A certificate of deposit(cd) is a short-term investment whereby an investor will deposit a sum of money in a bank and at maturity the investor will obtain his money back with interest. The cd is issued at a discount to the face value and at the maturity date the investor will thus redeem the face value of the CD. The investor cannot get his money back before the maturity date.
The negotiable certificate of deposit (NCD) however can be sold in the secondary market by the initial investor. He can thus get back his money before the maturity date. He will however have to accept a reduce interest. The negotiable certificate of deposit can thus be traded in the secondary market until it reaches maturity. At that point the last person that hold the NCD can redeem the face value of the NCD.
Since the NCD is issued by a bank then the return on it must be greater than on the treasury bill. This is because the treasury bill is a safe investment and has no default risk. The return on the NCD will thus be slightly greater than the return of the treasury bill to compensate the investor for the additional risk However since it is issued for a short period of time the solvency of the bank can be predicted. As a result the extra premium is quite small. As a result the return on the NCD is quite small compared to other money market instrument. Furthermore the NCD is issued at high denomination as a result the retail investor cannot have access to NCDs. Average investor can only access them through a money market mutual fund unless he has a lot of money to be able to buy individual NCD from banks or through his broker.
However despite these disadvantages there are two advantages that makes the NCD worth while investing in. First of all if you have some money in a bank account the return will mostly be small. Then investing in an NCD will give a slightly higher return than the average savings account. Furthermore if you cannot afford to lose your money but want to obtain higher return then the NCD is the way to go since the chance of the bank defaulting on the NCD is negligible.
Treasury Inflation-Protected Securities (or TIPS) are bonds that are issued by governments. The advantage that you get with this security is that the principal of the bond is adjusted yearly with inflation.Thus the principal increases every year and its real value will remain the same. This is contrary to other bonds whose nominal value remain constant whereas their real value decreases.
Since the principal is adjusted yearly with inflation, its value will increase and as a result the coupon payment will increase. This bond is thus a good investment in times of high inflation. The value of your investment will keep its real value with time. This compares to the normal bonds whose principal and the coupon remain the same thus losing its real value with time.
However in case of deflation like in Japan, where inflation turns negative, the value of the principal and coupon decrease with time. In this case a normal bond would have maintain its nominal value but would have its real value increasing.
So investing in tips is just about deciding whether the future will bring deflation or inflation.
If you wish to lower your debt burden and enjoy a single monthly payment for all your debts at a reasonable interest rate, then debt consolidation might be a helpful choice for you. It is important for you to know how you can reduce your debt with debt consolidation. The steps given below would help you get a better idea about the procedure.
Debt is not a pleasant thing but sometimes, you cannot avoid debt. Debt consolidation can be the way out for your debt problems. However, choose a company carefully and check their background with the BBB (Better Business Bureau).
You will start by filling out a form at prosper.com. You will give all your details and prosper will use these details to check your credit rating. Based on your credit rating prosper will classify you from AA - the best through E and HR (high risk). If you have a rating below 520 your application will be rejected.
Once you have been approved and registered you can now apply for loans. You will fill a form telling lenders how much you want, at what interest rate you are prepared to borrow and what you will do with the money. It is appropriate not to lie and to tell. Since many people lend after having read the application, the better your story the better your chance of getting the loan. Remember that depending on your credit rating, the interest rate at which people are prepared to lend to you will vary. So follow the table provided by prosper. If you deviate too far from the suggested rate, lenders will not lend to you.
Once you have filled your loan application, it will be listed. People will bid on portions of the loans. This is better because if you default then the loss will be shared by many lenders. This s called diversification. After 10 days if the loans have been fully funded then your loan will be approved. The interest rate will be the average of the interest rate that the lenders are offering.
After the loan has been approved the money will be credited to your account and prosper will charge a fee ranging from 1% to 2% of the loan.
After the loan has been granted you will have to pay every month the same amount for three years. If you default then it means that the last company that was prepared to lend to you is closed to you now. So be careful. Be on time.
A debt is generally a sum of money that you borrow from a lender to buy something that you don't have enough money to buy now. In the past people used to borrow only in exceptional cases. Like buying a house, a surgery or any emergency. However today people borrow all the time to satisfy even the flimsiest of urges.
So how to control your debt?
There are two types of debt:
1. Good debt
Debt that you take that would truly benefit you. Like a mortgage, a loan to buy a car, a student loan or a loan to start a business. Such a loan will give you benefits in the future and would increase your financial security.
2. Bad debt
Bad debt is any debt that you could do without. Most if not all of the time it is just a fancy, to be trendy or to do as someone else is doing. Such debt will make your financial future insecure and will make your life miserable over the long run. They are debt to buy furnoture, clothing, vacations, etc.
It is important to avoid borrowing to buy things that you cannot afford or that you ca go without. As such the environment that you are evolving is important. It is better to stop meeting people who are living way above their means as it would influence you over time. Live around frugal minded people and discuss ways of reducing spending with them.
The next important thing is to limit the part of your income that go towards servicing debt. While some people can be it i not always possible. So keep the percentage of your earnings that goes towards paying debt as low as possible. Around 30 % is about right. Remember that increase in interest rate ca increase that percentage and make servicing those debt unbearable.So keeping that percentage as low as possible would benefit you both in high and low interest rate times.
Avoiding debt is just one of the way to be financially secure. If you add hard work, frugality, saving, investing, etc with it then your wealth will increase with time.
