Stock Research Pro

Calculate the Future Value of a Certificate of Deposit (CD)

Stock Research Pro — Mon, 15 Feb 2010 01:01:12 +0000

A Certificate of Deposit or “CD” is a type of savings certificate in which the holder deposits some amount of money (usually a minimum of $100) for a specified period of time. CDs are offered by most banks, credit unions, and thrifts and typically require a deposit timeframe of several months to several years. In exchange, they offer a fixed rate of interest that is higher than most traditional savings accounts and a guarantee of their safety from the federal government. While most CDs penalize the holder for early withdrawal, they can make a good investment choice for conservative investors who will not need the money until the CD matures.

Certificates of deposit in larger amounts and longer-timeframes usually offer higher interest rates than those of smaller amounts and shorter timeframes. While most CDs are offered with fixed-rates, some offer a “bump-up” feature, allowing for a one-time adjustment of the interest rate at some point during the term of the CD.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Eligibility and Contributions to a Spousal IRA

Stock Research Pro — Wed, 10 Feb 2010 11:41:38 +0000

A Spousal IRA is an IRA under which contributions are made by an individual for their spouse. A Spousal IRA can be wither a Traditional IRA or a Roth IRA, both of which can create savings opportunities with tax advantages for a spouse with little or no income. The parameters regarding eligibility and contribution limits are the same Spousal IRAs as those for regular IRAs.

Spousal IRA Eligibility

To be eligible for a Spousal IRA, the couple must be legally marries before the end of the tax year and they must be filing joint tax returns. While there are no age restrictions regarding contributions to a Roth IRA, under a Traditional IRA, the working spouse cannot be older than 70.5 years (because this is when minimum distributions begin with a Traditional IRA).

Spousal IRA Contributions

For 2010, the non-working spouse can make contributions up to $5,000 or up to $6,000 if age 50 or over before the end of the year. If, however, the couples’ adjusted gross income is between $167,000 and $177,000, the non-working spouse’s 2010 contribution is phased out. For 2010, the working spouse’s deductible contribution is phased out between an adjusted gross income of $89,000 to $109,000.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

How Primary and Secondary Offerings Work

Stock Research Pro — Tue, 09 Feb 2010 11:44:15 +0000

A primary offering refers to the initial sale of a company’s stock usually through an underwriter or an investment bank. The revenue from the primary offering goes to the company and is used to fuel growth and expansion. In exchange for the revenue, the company must give up part of its ownership to the investors.

A primary offering might be followed by a secondary offering, which is an additional stock issue to the market to raise more equity capital for the company. By issuing more shares, the company not only raises more money, but it dilutes the shares already outstanding. When additional shares are issued, the stock price will usually decrease to account for the greater number of shares outstanding for that company. A secondary offering also occurs when the company’s major shareholders decide to sell large pieces of the holdings. Owners typically choose to sell their shares gradually over time in order to not cause a sudden and dramatic decrease in the stock price.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Measure the Trade-Off Between Risk and Return with the CAPM

Stock Research Pro — Tue, 09 Feb 2010 01:48:25 +0000

The Capital Asset Pricing Model (CAPM) is used to determine the appropriate rate of return of an asset. In calculating this expected return, the CAPM accounts for both risk and the time value of money and can be used to assign a discount rate for the purpose of asset valuation. The idea behind the CAPM model is that since even well-diversified portfolios take on some level of risk, rational investors should expect to be compensated for that risk.

The formula for the CAPM can be written as:

Expected Return = (Risk Free Rate + Risk Premium)

Using the calculator below, the time value of money is represented by the available risk-free rate of return to provide compensation to the investor for putting money into an investment for some period of time. The additional risk portion is represented by beta to compare the returns of the asset to overall market returns.

Generally speaking, the CAPM model says that if the expected return of the investment does not meet the investor’s required return, then the investment is not worthwhile.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

How Do You Calculate the Value of a Bond?

Stock Research Pro — Mon, 08 Feb 2010 00:53:53 +0000

A bond is essentially an ‘IOU’ set up between an investor and a company or government entity. Under the agreement, an interest rate is set and the timing of payments that the lender will receive during the life of the bond is defined. At the end of the bond’s life- its maturity- the principal amount is returned to the lender. Companies that are looking to expand often issue bonds in order to fund that expansion. Government entities also issue bonds to raise money or fund specific projects. Investing in bonds is different from investing in other types of debt securities in that the value of the bond can fluctuate over its lifetime as interest rates rise and fall. Because bonds can be bought and sold on a secondary market, bond investors should take the time to become familiar with the bond valuation process.

A basic bond valuation calculator is below.

Bond prices are influenced by market interest rates. For example, a bond purchased with a coupon rate of 10% becomes more valuable if market interest rates fall to 9%. When assigning a present value to a bond, an investor would discount the bond’s expected cash flows with the discount rate used being driven by currently available interest rates for debt instruments that offer comparable risks and maturities.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

What is the PEG Ratio and How is it Calculated?

Stock Research Pro — Sun, 07 Feb 2010 13:50:43 +0000

The PEG or “Price/Earnings to Growth” ratio is a measure used to value a stock based on the trade-off between the P/E ratio of the stock and the company’s forecasted growth. Made popular by Peter Lynch in his book “One Up on Wall Street”, the PEG ratio is closely tracked by many investors to help determine whether a stock is currently over or under priced when factoring for growth expectations of the company.

The formula for the PEG ratio can be written as:

PEG Ratio = (Price/Earnings) / Annual Earnings per Share Growth

A PEG ratio equal to one is thought to represent a fairly valued stock. For example, a company with a P/E ratio of 20 with a growth rate of 20% would have a PEG of 1. Like the P/E ratio, stocks with lower PEG ratios are seen as offering better value and a PEG ratio of less than 1 can indicate that the stock is currently undervalued. Value investors in particular may look for this attribute when choosing stocks for investment.

The PEG ratio is typically most beneficial when considering small and mid-cap growth companies as these organizations are more likely to pour their earnings back into the company to stimulate continued growth. Large-cap companies often allocate these earnings to dividend payments.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

How and Why to Calculate Your Personal Net Worth (Includes Calculator)

Stock Research Pro — Fri, 05 Feb 2010 12:48:48 +0000

Any good financial planner will tell you that the first step toward developing a long-term financial plan is calculating your personal net worth. Net worth is a better measure than your annual income or your credit score as it provides a snapshot of your current financial state; it is the difference between the assets you own and the liabilities you owe. That difference is represented by a single number that you can use to track your financial progress over time.

Calculating your net worth is like creating your own balance sheet using the equation:

Net Worth = Assets – Liabilities

Your assets are everything you own, including your house, cash savings, stocks and other business equity, bonds, insurance policies, your car, jewelry, collectibles, consumer durables, and the market value of other items. Your liabilities are everything you owe, including your mortgage, student loans, credit card debt and any debts you owe to others.

A negative net worth represents bankruptcy (at least on paper). A positive net worth means you’re doing something right. In either case, knowing your current net worth gives you a benchmark to mark your improvement.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

What is a Keogh Plan and Who is Eligible?

Stock Research Pro — Thu, 04 Feb 2010 11:59:39 +0000

A Keogh plan, also known as an “HR10 plan” is a tax-deferred retirement savings plan available to unincorporated businesses and self-employed individuals. While most Keogh plans are set up as defined contribution plans (meaning the company sets aside a defined percentage of money to benefit the employee), they can also be set up as defined benefit plans (the employee benefit is determined based on a formula that incorporates duration of time employed and the salary history). Keogh plan contributions are deducted from gross income, making reduced pre-tax income one of the key benefits of the plan. Additionally, contributions and earnings grow on a tax-deferred basis until the time of withdrawal.

Keogh plan participants may contribute up to 100 percent of their income to a yearly maximum of $49,000 in 2009 (increased from $46,000 in 2008). Like other retirement savings plans, Keogh plan investors can choose almost any type of investment instrument (except precious metals or collectibles) and the plan carries early withdrawal fees for any withdrawals made before the participant turns 59 years old and is retired.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Calculate the Treynor Ratio to Measure Risk-Adjusted Portfolio Performance

Stock Research Pro — Thu, 04 Feb 2010 02:46:51 +0000

The Treynor Ratio or “Treynor Index” is used to measure investment returns against the available risk-free rate of return. Developed by Jack Treynor, the ratio provides an analysis similar to the Jensen and Sharpe ratios to enable investors to more clearly evaluate the trade-off between investment risk and return.

The formula for the Treynor Ratio can be written as:

Treynor Ratio = (Average Portfolio Return – Risk-Free Rate of Return) / Beta of the Portfolio

The element of risk incorporated into the ratio is known as “systematic risk”; that is, the risk associated with overall market or market segment fluctuations. Changes in interest rates, the business cycle, and the political climate provide sources of systematic risk as these risks cannot be eliminated through diversification and can impact the overall market. Because unsystematic risk (the risk associated with a specific company or industry) is not accounted for in the Treynor Ratio, the results are thought by many to be misleading.

Generally speaking, a higher Treynor Ratio indicates greater profitability when accounting for risk.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Calculate Your Back-End Ratio for Mortgage Approval

Stock Research Pro — Tue, 02 Feb 2010 18:26:30 +0000

A back-end ratio is a measure used by mortgage lenders to determine the portion of the borrower’s monthly income that goes toward paying off debts. Also known as the “debt to income ratio”, the measure includes such things as credit card and other loan payments, child support, and mortgage payments.

The calculation for the back-end ratio can be written as:

Back-end Ratio = Total Monthly Debt / Gross Monthly Income

Generally speaking, lenders prefer to see a back-end ratio of less than 36%. But some lenders will make exceptions and approve loans to borrowers with back-end ratios of up to 50% if the borrower shows a very good credit history. In these scenarios, though, the borrower should be cautious as carrying a debt load this high can lead to financial problems.

While some lenders evaluate a borrower’s back-end ratio only, other lenders look at it in conjunction with the front-end ratio.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.