succeed.

Savers place their money in bank accounts, and they also purchase bonds and common stocks. They hold a mix of assets, and they vary the mix of assets according to how optimistic or pessimistic they feel about future economic conditions, according to how much risk they can afford to take, and according to how old they are. For them to purchase a risky security, they have to believe its future returns will be high enough to compensate them for the risk they are taking.

Finance experts have known those points for centuries. The new discovery came in 1952, and it gives a way of calibrating how risky a security is. The discoverer, Harry Markowitz, noticed that professional portfolio managers do not invest 100 percent of a portfolio in the security they think will go up the most. Instead, they invest in many different securities, diversifying the holdings among a wide range of different securities.

The breakthrough was that Markowitz computed a measure that nobody had computed before. He measured the amount of risk reduction this strategy of diversifying the portfolio achieved. He did this with a mathematical technique that is quite simple and simple to illustrate.

To see Markowitz’s method, think about a risky security. In this example we use the common stock of an oil company. This company operates in a country with the necessary institutional infrastructure, so the shareholders will get the benefit if the company does well. The company has oil wells, so if the price of oil rises, its revenues and profits will rise. The company will pay some of the higher profits to the shareholders, so if the price of oil goes up, the stock price will rise. If the price of oil goes down, the stock price will fall, but not by very much. It will start only a small amount because the company will survive and will probably continue to pay dividends, and the oil price might rise during some later time period.

To continue with the example, let us suppose the oil stock is selling at $20 a share at the beginning, before the oil price goes up or down. Let us suppose that if the oil price rises, one year later the stock will have gone up to $28 a share; and if the oil price falls, one year later the stock will have fallen to $18 a share. Assume these price fluctuations include the cash dividends the oil company pays, so, for example, if the company paid a dividend of $0. 50 during the year, the ending stock prices would have been $27. 50 and $17. 50.

This oil stock is a risky security because its price can go down and also because the range of outcomes is wide for such a short time horizon as one year. A risk-averse investor would not purchase this stock, or would purchase only a very small amount, so that the stock’s fluctuations would not destabilize the entire portfolio.

Now think about another risky security. This second one is the common stock of an airline. This particular airline is more stable than most, and is not covering much risk of bankruptcy, but its operating results are very vulnerable to fluctuations in the price of jet fuel. Its profits rise and start with the price of oil. If the price of oil falls, jet fuel will be less expensive, and the airline will do well. If the price of oil rises, the airline will not do as well. Suppose that at the beginning, before the price of oil falls or rises, the airline stock price is $40. If the price of oil falls, the airline stock price will rise to $56 after one year, and if the price of oil rises, the airline stock price will start to $36 after one year. Again, these ending prices include dividends the airline pays to its shareholders. For example, if the dividend per share were $1, the ending stock prices would have been $55 and $35.

This second security is also quite risky, and a risk-averse investor would not purchase it. It is exactly as risky as the oil stock. It can deliver a return of 40 percent or a loss of 10 percent.

Markowitz measured the risk of apiece security by computing a statistical measure of dispersion called the standard deviation. This was a huge advance, because early writers had not used such a precise, easy-to-compute indicator of risk.

The real breakthrough that Markowitz made, however, was to point out that these securities are much less risky if they are combined in a portfolio. He developed a method of computing how much risk the diversified portfolio has, and contrasted the risk of the portfolio with the risk of apiece individual security in the portfolio.

To see the effect that diversification has on reducing the risk of owning securities, think about a portfolio that has shares of the oil company stock and the airline stock in it, and no other securities.

The portfolio is

½ invested in shares of the oil company; and
½ invested in shares of the airline.

Each of these stocks is quite risky by itself, but when they are in this simple portfolio, they are much less risky. In fact, in this example, the portfolio’s value after one year comes out the same, whether the price of oil rises or falls. To verify this, let us calculate the value of the portfolio after one year. Suppose the investor began with $200,000 and at the beginning place $100,000 into apiece of the two common stocks. The investor would purchase 5,000 shares of the oil company stock and 2,500 shares of the airline stock. So the portfolio would consist of

5,000 shares of oil company stock; and
2,500 shares of airline stock.

One year later the portfolio would be worth $230,000, regardless of whether the price of oil rose or fell. The value of apiece individual stock in the portfolio would have risen or fallen, but the total value of the portfolio would come out to be worth $230,000 in both cases.

If the price of oil rose, the oil stock would have risen to $28, so that portion of the portfolio would be worth $140,000, including the dividend the oil stock paid during the year. The airline stock would have fallen to $36, so that portion of the portfolio would be worth $90,000, including the dividend the airline stock paid during the year. The total value of the two holdings would be $230,000.

If the price of oil fell, the oil stock would be worth $90,000, and the airline stock would be worth $140,000. Both figures include the dividends the stocks paid during the year. As before, the total value of the two holdings would be $230,000.

In this perfect example, the strategy of diversifying the portfolio works so well because the two stocks respond in exactly opposite ways to the oil price. Their returns are perfectly negatively correlated.

Several caveats are in order. First, the portfolio is still vulnerable to other macroeconomic events, so it is not absolutely risk-free. Second, finding two stocks whose returns are perfectly negatively correlated is difficult in real life.

This first breakthrough had many implications and had a profound effect on financial management. It explained why portfolio investors were willing to purchase risky common stocks, despite being quite averse to risk. It explained why some risks did not scare them away and why other risks, which did not look any greater by themselves, were red flags.

Project treasurers gradually learned how to design securities so that portfolio investors would think about the securities attractive. Treasurers revised their view of shareholders. In the centuries before 1950, the dominant view was that shareholders were like business partners. They understood the characteristics of the businesses they invested in and tolerated the ups and downs of those businesses. If an entire industry sector had a slump because of overcapacity, shareholders understood the situation and rode through the slump, looking forward to better times. They did not blame the managers of the companies and did not sell the shares.

After Markowitz, Project treasurers came to comprehend that shareholders are not business partners. They purchase common stocks because they anticipate the shares will deliver returns and offset the risks of other shares in their portfolios. They hold the shares as long as the shares perform those roles in the investors’ portfolios. When the shares cease to perform, or when shares that can perform better become available, the investors sell the shares. They do not feel any sense of shared destiny with the companies or loyalty to the managers of the companies.

There were many implications, and soon specific techniques appeared for calculating whether a security would be captivating to buyers. Portfolio managers used these techniques, and Project treasurers soon had to master the techniques and apply them to accommodate the securities they sought to issue. The ones who did this successfully got more capital for their companies, and they got it more cheaply. The ones who did not adopt the new view were still healthy to get capital for their companies, but they got less of it, and their companies had to pay more for it.

The Second Principle: Optimizing Capital Structure

The next breakthrough happened in 1958. The typical corporation gets money by borrowing it and by selling shares. Different corporations use these two sources of financing, debt and equity, in different proportions. The old rule of thumb was that companies with stable cash flow could rely more on debt financing, and companies that were more cyclical had to use less debt financing and rely more on funds from shareholders. There was no satisfactory proof of this rule of thumb, besides the experience of the marketplace. Two writers, Modigliani and Miller, sought to comprehend why companies select to obtain capital from these two sources in specific proportions. They observed that companies appear to have an saint mix of debt and equity financing in mind. The mix of debt and equity financing is called capital structure, and when a company sets a target for its mix of debt and equity financing, finance experts state it is making a capital structure decision.

To probe the underlying rationale for choosing debt or equity financing, Modigliani and Miller used a method of analysis that in mathematics is called proof by contradiction. They started by asking whether it makes any difference whether the company uses debt financing or equity financing. They asserted, as a way of challenging the old rule of thumb, that companies would not be worth any more or any less if they were financed 100 percent with debt or 100 percent with stockholders’ equity. Then they began testing this bold assertion to see whether it is true or false.

Their initial assertion triggered a healthy debate among finance experts, and by 1962 a much deeper understanding of the capital structure decision had emerged. The debate revealed that capital structure does matter – a company can be worth more if it uses debt and equity financing in the appropriate proportions. The debate also revealed that if a company is using too much equity financing, it can raise its stock price by borrowing money and then using the money to purchase back some of its shares in the open market. This maneuver changes its capital structure and raises its ratio of debt to equity financing. Many companies have done this, and the maneuver is now called a common stock buyback.

Many seasoned executives were skeptical of this maneuver. They did not see why the company should be worth more after it alters its mix of debt and equity financing. They thought the company’s stock price went up only because the company was buying its own shares. Some of them believed the maneuver was a manipulation and denied that it creates real value. As the debate among experts continued, however, these executives finally had to admit that capital structure does make a difference. There are many ways of understanding why optimizing a company’s capital structure creates value. All of these ways rest on a premise that needs to be said clearly at the beginning. The premise is that investors are not buying the whole company; they are buying only small amounts of its stock or bonds. If an investor is buying the whole company, its value depends on how the company will fit with the investor’s other businesses and operations. An investor who is buying only a small amount of the company’s stock or bonds thinks of different issues. If the investor is buying the company’s bonds, he or she judges how risky the bonds are and tries to assess whether the projected yield is high enough to compensate for the risk. If the investor is thinking of buying the company’s common stock, he or she judges how risky the stock is by itself and how risky it will be in his or her portfolio. Once this premise is stated, the assertion that a company’s capital structure affects its value sounds more reasonable. Once everyone concurs that the entire company is not for sale, and that it is a going concern, then everyone concurs the company will raise new funds from time to time. The buyers will be passive portfolio investors, who will not try to exercise control over the company, and who will only place the securities in their portfolios.

Then it makes sense to speak about how many bonds the company should try to sell during a given time interval, relative to the amount of stock it has outstanding. The company finances itself by offering two classes of securities: bonds targeted to risk- averse investors and common stock targeted to risk-tolerant investors. It puts out amounts of apiece type according to the demand. If it tries to place out too many bonds, investors will refuse to purchase or will demand a higher coupon rate. If it puts out too much stock, the market price of the stock will decline.

The Third Principle: Pricing Risky Securities

The Markowitz technique gave a method of figuring out how risky apiece security is, relative to another individual security, but it did not give a calibration for the risk of apiece security vis-à-vis a standard benchmark of risk. Beginning in 1966, Sharpe and three other writers place forward methods that calibrate how risky an individual security is. They distinguished two types of risk: a type that can be eliminated by diversification, like the vulnerability to fluctuations in the price of oil in our early example, and risk that can't be eliminated by diversification. They called these two types of risk unsystematic and systematic, or diversifiable and undiversifiable. The model they place forward is called the Capital Asset Pricing Model. Its key parameter is the measure of risk of an individual security, and they used the Greek letter beta to represent that.

The Capital Asset Pricing Model was a breakthrough because it simplified Markowitz’s method. After it came out, more portfolio managers could apply scientific portfolio selection criteria. It helped in two other ways that were equally important. It granted independent observers to calibrate whether one portfolio manager was taking more risk than another. In the past, there had been star managers who took huge risks and sometimes prefabricated huge returns for their clients. The Capital Asset Pricing Model granted observers to tell whether these star managers had reached their better performance by selecting mostly risky stocks or by selecting safer stocks. Managers who take larger risks sometimes do well, but are more likely to have periods of very bad performance. The other way it helped was to give analysts a formula that could predict the effect on a company’s stock price if it acquired another company, sold off a division, issued bonds and then purchased back its common stock, or took any other major step.

This breakthrough accelerated several trends in portfolio management and Project financial management. It gave the scientific portfolio managers another advantage over the old portfolio managers who relied on rules of thumb. It broke the remaining ties of loyalty that were still remaining between stockholders and Project treasurers. Professional portfolio managers attracted more money, and individual investors handed over more and more of their assets to professionals and paid them to manage the assets. Project treasurers learned swiftly that they had to offer securities with captivating features, or they would have difficulty placing the securities. Buyers were experts, and they eyeballed apiece new issue critically before deciding whether to purchase any of it. There were no longer as many gullible buyers, no captive buyers, and no buyers who would subscribe to a new issue for reasons of loyalty. The new formula prefabricated it too simple to calculate the correct price of the security, and if the company tried to get a price higher than that, the buyers would shun the issue.

The Fourth Principle: Pricing Options

In the period 1972-73 there was a fateful coincidence. Three developments happened in a short span of time, and together they spawned a revolution in Project finance. The pressures on Project financial managers until that time were intensifying, but the events of 1972-73 ratcheted up the intensity.

The events began when Black and Scholes published a formula for valuing the price of an option. This formula used more advanced mathematics than the three breakthroughs that preceded it. Time might have elapsed before the formula would have come into widespread use, but the other two events place the formula to work nearly immediately.

Hewlett Packard began marketing a high-end hand-held calculator that could find solutions to the formula quickly. The calculator was expensive, and many scientists did not purchase it because they could solve formulas on their mainframe computers. But the third event was that the Chicago Board of Trade launched a new category of product, options on common stocks. These were different from futures contracts, which were what the Board of Trade had offered before. These options on common stocks were difficult to value, and the young traders who acted as market makers knew that. Some of them found the Black-Scholes formula and the new Hewlett Packard calculators, and as soon as they had those two tools, they were healthy to purchase options that were underpriced and sell options that were overpriced.

Other market makers who did not use those two tools were trying to do the same thing, and their methods were less accurate. Option trading is a fast-moving game, and a market maker can make hundreds or thousands of trades a week. The people who used the formula and the calculator had an advantage, making fewer errors and higher average profits on apiece trade. In a very short time the formula and the calculator were absolute stipulations for survival.

Trading volume in options grew rapidly. Portfolio managers and individual investors found ways of using the Chicago Board of Trade options. The options granted them to modify the risk characteristics of their portfolios and to stabilize the rates of return their portfolios delivered. By using the options correctly, a sophisticated investor could purchase risky securities with high expected yields but high volatility and convert them into a portfolio that was quite stable. The options added stability to portfolios that had already been prefabricated as stable as Markowitz’s and Sharpe’s techniques could make them.

Project treasurers saw what was happening, and some of them began to investigate ways of applying the new options to improve the financial stability of their companies. For them, the new options were another kind of hedging product. There had been hedging products before the new options came along. For example, foreign exchange hedging products had existed for centuries, and Project treasurers had used them extensively. There had also been a wide range of insurance policies, and Project treasurers had purchased those to protect their companies.

Project treasurers as a group were slow to take advantage of the new options. They visaged restrictions and had to move until new hedging products appeared. The success of the Chicago Board of Trade options showed that there is demand for new hedging products, and financial institutions began to offer innovative products. The result has been called the Derivatives Revolution.

The term derivative is a catch-all that includes options, futures contracts, and swaps. All these products have some common elements, despite having evolved separately. They all protect against one risk or another. In that sense they are all like specialized insurance policies that pay off when some specific event occurs. A company can purchase them individually or in combinations, or it can sell one and use the proceeds to purchase another. As these products began to appear in massive numbers and variations, Project treasurers had a complicated but potentially rewarding task. They had to select which ones to use, and they had to keep reviewing the ones they were using, and replacing some of the ones that expired. The study of the task is risk management.

Companies that are good at risk management show steady growth despite the volatility of the industry sectors they operate in. They use risk management products to smooth the ups and downs of the underlying commodity cycles. In that fashion they deliver stable, growing returns to shareholders. Among investors there is always a strong demand for shares that do not fluctuate violently, but instead rise steadily, with few bumps along the way. The companies that are healthy to deliver that performance succeed, and their shares rise in the market. The companies swiftly acquire leadership position and often are healthy to raise enough capital to purchase their competitors. Stock market performance gives them the advantage they need to acquire dominance in their industry sector.

Simple Application of the Standard Model

Showing the Shareholder Value Criterion

We have shown how the Standard Model of Finance came into existence, as apiece of its pillars appeared and reached widespread success. Now we can look at a business decision and see how the Standard Model guides Project financial managers to the correct decision.

Suppose there is a petrochemical company that processes crude oil and makes it into several different plastics. The company is known for the high calibre of its products and is successful. It sells to more than 175 different customers, and no customer accounts for more than 2 percent of its annual sales, so in that sense it is stable. It does not rise or start with any industry sector because its customers are in many different industries.

The petrochemical company’s capital structure is optimal. Its management confers frequently with investment bankers, and as market sentiment changes, the company tailors apiece new issue of securities to stay in step with what the market wants. The company sometimes purchases back its common shares and sometimes uses the shares it has purchased back to pay for an acquisition.

Despite the calibre of its products and its other advantages, the petrochemical company’s share price is not very high. Its earnings are too volatile, and its capacity to pay dividends is too low. The company operates in a mature industry, and investors see that it should have the capacity to generate steady earnings. They also see that it does not deliver stable performance, so they purchase its shares only at times when the shares are relatively cheap. The company’s earnings are unstable because the price of crude oil fluctuates, and the company is not healthy to raise the prices of the plastics it sells apiece time the price of crude rises. The company tries to hedge its exposure to the fluctuations in the price of crude, but its hedging is not very successful. The company is underhedged, so its earnings fluctuate too much.

Now suppose there is an opportunity to purchase a company that has oil wells. These are good wells, with many years of reserves, and they are located near the company’s petrochemical plants. From a strategic point of view, buying the oil company looks like a good decision. The petrochemical company would integrate vertically, and its cost of crude oil would no longer fluctuate. The petrochemical company would purchase 100 percent of the shares of the oil company and then consolidate the oil company’s accounts into its own. The petrochemical company’s equilibrise sheet would then show its original assets and liabilities together with the assets and liabilities of the oil company.

The acquisition might be a bad intent from a financial point of view. To see how financial considerations could block this acquisition that sounds so logical from a strategic point of view, suppose the oil company owed $900 million. Also suppose that its equity is worth only $100 million. To complete the beginning assumptions, suppose the petrochemical company owed $500 million, and its equity was worth $500 million. Also suppose the petrochemical company would issue new shares in exchange for 100 percent of the shares of the oil company. Before the merger, the petrochemical company has 10 million shares issued and outstanding, and its shares are trading at $50 a share. It would issue 2 million new shares and give those to the owners of the oil company, so after the merger there would be 12 million shares outstanding.

The petrochemical company’s stock price would probably go down as soon as it announced the transaction. This is normal because investors would be healthy to see that 2 million new shares are going to come into existence, so they would be wary of buying until they have seen whether the owners of the oil company decide to keep the shares of the oil company or sell them.

The huge question the Standard Model can answer is whether the shares of the petrochemical company would rise in the weeks and months following the merger.

In this case the shares probably would not rise back to $50; instead, they might fall. The reason is that after the merger the petrochemical company would owe too much money. It would owe the $500 million it owed before the merger, and it would also owe the $900 million the oil company owed. To complete the merger, the petrochemical company would have had to adopt the oil company’s debt. Its consolidated debt position would be $1. 4 billion. If market participants considered that amount of debt prudent for the consolidated company, the market value of its equity would be $600 million. If market participants felt the consolidated company would be safer and more profitable after the merger, the market value of its equity could be greater than $600 million. Its stock price could rise above $50 a share in the months following the merger.

The more likely outcome, however, is that market participants would feel $1. 4 billion is too much debt for the consolidated company to bear prudently. In that case they would be wary of buying the shares, so the shares would start on the declaration of the merger and not rise later. They might start to $40 a share and not rise until the consolidated company had paid back enough of the debt that its debt burden once again looked prudent.

The calculations to determine ahead of time whether the merger would raise the petrochemical company’s stock price or lower it are quite simple. The data inputs needed are also simple to obtain. Any junior analyst can swiftly get the data and do these calculations.

What does the Standard Model recommend the petrochemical company should do if the merger would lower its stock price? The answer is the petrochemical company should improve its hedging. It can purchase a cap. This is a contract that puts a ceiling on the price the petrochemical company pays for crude oil. For example, if the petrochemical company purchases a five-year cap with a price ceiling of $25 a barrel, and the price of crude oil rises above $25 a barrel, the counterparty that issued the cap will have to pay the excess over $25 a barrel to the petrochemical company. If the price of crude oil rises to $28 a barrel, the counterparty would have to pay $3 a barrel to the petrochemical company. Caps are now simple to buy, and there are several major financial houses that offer them.

This example shows that financial considerations now influence whether deals are done, and it shows that the main consideration is the effect of the deal on stock prices. The example also shows that new risk management products have appeared in the market. These new products meet the needs for hedging that are now greater because old-fashioned strategies, such as vertical integration, are not always helpful, since shareholders do not tolerate volatility.

Gautam Koppala,

POME Author

online finance dictionary Related Knowledge Base You see, we should be very thankful that we are born in this modern generation because of the existence of the Internet. With the Internet, each information (whether about online finance dictionary or any other such as business finance, importance of finance, finance analyst or even finance magazines) can be found with assist on the Internet, with great articles like this. If you benefit your credit cards sparingly, banks and credit card companies will be unable to comprehend your spending and pay-back behavior. Under these circumstances, most banks and credit card companies will be against to give you a higher credit card limit. First Financial Help will help you through the process of taking control of your debt and spending. We will focus on credit card debt and credit card management. Criteria Three: The management team has compelling knowledge in the considered market. You must have a great execution team. Visionary founders might be inspiring, but they only can't bring a great intent home. Get an experienced and accomplished operator in early. Don’t forget that if this article hasn’t provided you with exact online finance dictionary information, you can use any of the main search engines on the Internet, to find the exact online finance dictionary information you need. People who are affected with these bad credit records can apply with same day unsecured loans and instantly get approved. Even, while you are applying for these loans you are not obligated to pledge collateral (secure the loan) against the amount. This has been the comfort regularize for most borrowers who are in financial trouble for unexpected expenses and bills. For first time clients, you will be given the chance to obtain 300 on your first visit. Let them know you will be filing complaints against them with the Ideal Business Service, the Federal Trade Commission, and with your say Attorney General’s Office. We discovered that many people who were also searching for information related to online finance dictionary also searched online for related information such as goog finance, different sources of finance, and even sba finance.

You see, we should be very thankful that we are born in this modern generation because of the existence of the Internet. With the Internet, each information (whether about online finance dictionary or any other such as business finance, importance of finance, finance analyst or even finance magazines) can be found with assist on the Internet, with great articles like this.

If you benefit your credit cards sparingly, banks and credit card companies will be unable to comprehend your spending and pay-back behavior. Under these circumstances, most banks and credit card companies will be against to give you a higher credit card limit.

First Financial Help will help you through the process of taking control of your debt and spending. We will focus on credit card debt and credit card management.

Criteria Three: The management team has compelling knowledge in the considered market. You must have a great execution team. Visionary founders might be inspiring, but they only can't bring a great intent home. Get an experienced and accomplished operator in early.

Don’t forget that if this article hasn’t provided you with exact online finance dictionary information, you can use any of the main search engines on the Internet, to find the exact online finance dictionary information you need.

People who are affected with these bad credit records can apply with same day unsecured loans and instantly get approved. Even, while you are applying for these loans you are not obligated to pledge collateral (secure the loan) against the amount.

This has been the comfort regularize for most borrowers who are in financial trouble for unexpected expenses and bills. For first time clients, you will be given the chance to obtain 300 on your first visit.

Let them know you will be filing complaints against them with the Ideal Business Service, the Federal Trade Commission, and with your say Attorney General’s Office.

We discovered that many people who were also searching for information related to online finance dictionary also searched online for related information such as goog finance, different sources of finance, and even sba finance.

As business owners develop their small business loan plans for future financing and refinancing throughout the United States, there is an increasing awareness that there have been significant business finance changes that can't be ignored. Some of these measures are likely to end up being permanent, and even the temporary commercial mortgage loan and working capital loan changes are expected to be in place for an extended time due to the severity of the current financial climate.

The net result from business finance changes has been a reduction in commercial lenders as well as stricter standards for acquiring commercial loans and commercial mortgages. Unfortunately there has also been no shortage of misinformation about the availability of commercial funding.

A significant reduction in business lending activity overall is perhaps the most dramatic change. This has been due to several events occurring nearly simultaneously. Several major commercial lenders have gone out of business altogether. Even though they have continued consumer lending, many banks have stopped commercial finance lending. Numerous business lenders have enacted stricter standards for the commercial financing transactions they are still willing to consider.

It remains to be seen how many changes will be permanent or temporary. But from a practical perspective, commercial borrowers are left with no choice but to adapt to the changing business finance environment. Business owners must be prepared to operate within a more complicated climate for commercial mortgage loans and small business loans regardless of how long the changes might be kept in place.

What should borrowers do about this? A primary option that business owners should explore involves looking beyond their local market area for help with commercial loans. A commercial financing expert operating throughout the United Says should be helpful in improving upon this situation.

In addition to fewer business lenders to select from, there are two other significant changes which must be anticipated by business owners before seeking new commercial loans. First, commercial lenders are increasingly demanding more collateral for virtually all business finance funding. Second, most lenders have cancelled or are about to eliminate unsecured lines of credit (usually called working capital loans) for many businesses.

Considering a business cash advance program based on future credit card processing transactions is likely to be an effective commercial financing strategy for overcoming the combined obstacles of more collateral, reduced unsecured credit lines and fewer lenders. This is proving to be one of the few sources of business funding that has not been adversely impacted by current events. It will be productive to discuss the potential with a business finance expert who can wage advice about small business financing solutions including business cash advances and other financial options.

It is increasingly obvious that many banks will continue to alter their business lending programs in response to changing conditions. This means that another key change issue for working capital financing and commercial mortgages is the likelihood that more changes will be forthcoming in the near future.

To adequately prepare for future commercial finance changes that might (or might not) occur is a daunting task for a business owner. A commercial financing expert familiar with Plan B contingency financing for small business loans will establish to be a valuable resource for any borrower wanting to seriously deal with both current and future changes impacting the financial health of their business. By having a candid conversation with a commercial loan expert, business owners should be more capable of implementing an appropriate strategy for the vast changes which have recently occurred or are about to become effective for most business financing and working capital finance funding.

Corporate Finance

If you are like most business owners and managers, you require reliable commercial financing in order to keep your doors open.   A proper, reliable course for corporate finance is fundamental to your operations.   Understanding the importance of commercial financing, the article is presented to touch on a couple of important factors relevant to this issue.

Perhaps the most important step that you have to take when it comes to ensuring reliable corporate finance is to maintain constant, stable and reliable relations with your current commercial finance resources.   In other words, if you have a banking partner at this time, it is vitally important that you develop and expand that preexisting relationship if at all possible.

If you need to venture out onto the market to fulfill your overall corporate finance needs, you need to focus your attention on those institutions that are offering commercial financing options and opportunities to business enterprises similar to your own.   Many lenders involved in commercial finance are not only limiting the dollar amount that they loan but also the type of ventures with which they will do business.   By understanding which sources of corporate finance are dealing in your industry, you will be in the ideal doable position to expand and enhance your commercial finance options.

If you need to venture out onto the market to fulfill your overall corporate finance needs, you need to focus your attention on those institutions that are offering commercial financing options and opportunities to business enterprises similar to your own.   Many lenders involved in commercial finance are not only limiting the dollar amount that they loan but also the type of ventures with which they will do business.   By understanding which sources of corporate finance are dealing in your industry, you will be in the ideal doable position to expand and enhance your commercial finance options.

If you need to venture out onto the market to fulfill your overall corporate finance needs, you need to focus your attention on those institutions that are offering commercial financing options and opportunities to business enterprises similar to your own.   Many lenders involved in commercial finance are not only limiting the dollar amount that they loan but also the type of ventures with which they will do business.   By understanding which sources of corporate finance are dealing in your industry, you will be in the ideal doable position to expand and enhance your commercial finance options.

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What is a Bridging Loan?

A Bridging Loan is short term funding to wage temporary financing until more permanent finance can be found. Bridging Loans are acquirable for a whole range of financial stipulations and can be on the basis of a 1st, 2nd or even 3rd charge equity release, usually provided for any legal purpose.

Examples: 

Commercial & Residential Buy Commercial & Residential Refinance Auction Buys Capital Raising * Chain Breaking Refurbishment Speculative Deals Business Cash Injection Defective Property

* Capital raising funds can be used for many reasons including holidays, overseas property investment and tax bills etc.

Security 

Residential Property Commercial Property Land (with or without planning permission in place) Real Property (such as Plant machinery)

Bridging Loans carry a higher interest rate than standard mortgage lending and at the offer of loan stage there will be an concurred term of repayment, normally between one day and two years.

Bridging Loans are most commonly used when the financing stipulation is important and beyond the timescales that a standard mortgage lender or bank could provide. In some cases Bridging Lenders can wage funds within 24 hours. Another common use of bridging finance would be to fund the buy a new home prior to the existing property being sold.

Characteristics 

Bridge loans will nearly certainly carry higher fees which can include: 

Administration Fees Arrangement Fees Legal Fees Completion Fees Valuation Fees Exit Fees ** Broker Fees (normally non-disclosed)

** A fee charged to redeem the loan, typically equivalent to one month’s interest payment.

As most bridging Loans are not regulated by the Financial Services Authority the above fees can vary substantially as they start within no boundaries or guidelines, only competitive pricing.

Application 

Bridging Lenders will think about loans to discharged bankrupts and clients with adverse credit such as CCJs and IVAs. They will lend to individuals as well as Businesses, Ltd Companies and tax efficient cars such as SPVs.

Variations 

Bridging Loans are split into two main categories:

Closed Bridging Finance 

At the time the funds are drawn down there is a firm exit in place to repay the loan normally within a short period of time. The most common use of Shut Bridging Finance would be the pending understanding of an existing property on which contracts have been signed and exchanged/missives concluded

Open Bridging Finance

At the time the funds are drawn down there is no fixed exit or repayment method for the lenders comfort, only an concurred maximum term that the loan can run for. Seen as higher risk than shut Bridging Finance it is therefore more expensive.

Other forms of short term finance:

Mezzanine Finance

Often a combination of debt and equity stake which is typically used to finance the expansion of existing companies. To secure mezzanine finance the business would normally have to demonstrate a track record in the industry with an established reputation and product, a history of profitability and a viable expansion plan for the business (e. g. expansions, acquisitions, IPO).

Lenders

There are over 20 Primary Bridging Lenders in the UK that are healthy to lend their own funds and therefore set their own criteria of risk.

Private Financers

Should Bridging Lenders decline to lend, Private debt and equity financers can be sort to wage funding for the examples above. This type of finance is normally very expensive.

Specific Uses

Bridging Loans can be used as a Below Market Value (BMV) buy instrument where the initial buy takes place at the lower buy price allowing a subsequent refinance application to be put with a mainstream lender for borrowing based on the Open Market Value of the property with the purpose of releasing the difference in equity between the buy price of the property and the higher resulting remortgage loan.

Costs

Bridging Loans typically cost between 1-2% per month. Variable rates with margins over Libor can sometimes be applied as an substitute or an addition.

Find an Independent Bridging Finance Broker to give you all the acquirable options.

It is difficult for businessmen to concentrate towards the growth of his business if he is short of finances. Also financial help is a must for people who want to begin their own business. Small business finance helps you with all your financial needs. It is meant for small business houses and can be availed in two forms secured and unsecured small business finance. It is also open to people suffering from bad credit history.

BASIC INFORMATION ON SMALL BUSINES FINANCE

As the study recommends small business finance is meant to wage financial help to small business houses. You can also avail small business finance if you want to begin your own venture. Small business finance is basically of two types, secured small business finance and unsecured small business finance. To avail secured small business finance you will have to place one of your properties as collateral against the loan amount. This can be any of your property like car, home, bank statement etc. Placing a security helps you to avail small business finance with lower interest rate and flexible repayment duration. Also you can avail massive amount of money by placing collateral of high equity. On the other hand no such collateral is needed to avail unsecured business finance, but the interest rate is slightly higher compared to secured business finance and also the repayment duration is shorter. Small business finance can also is availed by people suffering from bad credit history.

SMALL BUSINESS FINANCE: ADVANTAGES

Small business loans are advance to businessmen running small business or those who want to begin their own venture. Small business finance is acquirable in both forms, secured and unsecured small business finance. If you don’t want to risk your property you can avail unsecured small business finance, but if you want to avail loan at low interest rate secured business finance is the ideal option for you. Small business finance open to all be it good credit borrower or bad credit borrower. Anyone suffering from arrears, defaults, CCJ, IVA, bankruptcy etc can also avail the benefits of small business finance.

SMALL BUSINESS FINANCE: SUGGESTION

While applying for loan, always give preferences to a well known lender having good reputation in the market. Also search well before applying for loan. With good research you can avail a lender offering small business finance at reasonable interest rate. Small business finance is the ideal option for small business home and for people wants to begin their own venture.

Did you know that used cars could also be financed? Yes. Now with used auto financing option, you can also get a used automobile financed. No matter what kind of automobile you are planning to purchase, you can get finance for any sort of cars including car, truck, van or others.

Used auto finance is doable in two ways; secured and unsecured. If you want to opt for the secured option, then pledging a security against the lending amount is a must; while such kind of obligation is absent in the unsecured option. However, with the unsecured used auto finance option, it is doable for all kinds of borrowers, especially council tenants, MOD tenants, housing executives to buy a automobile by availing loans.

Though all kinds of cars can be financed with used auto finance, but some basic criteria are there. The vehicle, which you intend to get financed, should be not more than 5 year old. You can go for 100% finance but for that your monthly income, credit score and repayment capacity will be taken into consideration. Used auto finance is mainly acquirable for 2-5 years.

It has been noticed that the interest rate of used auto finance is respectively high. So, do some shopping before finalizing a deal. Comparing various loan quotes of different lenders will definitely give you some edge in this regard. Used auto finance is prefabricated acquirable for all kinds of borrowers. Even, if you are suffering from credit problems like CCJ, IVA, arrear, default or bankruptcy, it won’t be difficult for you to get finance option. Do some research, browse various lending sites. Ultimately, you will find a superior deal within a least period of time and also with no hassle.

So, nothing else you need to do except browsing various websites. You will get a superior solution on used auto finance without any hassle.