Yield vs Coupon Rate

When it comes to investment, finance, stocks, bonds or banking, there are a lot of industry-specific terms which are often confusing for those who do not have a financial background. Fortunately, information is easily accesible so you can just as easily go online and  for the difference between two terms.

Here, we will have a quick, basic definition of two finance-related terms: yield rate and coupon rate. What are the differences and similarities between the two? Read on to find out

First, let’s talk about yield. This is a particularly important field to learn about if you are planning to buy a new bond and keep it to maturity. Basically, you need to learn about changing prices, interest rates and yields so that you can keep up with your own investment. The simple definition of a yield on a bond is its annual return which is mainly affected by the price a buyer pays for it. if you are a buyer, you would naturally look for a high-yielding bond.

The coupon rate, on the other hand, is the annual coupon amount divided by the face value of the bond. Let’s say that you have a  bond issued at $1,000 and the coupon is $50. The coupon rate is 5%. Remember that there is also such a thing as a zero coupon bond, which means that there is no interest to be reinvested. In this case, the entire return comes from the difference between the purchase price and the bond’s actual or face value.

So how are the two terms related? Again, taking the $1,000 bond as an example – if the coupon rate is 5%, it will pay off $50.00 per year. The rule of thumb to follow is that the higher the coupon rate, the higher the yield – so make sure to always look for high coupon rate, high-yield bonds.

Simple Interest vs Compound Interest

Interest rate is generally defined as the cost for borrowing money. It is stated in percentage and set against the original amount of the borrowed money or the principal. There are two types of interests. One is simple interest while the other is compound interest. If you are planning to borrow money or to invest in the money market, you should get a clear idea about the difference between simple and compound interest.

First of all, simple interest is computed based on the principal only or original amount of the borrowed money. Compound interest on the other hand is computed periodically. The computations include the earned interest from the principal plus the compounded interest earned over a period of time.

Simple interest is applied on loans for single periods such as 30 days or 60 days. So if you get a short term loan for 60 days, the interest will be computed based on the original principal only. For long term loans, lenders usually apply compound interest. The periods are pre-defined by the lender. These could be quarterly, semi-annually, or annually. With compound interest, the interest earned during the previous period will be added to the principal. This will become the new principal and it will earn an interest according to the terms agreed.

You have to note that the growth of interest with simple interest calculation is constant. That is why it is the preferred system for short-term loans. With compound interest, the growth is exponential because the principal is getting bigger each period. Compounding interest is the fastest way to accumulate wealth so this is the preferred system of lenders and investors.

Simple interest and compound interest are radically different from each other. The former is usually applied to short-term loans while the latter is used for long term loans and investments.

Iasb vs fasb

IASB or International Accounting Standards Board and FASB or Financial Accounting Standards Board are both related to  accounting . Though the IASB and FASB have come together in most of their functions, they are still different in many aspects.

When comparing their origin, the International Accounting Standards Board came into existence on April 1, 2001. The IASB can be called as the successor of International Accounting Standards Committee. The IASB deals with the development of International Financial Reporting Standards and promoting the application of these standards. The IASB based in the UK capital London is an accounting standard setter, which is independent and funded privately.

The FASB is based in the United States and came into existence in 1973. It replaced the Accounting Principles Board (APB) and the Committee on Accounting Procedure (CAP). The FASB is a no-profit organisation, which caters to the development of Generally Accepted Accounting Principles (GAAP) in the interest of the public.

Coming to the organisation, the International Accounting Standards Board has 16 members on board, each having a vote. The members are chosen based on their professional competence and practical experience. Though unanimous vote are not counted for publication of a standard, exposure draft, the approval by nine members is required.

Well, the Financial Accounting Foundation (FAF) selects the board members of the Financial Accounting Standards Board. The FASB has 5 full time members and these members should have to give up all their affiliation or ties with their earlier firms or institutions that they have worked. These members are appointed for five years and also get an extension of one year. Apart from the five full time members, there are about 68 other members who are professionals drawn from various fields such as government, public accounting and industry.

Summary

1.The International Accounting Standards Board came into existence on April 1, 2001. Meanwhile, the Financial Accounting Standards Board came into existence in 1973.
 

2.The IASB is based in London and FABS is based in the US.
 

3.The IASB can be called as the successor of International Accounting Standards Committee. The FASB replaced the Accounting Principles Board (APB) and the Committee on Accounting Procedure (CAP).
 

4.The IASB deals with the development of International Financial Reporting Standards and promoting the application of these standards. The FASB is a no-profit organisation, which caters to the development of Generally Accepted Accounting Principles (GAAP) in the interest of the

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GAAP vs IFRS
 

The IFRS or the International Finance Regulation Standards are defined by the International Accounting Standards Board. The IFRS is increasingly being adopted by companies across the globe for preparing their financial statements. On the other hand, the US GAAP has been developed by the Financial Accounting Standards Board or FASB for listed companies. Chris Cox, former chairman of the Securities Exchange Commission or SEC, has asked US companies to transition to IFRS by 2016.

There are quite a few similarities between IFRS and US GAAP and the differences are rapidly getting reduced owing to the convergence agenda of both these organizations. The differences explained below are just a few significant ones and as of this point of time. These can change due to developments in the convergence agenda of the IFRS and US GAAP

With respect to revenue recognition, US GAAP has developed a detailed guidance for different industries incorporating standards suggested by the other local accounting standard organizations in the US. IFRS, on the other hand, mentions two main revenue standards along with a couple of interpretations related to revenue recognition as guidance.

There are also some significant differences related to when an expense should be recognized and the amount that has to be recognized. For instance, IFRS recognizes the expense of certain stock options with vesting over a period of time sooner than the GAAP

There are also some significant differences between the US GAAP and IFRS with respect to the arena of financial liabilities and equity. Instruments that were regarded as equity by the US GAAP will be considered as debt under the IFRS standards.

The US GAAP has several criteria for consolidation whereas under IFRS, a company can consolidate based on the power it can exercise on the financial and operational policies of the other entity. By being responsible for the reporting and performance of these new entities can affect the company’s financing arrangements and several more areas.

Unlike US GAAP, IFRS forbids companies from using the LIFO or the last in, first out method of costing inventory. Companies using LIFO will have to transition to other costing methodologies.

Summary:
 

1.Regarding revenue recognition, US GAAP is more detailed and industry-specific than IFRS.
 

2.Expense recognition has some differences with respect to the time period and expense amount that can be recognized by the companies.
 

3.Some financial instruments that were recognized as equity by GAAP will be recognized as debt under IFRS.
 

4.The IFRS allows consolidation based on the power exercised by the company on the financial and operational policies of the other entity.
5.IFRS does not allow the use of LIFO method of inventory costing.

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FDI vs FPI

FDI is an acronym that stands for Foreign Direct Investment. It refers to the type of investment carried out at international level where an investor will acquire a stake in an enterprise in a foreign country with long term realization of goals in the enterprise. FPI stands for Foreign Portfolio Investment where an international investor acquires stakes in a foreign country in terms of stock, bonds and some other assets but with the investor having an inert role in the management of those financial holdings.

Term Deposit vs GIC

Term Deposit and Guaranteed Investment Certificate (GIC) are very similar because they are secured investment instruments. These types of portfolios are preferred by conservative investors who want guaranteed returns. However, you have to understand their slight differences so you can better decide which one would be suitable for you.

One of the most noticeable differences between term deposit and guaranteed investment certificate is the length of time required to lock-in your investment. Normally, a term deposit has shorter investment period of 30 days to 364 days. Guaranteed investment certificate, on the other hand, is usually locked-in for at least 1 year or up to 5 years.

Because of the amount of time required to invest your funds, banks usually offer higher interest rates for guaranteed investment certificate. So your investment earns more but you can not touch your money for very long periods. Meanwhile, a term deposit normally has lower interest rate but the maturity of the investment is shorter. Thus you can en-cash your investment much faster.

Term deposits are also pre-encashable even before the maturity period. In contrast, GIC or guaranteed investment certificate is locked-in and is not redeemable before the term matures. Rates are fixed for term deposits until the investment matures. Guaranteed investment certificates on the other hand can have fixed rates or variable rates especially if the portfolio is tied to another investment such as the stock market.

With term deposit, you will only have two choices: short-term or long-term deposits. If you purchase a guaranteed investment certificate, you can have lots of options such as market linked GIC, flexible, cashable, or escalator GICs.

In general, bankers and investment experts really do not differentiate term deposits from GIC. They treat it as one and the same. But slight differences in terms, maturity, and rate structures are important to understand so you can choose which instrument is more appropriate for you

Difference between RSP And GIC

Financial planning for your future is a must. You can shield yourself from future financial difficulties if you save today or invest your money wisely. While there are many ways how to invest your money, the benefits of contributing to your Retirement Savings Plan (RSP) or investing in Guaranteed Income Certificate (GIC) can not be discounted.

Technically, RSP and GIC are both investment options. However, RSP is more like a plan in preparation for your retirement. GIC on the other hand is a straightforward investment option. With the RSP, you are contributing money to the plan regularly until you accumulate enough funds which you can use when you retire. In contrast, a guaranteed investment certificate is a lump sum that you invest in banks. It stays there for a specific term until it matures with interest.

Both investment options earn interests so you are guaranteed that your money will grow over time. However, your contribution to your RSP is tax deductible while interest earnings of your RSP are tax deferred. You will only pay taxes if you withdraw from your RSP funds.

Meanwhile with GIC, the amount you earned from your investment should be reported as income and is subject to taxation. You will not also enjoy tax deductions if you invest money in your GIC.

There is also a great difference between GIC and RSP when it comes to withdrawing your funds. With GIC, your money is locked-in for a fixed period usually 1 to 5 years. You can not redeem it before the maturity period. With RSP, you have greater flexibility because you can withdraw all or part of your funds at any time subject to tax or other terms in your investment option.

RSP and GIC are good investment options. RSP primarily serves as your retirement fund. You can enjoy tax savings from it. On the other hand, GIC is a straightforward investment offering good returns but it is subject to taxation.

Open Mortgage vs Closed Mortgage

There are two different types of mortgages – open mortgage and closed mortgage. Some differences exist between the two types but often people get confused

The main difference between the two types of mortgage is in the payment term. In a closed mortgage, you are committed to the mortgager for a specified period of time. It is often referred to as a locked system. In this locked system, you will be able to pay off your mortgage only when you sell off the property. On the other hand, open mortgage is not that strict. In this mortgage system you can pay off the mortgage without any penalty charges at any point of time.

Open mortgages are for shorter periods than closed mortgages. The time period can vary from six months to a year. But the interest rates are higher for open mortgage system. In closed mortgage systems, you cannot refinance or negotiate on the mortgage before you reach the end of the term specified. And if you want to renew the mortgage, you will have to pay a penalty charge. The penalty charge is decided by the mortgage lender and it can be an interest for a period of time or the interest rate differential amount. Some closed mortgage systems let you avail certain benefits of open system like the different pre-payment options.

An advantage of choosing a closed mortgage plan over an open plan is the time period. The plans can range from 6 months to 25 years. But if you choose a variable open plan, you can get the term of the mortgage up to 2 years. In a closed mortgage plan, you can pay the principal amount in different payment sets, depending on your convenience.

Closed mortgage plans are more secure. Open plans can be affected by the market conditions owing to the short span and high interest rates. But open plans are more flexible than the closed plans. In an open plan, you can get freed off from the loan at any time without making any penalty payments. Though the interest rate is high in an open plan, you can at times save pretty good amounts as the term is less. Comparing it to closed plans, you will have to pay the interests for a longer period of time, which may total close to the open plan’s interest amount at times. Good times to opt for open mortgage plans are when you have a financial uncertainty or you expect that the interest rates will drop.

Summary:
 

1. Closed mortgage plans are longer in duration than open plans.
 

2. The interest rates are higher in open plans than in closed systems.
 

3. Due to the flexibility of the open mortgage plans, you can close the plan at any time without paying any penalty amount.
 

4. In a closed system, you cannot refinance the mortgage before the end of the term

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Simple Interest vs Compound Interest

Interest rate is generally defined as the cost for borrowing money. It is stated in percentage and set against the original amount of the borrowed money or the principal. There are two types of interests. One is simple interest while the other is compound interest. If you are planning to borrow money or to invest in the money market, you should get a clear idea about the difference between simple and compound interest.

First of all, simple interest is computed based on the principal only or original amount of the borrowed money. Compound interest on the other hand is computed periodically. The computations include the earned interest from the principal plus the compounded interest earned over a period of time.

Simple interest is applied on loans for single periods such as 30 days or 60 days. So if you get a short term loan for 60 days, the interest will be computed based on the original principal only. For long term loans, lenders usually apply compound interest. The periods are pre-defined by the lender. These could be quarterly, semi-annually, or annually. With compound interest, the interest earned during the previous period will be added to the principal. This will become the new principal and it will earn an interest according to the terms agreed.

You have to note that the growth of interest with simple interest calculation is constant. That is why it is the preferred system for short-term loans. With compound interest, the growth is exponential because the principal is getting bigger each period. Compounding interest is the fastest way to accumulate wealth so this is the preferred system of lenders and investors.

Simple interest and compound interest are radically different from each other. The former is usually applied to short-term loans while the latter is used for long term loans and investments

Subsidized vs Unsubsidized Loans

Subsidized Loans are the ones in which the cost or partial cost of the loan is paid by someone other than the user. Some examples of subsidized loans are education loans, agricultural loans, housing loans, business loans, etc. Unsubsidized loans are where the user is himself bearing the cost of the loan

Subsidized loans are generally floated to achieve a specific goal and generally come with a lot of strings attached. Although these may sound to be a good deal, one must thoroughly evaluate all the aspects and clauses very carefully before accepting. For example the student loans are generally subsidized by the government or trusts, foundations, non government organizations, etc. The loans first of all would be given to very deserving individuals and not be available to all. These would generally also require the student to maintain a minimum grade average throughout the course period. They would also specify the family status and maximum income for those who can avail this. Housing loans are generally subsidized to promote settlements in a particular area or in areas hit by natural disasters or war. Subsidized housing loans would normally specify the residential area, maximum property size, maximum construction cost and the time period. Business Loans are generally available for industries that the government would want to develop. Most governments are promoting industries producing equipment related to alternative energy sources like solar energy, windmills, etc. Unsubsidized loans would normally be available to anyone able to show his financial ability to pay back the loan and came with very few strings attached. Students for example do not need to maintain a consistent high average of grades and hence can also take up work along with studies. Unsubsidized property and business loans would virtually be available to anyone with payback capacity.

The other problem that may happen with subsidized loans is the fact that these may not be very flexible. The unsubsidized loans on the other hand are very flexible. They may offer you the option of negotiating interest rates, change the time period, use deferred payment plan and even allow you to prepay the loan if an when the money is available.

Summary
 

1.In Subsidized Loans the cost of the loans is partially or fully covered by someone else whereas in unsubsidized loans the cost is borne by the user.
 

2.Subsidized loans are offered to achieve a specific goal whereas unsubsidized loans are available for just about anything.
 

3.Subsidized loans generally come with a lot of string attached and are not very flexible whereas the unsubsidized loans can be tailored to one’s needs.

Mortgage Insurance vs Life Insurance

Owning a house is a dream for all of us. But a good house is a costly affair these days. Purchasing a house thus requires a lot of borrowed money. If you are a borrower, you need mortgage insurance if your down payment is less than 20% of appraised market value or purchase value of the property you are purchasing. The mortgage insurance does not protect you. It protects your lender from the risk of your defaulting on the payment to him. Mortgage insurance can be availed of from both the government and the private players, government providing mortgage insurance even at less than 3% down payment

Life insurance on the other hand is an altogether different proposition. A life insurer insures the ‘life’ of a person for a certain length of his life span or even for whole life  and in the unfortunate event of death of the insured, the insurer pays the insured amount (called ‘sum assured’ in insurance parlance) to the nominee or legal heir of the insured. Life insurance premiums are required to be paid at agreed intervals for whole of the period of life risk coverage.

The difference between mortgage insurance and life insurance are given below to give you a better overview of both type of insurances.

1. Mortgage insurance is normally taken by the borrower to protect the lender against any default in payment by him. So it is a case of ‘I pay for insurance to protect you from me.’ Life insurance on the other hand is taken by the ‘insured’ on his own life to protect his own family in the event of his untimely death.
2. Mortgage insurance premium payment can be stopped by the borrower once the loan to value ratio of the property mortgaged hits the 80% mark in case of private mortgage insurance (in case of government mortgage insurance, the premium payment may have to be continued for life of the loan). Premium payment for life insurance product is to be continued for the entire period of insurance coverage.
3. In mortgage insurance three parties are involved, viz, the borrower, the lender and the insurer whereas the life insurance is essentially a contract between the insurer and the insured.
4. Life insurance policy is taken on the life of the insured. The payment by insurer in case of life insurance is almost always substantially more than the total amount of premium paid to the insurer by the insured. In mortgage insurance there is absolutely no refund of premium when the mortgage insurance is terminated.
5. Mortage insurance premium may or may not be tax deductible, but life insurance premium is almost always tax deductible.

Summary

1. Mortgage insurance is insurance on property purchased by the borrower whereas life insurance is insurance on life of the insurer.

2. Premium for life insurance is to be paid for entire period of policy term, but the mortgage insurance can be terminated after the loan-to-value ratio of the property hits 80% mark.

Foreclosure vs Power Of Sale

Foreclosure is a legal proceeding in which the lender obtains a court order to terminate the right of the borrower to the property or the asset mortgaged usually due to default and recover the debt by the sale of the property. Power of Sale is a clause that is usually inserted in the agreement made at the time of execution of the loan, giving the right to the lender to reposes the property in case of a default by the borrower without getting a specific court order for this.

Foreclosure can only be carried out after a specific court order is obtained by the lender to terminate the right of redemption of the borrower. The right of redemption is the borrower’s right, meaning that the borrower can repay the complete full amount due to the lender and retain his property. The lender would generally reposes the property and conduct a public auction of it to recover his debt. This auction would be conducted in supervision of the court or its designated person. Power of Sale clause, which is included in the loan agreement would also specify the type and number of defaults that could trigger the clause. This clause would neither require a specific court order nor court supervision to execute the repossession and subsequent auction. The proceeds of the auction would first be used to clear the debt of the lender then that of any lien holders and if there is a surplus, the same would go to the borrower.

The term foreclosure, however, is interpreted in different ways in different countries or parts of the world. In places like India the term refers to the intention of the borrower to close the loan before the expiry of the term by way of prepayment of the balance amount due. The term power of sale is generally interpreted the same way everywhere.

Summary

1. Foreclosure is the procedure by which the lender obtains a court order by which he can reposes the mortgaged asset of the borrower in case of default. The Power Of Sale is a clause inserted in the loan agreement by virtue of which the lender can reposes the mortgaged property of the borrower in case of default.
 

2. After repossession in a foreclosure any auction or sale may only be carried out in supervision of the courts whereas in Power of Sale this may be done without court intervention.
 

3. The term foreclosure is interpreted differently in different parts of the world whereas the term Power of Sale generally maintains the same meaning.