Nivine Richie, Ph.D., CFA is an Associate Professor of Finance at the University of North Carolina Wilmington. She teaches courses in corporate financial management, derivatives, fixed income, and commercial bank management. Her research interests include cost of capital, banking, and derivatives. She has published studies in the Journal of Economics and Finance, Journal of Futures Markets, Review of Futures Markets, and Journal of Trading, among others.
The time value of money states that $1 is worth more today than tomorrow. This accounting website explains why:
Time value of money is the concept that the value of a dollar to be received in future is less than the value of a dollar on hand today. One reason is that money received today can be invested thus generating more money. Another reason is that when a person opts to receive a sum of money in future rather than today, he is effectively lending the money and there are risks involved in lending such as default risk and inflation. Default risk arises when the borrower does not pay the money back to the lender. Inflation is the rise in general level of prices.
We've been discussing the possibility of the Fed raising rates for some time now. This WSJ video from 2015 talks about the winners and losers in the event of higher rates in the U.S. Though this article is dated, it is still relevant because rates are still near zero. And we continue to anticipate rising rates.
Interest rates have been near zero for years now. The Fed sets the rate in an attempt to encourage economic growth while simultaneously keeping inflation under control. However setting rates is not as simple as the Fed making a pronouncement on the news of what interest rates should be. There is a mechanism by which the Fed, along with market forces, get rates to their target.
Based on this video from the WSJ, explain in your own words how the Fed sets interest rates.
Not long ago, entrepreneurs raised money to launch their ideas by calling friends and family, tapping into their personal credit, or borrowing from the bank. Today, crowdfunding is a source of funds small and large.
Because of the potential to hurt small investors who may not have the same expertise to evaluate financial risk as a bank, the Securities and Exchange Commission has been working on regulation to protect the investing public. From a recent SEC announcement:
Regulation Crowdfunding, a key JOBS Act rulemaking that went into effect on May 16, 2016, allows for a large number of retail investors to be solicited on the web and through social media to purchase unregistered securities of small private companies. Additionally, the rule establishes a new type of intermediary – the funding portal – that brings buyers and sellers together online.
To date, 21 funding portals have emerged to facilitate these transactions, with 163 deals initiated, of which 33 have completed their fundraising. Approximately $10 million of new capital has been raised in total since Regulation Crowdfunding became effective.
You will find more statistics at Statista
1. What is crowdfunding?
2. How would you decide whether you should invest in a start up firm on one of these sites?
3. What risks exist in crowdfunding?
Monetary policy promotes economic growth and price stability. From the Federal Reserve:
The term "monetary policy" refers to what the Federal Reserve, the nation's central bank, does to influence the amount of money and credit in the U.S. economy. What happens to money and credit affects interest rates (the cost of credit) and the performance of the U.S. economy.
From the Federal Reserve website, you can answer the following questions:
This video from the Atlanta Fed explains why monetary policy matters to you:
According to Warren Buffett, IQ may be the horsepower, but what matters more is the output.
What do you admire most about someone? What are the qualities that turn you off the most in someone? The qualities you admire are likely qualities you can make your own. Find the reprehensible qualities in others and decide to avoid them. In this way you can convert horsepower into output.
In this video, Warren Buffett advises you should go to work for people and for an organization you admire.
What is your favorite bit of advice in this video? What can you put into practice in your investment habits?
Identify fraud has increased, in spite of added safety measures like credit card chips. One of the reasons for the increased fraud is the increased sales online where a chip cannot be used. Additionally, opening fraudulent accounts or taking over existing accounts where the fraudster can act without the bank's or the consumer's knowledge.
According to the FTC, some protection measures you can take include:
What are some other protection measures you can take based on the video above?
Robo Advisors are here and likely to stay, especially with millennial investors. According to this CNN article, here's how robo advisors work:
Customers fill out an online questionnaire about their income, goals and comfort with risk taking. Computer software then selects the best investments, often in various low-cost exchange-traded funds (ETFs). Technology then does all the work, continually rebalancing the portfolios.
The idea of computers controlling your portfolio may sound farfetched to some, but it's likely to catch on.
A robo boom: Millennials, who often don't have enough money to qualify for traditional advisors, are big users of robo advisors. They get an end result that is somewhat comparable to what a traditional advisor would do for them, but at a fraction of the cost.
"Robo-advisory services will become mainstream over the next three to five years," consulting firm A.T. Kearney concluded in a report published this week.
1. What are the challenges facing traditional advisors?
2. How do robo advisors help investors?
3. What are the challenges facing the robo advisor market?
According to this video interview, investing is not the same as speculating.
According to Investopedia, speculation is defined like this:
Speculation is the act of trading in an asset or conducting a financial transaction that has a significant risk of losing most or all of the initial outlay with the expectation of a substantial gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain, otherwise there would be very little motivation to speculate. It may sometimes be difficult to distinguish between speculation and investment, and whether an activity qualifies as speculative or investing can depend on a number of factors, including the nature of the asset, the expected duration of the holding period, and the amount of leverage.
What is the difference between speculating and investing? What is Warren Buffett's view on speculation?
From a recent NPR article by Selyukh:
When a 2014 Forbes cover featured a grinning cofounder of Snapchat, the accompanying text described CEO Evan Spiegel as "the 23-year-old who told Zuckerberg to take his $3 billion and shove it." Snapchat had just turned away Facebook's acquisition offer, which was triple the amount the social network paid for Instagram in 2012.
The thing Spiegel was holding out for is happening now, after much anticipation: Snapchat's parent company, Snap, is going public, hoping to raise at least $3 billion.
By most reports, this is slated to be the biggest tech initial public offering in years. The listing is expected to value Snap between $20 billion and $25 billion — the highest valuation of an American tech company since Facebook.
You will find more statistics at Statista
From the Jan 2017 Federal Reserve Senior Loan Officer Survey, a summary of commercial and industrial (C&I), commercial real estate (CRE), and residential real estate (RRE) loans shows:
On balance, banks reported that they expect to ease standards on C&I loans and for the asset quality of such loans to improve somewhat this year. In contrast, banks expect to tighten standards on CRE loans, while they expect the asset quality of most major CRE loan categories to remain unchanged on net. Regarding loans to households, on balance, banks reported that they expect to ease standards and to see asset quality improve somewhat for most RRE home-purchase loan categories. Furthermore, banks responded that they expect to tighten standards on auto loans and to see asset quality of both auto and credit card loans deteriorate somewhat over 2017.
According to the World Bank:
Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.
Access to a transaction account is a first step toward broader financial inclusion since it allows people to store money, and send and receive payments. A transaction account can also serve as a gateway to other financial services, which is why ensuring that people worldwide can have access to a transaction account is the focus of the World Bank Group’s Universal Financial Access 2020 initiative.
Financial access facilitates day-to-day living, and helps families and businesses plan for everything from long-term goals to unexpected emergencies. As accountholders, people are more likely to use other financial services, such as credit and insurance, to start and expand businesses, invest in education or health, manage risk, and weather financial shocks, which can improve the overall quality of their lives.
This WSJ video describes the changes in global access to financial services.
Offering investment advice is about more than suggesting investments for clients. It's more about offering peace of mind.
Being a financial advisor seeks to meet the client's investment objectives, such as wealth preservation, tax savings, and more.
According to Duncan Group:
One reason for the higher returns is ongoing counsel. An advisor can help you avoid many pitfalls of investing alone: the temptation to believe that you can time the market successfully . . . the urge to sell at a loss when prices are falling . . . the desire to buy when the market is strong and prices are high.
An advisor can help you define your goals and identify an appropriate investment program. Then, an advisor can give you the confidence to stick with it through up and down markets. The “buy and hold” strategy that many financial advisors encourage outperformed “do-it-yourself” investors by over 16% in equity funds and 27% in fixed income funds.
In this video, legendary investor Warren Buffett says he doesn't have to understand thousands of companies. He just has to understand some.
The idea is that genius IQ is not required to be a successful trader. Instead, what is required is emotional stability.
Some ideas for successful investing:
1. More important than a brilliant decision is avoiding really bad decisions.
2. Maintain a margin of safety.
3. No need to swing at every opportunity. You can wait for just the right one.
What is a business you can form an educated opinion about? What do you know, and where is your expertise?
India launched one of the most ambitious financial inclusion programs in history: to bring financial services to all its citizens. The government tries to motivate the poorest of the poor to use a bank account by paying them their direct subsidies through these accounts. Unfortunately, the system is fraught with challenges. Many find the accounts more difficult and less reliable. The bank accounts end up going dormant and remain unused for years.
The problem of the unbanked exists in the U.S. as well. According to the FDIC:
Estimates from the 2015 survey indicate that 7.0 percent of households in the United States were unbanked in 2015. This proportion represents approximately 9.0 million households. An additional 19.9 percent of U.S. households (24.5 million) were underbanked, meaning that the household had a checking or savings account but also obtained financial products and services outside of the banking system.
Why do individuals avoid using banks? How would the improvement of the banking system help the citizens?
According to Mobilepaymentstoday.com, the top five mobile payment trends for 2017 include:
(1) Mobile payments will continue to see converts, with millenials being the primary users.
(2) Mobile payments will help the on-demand economy where consumers expect their orders and purchases to be fulfilled immediately.
(3) Consumers will become more skilled at using Bluetooth technology.
(4) Smartphones will become the virtual assistant on whom consumers rely for information on where and what to buy next.
(5) The sharing economy will continue to grow.
Japanese banks are reluctant to invest in start ups because of the risk associated with a firm that is not yet established. But this agribusiness firm was able to secure funding from the Japanese government to launch it's business.
Without access to venture capital funds, small firms cannot secure enough capital to start or grow their businesses. However, here is a success story: