Lesson 10: The Money Market

Stack of money
This is money. I am talking about the money market. You’re welcome.

The term money market is actually a great example of a misnomer. One might think that “money” in the form of currencies (Euros, U. S. dollars, Chinese Yen, etc.) are traded in this market.  This is incorrect. Instead the money market consists of highly liquid, short term debt investments.  The money market is the alternative to the capital markets which consist of longer term bonds and stocks.  An easy way to remember the difference is that if the asset is short term (it matures in one year), you are in the money market.  If the asset is long term (stocks, bonds, etc.) you are in the capital markets.

Financial Market Breakdown Chart
Here is a nifty breakdown to help remember.

Key Points

  • The money market is where short term debt instruments are traded.
  • Some of the key players in the money market include the U.S. Treasury, Federal Reserve, large companies, and individuals.
  • One of the main purposes of the money market is to house surplus funds and meet short term needs of funds.
  • Some of the securities traded in the money market include T-bills, commercial paper, federal funds, negotiable CDs, Eurodollars, and repurchase agreements.
  • The money market (mainly in the trading of T-bills) is where short term interest rates are determined.

What is the Money Market?

Say a company wants to build a new building or make a long term investment in a new product. A bond would be a perfect way for the company to raise a large amount of funds and pay it back over many years.  What if a company needs a smaller amount of cash for a quick payment (say to fill a small gap in the weekly payroll)? As the process for issuing bonds is very costly in terms of both dollar amount and time, it would be ineffective to issue bonds to address this small need of funds.  Thus in this case and others the money market instruments arose to fulfill the need of short term funds.

There are three common characteristics of money market instruments:

  1. Money market instruments mature in less than one year. Unlike bonds or stocks, money market instruments mature in less than one year than issue date whereas bonds mature in 5-10 years and stocks theoretically never mature.
  2. Money market instruments are highly liquid. The instruments in the money markets have high liquidity due to the large amount of participants and the large amount of funds that flow through the market.
  3. Money market instruments have low risk relative to the average risk of stocks and bonds. With their short maturities and high liquidity money market instruments in general possess very low risk when compared to their capital market counterparts.

Key Participants in the Money Market

The major participants in the money market include the U.S. Treasury, the U.S. Federal Reserve, large public companies, institutional investors, and individual investors.

  • U.S. Treasury: Remember those Treasury bonds that we mentioned in the bond market lesson? Well the U.S.
    Treasury Building
    This whimsical, fun looking building is the U.S. Treasury.

    Treasury also issues T-bills. We will discuss T-bill specifics later, but for now just now that the U.S. Treasury is the largest borrower of money market instruments which it uses to fund the federal debt.

  • Federal Reserve: The U.S. Federal Reserve (Fed) is the most influential player in the U.S. money market. It buys and sells vast amounts of T-bills to influence the money supply and short term interest rates in America.
  • Large Public Companies: Large companies participate in the money markets through buying and selling of securities.  One instrument associated with large companies in the money market is commercial paper which will be discussed later.
  • Institutional Investors: Due to their low risk many institutions (insurance companies, pension funds, etc.) will hold large amounts of money market instruments to generate investment returns while maintaining minimum risk.
  • Individual Investors: Primarily through the use of mutual funds (which we discuss in the next lesson) individual investors are able to participate in the buying and selling of the large dollar denomination securities in the money market.

Purpose of the Market

The primary purpose of the money markets is to provide a market that matches large amounts of excess funds from financial institutions to other firms and governments in need of short term funds.  Imagine a firm, let’s say Apple, has over $1 billion in excess cash.  What should Apple do with these funds? Furthermore let’s assume that the market for stocks and bonds has been volatile and therefore unusually risky lately.  One option is to buy money market instruments to generate higher return than the return that cash offers. (It is important to note that the return on cash is zero. Another way of thinking of this is cash in your wallet generates no return for you).  The money market allows Apple to invest in short term liquid securities that do not put Apple at significant risk and provides short term funds to other firms that need it.

Another way to think about the money market is imagine you as an individual have excess cash. One option you have is to go to a bank and put the money in a savings deposit.  The return on this account will be quite low. Now imagine there is a market where you can invest and get a slightly higher return with a corresponding slightly higher risk profile. You will provide the funds to institutions and businesses who have a short term need for funds and will compensate you with a higher rate for doing so.  This is the purpose of the money market.

Types of Money Market Instruments

  • T-bills: Treasury bills are issued by the U.S. Treasury Department and are used to finance the federal debt. The U.S. Treasury bill is arguably the most liquid and widely traded security in the world. As a result the interest rate offered on T-bills is used as a proxy for the short term risk-free rate.  T-bills do not pay interest and are instead sold at a discount and later matures at par value.  (Similar to the zero-coupon bonds discussed last chapter)
  • Federal Funds: Federal funds are short-term funds transferred between large financial institutions (usually larger commercial banks). Because banks must have minimum reserves relative to the amount of deposits they have, some banks need quick, overnight funds to avoid legal repercussions. As an investor you may hear the “federal funds rate” mentioned. This is the interest rate charged on these overnight bank loans.
  • Commercial Paper: Commercial paper are money market securities that are issued by corporations and mature in less than 270 days.  Commercial paper is offered directly from issuer to buyer and is used to fund the issuing companies’ activities.
  • Negotiable CDs: Negotiable certificates of deposit (CDs) are large, bank issued securities that range in value from $100,000- $10 million. Most individual investors will have little interaction with negotiable CDs, but it is worth noting that a negotiable CD is not the same instrument as the certificate of deposit that an individual can get at a consumer bank.
  • Repurchase agreements: Repurchase agreements (repos) occur when a firm sells Treasury securities and agrees to buy back the securities at a later date. In essence a repo is a short-term loan.  One firm sells the securities for quick funds and promises to rebuy the securities at a later date.  Repos are used by the Federal Reserve in conducting monetary policy.

The Risk Free Interest Rate

As mentioned above the T-bill is one of the most important securities within the financial markets.  The interest rate on the 3 month Treasury bill is commonly used as the “interest-free rate”. The interest free rate represents the return an investor should expect to earn on an investment with no risk. The T-bill is used for this theoretical rate because of its unparalleled liquidity and the ability of the U.S. Federal government to create more money to pay off the T-bill obligations as they come due.

 

Definitions

  1. Money market: The market for short term debt obligations used to facilitate short term borrowing and lending of excess funds.
  2. Interest free rate: The theoretical return an investor should earn on a security with zero risk. The interest rate on the 3-month Treasury bill is commonly used as a proxy for this theoretical rate.

Further Reading

Lesson 9: The Bond Market

L9.2 Barry Bonds Pic
Still not the type of Bond I will discuss. Image courtesy of milwaukeechiro.com.

The bond market is much larger in dollar amount than the stock market in the United States. This is mainly driven by the ability for governments (including federal, state, and local) to participate in the bond market to raise capital.  This large market also produces Treasury bond interest rates (or yields), which are closely monitored proxies for long term interest rates.  In short the bond market lacks the glamour of the stock market due to its slower moving nature, but it still holds a place of great importance in the U.S. capital markets.

Key Points

  • Bonds have many commonalities with the stock market including primary vs. secondary markets, OTC markets vs. exchanges, and brokers vs. dealers.
  • The two primary issuers of bonds are governments and corporations.
  • Treasury bonds are arguably the most important type of bond traded.
  • Municipal bonds are bonds issued by local, county, and state governments that have favorable taxation characteristics.
  • Corporate bonds have different characteristics than federal bonds.

The Similarities between the Bond and Stock Market

Before we delve into what separates the two it would be easier to identity what the bond and stock markets have in common. Both the stock and bond markets have primary and secondary markets. A primary market is where securities are issued for the first time (when offered to the investing public this is called an initial public offering (IPO)) whereas the secondary market is where securities are traded between investors.  In addition bonds can be traded either in over-the-counter (OTC) or organized exchanges with brokers and dealers providing liquidity to these markets.

The Differences between the Bond and Stock Market

Other than the obvious differences between the nature of the securities being traded (there is a lot more knowns with bonds compared to L9.3 Featured Image for Bondsstocks) the largest difference is between the market participants.  While only private corporations participate in the stock market, both corporations and government entities may raise capital in the bond market. The reason governments do not participate in the stock market is that they would be selling ownership claims (imagine a super bank owning a small foreign government…yikes). Governments still have to fund different activities such as infrastructure, defense, and social programs and thus may turn to bond debt to finance these activities.  This is what is referred to when people quote the “$3 trillion deficit” America possesses, its bond debt.

The Importance of Treasury Bonds

The 10-year Treasury bond plays a key role in the U.S. financial markets.  It is one of the main ways the U.S. government funds federal expenditures.  They also have very little risk associated with them as in theory the U.S. government can always print more money to pay these bonds off as they come due.

Because of the low amount of risk these securities possess, little return is offered. In fact in some years the rate of inflation has been higher than the interest rate (or yield) offered on 10-year Treasury Bonds.  It also noted that the interest rate offered on 20-year Treasury Bonds is consistently higher than the interest rate offered on 10-year Treasury Bonds. The reason for this is simple and ubiquitous. The 20-year Treasury Bond has a longer maturity than the 10-year Treasury Bond and thus has more inherent risk and as our risk vs. return principal dictates the higher this possibility of risk the more compensation that must be offered to investors.  The U.S. federal government is of course not the only government that can sell bonds and at any given time you can buy French, Russian, or Argentinian bonds.  Depending on the riskiness of the country issuing, different returns are offered.  Similar to corporate bonds, bonds offered by governments are rated by rating agencies.

L9.1 Inflation vs. 10 Year Treasury Yield
Graph of 10-Yr U.S. Treasury Yield vs. Inflation Over Time

 

Municipal Bonds

Municipal bonds are bonds issued by local, state, or county governmental entities for the purpose of raising capital to fund public projects.  “Munis” have a small amount of default risk as a municipality can in fact default on its bonds. The two common types of municipal bonds are general obligation bonds and revenue bonds.  General obligation bonds are municipal bonds that do not have specific assets pledged as security for the bond and are instead supported by the “full faith and credit” of the issuer.  Bonds like this can also be referred to as unsecured bonds as there is no assets that serve as collateral for the bond.  A revenue bond is backed by the promised revenue of a project. An example of this would be charging fees to use a hospital or public port. These revenue streams provide funds to pay off the interest charges and principal of the outstanding bonds.  Revenues bonds can be referred to as secured bonds as there is an asset base supporting the repayment of the bonds.

One of the most important characteristics from an investor standpoint is that many municipalities place tax reductions or make the interest payments on the bond paid to the investor tax free, provided the investor is a resident of that municipality.  This is solely at the discretion of the issuing municipality, but for some high tax bracket investors muni’s present an opportunity to avoid large tax reductions from their investments.

Corporate Bonds

As a whole corporate bonds function similarly to government based bonds, but they have some differing characteristics. In general, corporate bonds pay a higher return than their government counterparts due to higher perceived risk of default on corporate. In the last lesson I discussed how the rating agencies rate the corporate bonds on the perceived risk of default the list of which I have provided again.  In addition corporate bonds are almost always issued in $1,000 par value, have the standard coupon payment structure, and may have a call provision which enables the issuing company to buy back (or “call”) the bond after a certain time period has elapsed.

Zero Coupon Bonds

A zero coupon bond is a type of bond that does not pay the investor interest payments but instead sells at a deep discount and is redeemed at maturity for a higher value.  In zero coupon bonds the investor forgoes the coupon payments in return for buying the bond at a discount and receiving a higher principal amount when the bond matures. For example you could buy a bond for $500 that in five years matures for $1,000 that offers no coupon payments. Many federal and municipal bonds function as zero coupon bonds.

Definitions

  1. Municipal bonds: Bonds issued by local, state, or county governmental entities for the purpose of raising capital to fund public projects.
  2. General obligation bonds: Unsecured municipal bonds that are backed by the “full faith and credit” of the issuing municipality.
  3. Revenue bonds: Municipal bonds that are secured by the revenue stream that will result from the completion and operation of the project the bond is funding.
  4. Call provision: A provision on bonds that enables the issuer to buy back bonds for a fixed payment that results in ceased interest payments to the investor who owns the bonds.
  5. Zero coupon bonds: Bonds that do not offer interest payments but are instead issued far below par and mature at par. The difference between the issuance price and the maturity is the yield the investor receives.

Further Reading

The Growing Problem of Student Debt

Remember how I wrote on all the federal loan programs and college debt? Well that college debt keeps growing and it is getting a bit scary.

Key Points

  • Over the past year alone, the total balance of the direct loan program has grown from $687 billion (with a “B”) to $806 billion.
  • The total size of the student loan debt is now in excess of $1.13 trillion (with a “T”).
  • Since 2007, the federal direct student loan program has increased near seven fold.
  • This increase in leverage on students creates an interesting relationship between the federal government and indebted students.

Woe to the Students

ST The College Debt Bubble
Some readers may be able to relate. Image courtesy of CNNMoney.com

Based on the statistics above you may reach the same conclusion I have. The student debt situation in America is a rapidly growing concern that merits some attention. When considering the sour job market and the ever growing cost of attending college the above statistics really should come as little surprise.  Unlike the housing bubble where banks were the holders of the debt, the federal government now holds 80% of this debt. The future consequences of this system have yet to be seen.

An interesting consequence viewable now is that young adults are lessening consumption according to research by the New York Federal Reserve. Less than 25% of young adults aged 27-30 have any sort of home secured debt (eg. A mortgage).  This pattern is also evident in the auto market. This makes intuitive sense as this age group is already straddled with student debt and is unwilling to take on more debt.

Will universities continue to increase costs of attending? Will the federal government continue to grow the monstrous student debt? What alternatives are available to solve the ubiquitous issue of paying for college?  I wish I knew these answers. What can be said is that it will be interesting to see the relationship that emerges as more and more young Americans become indebted to the federal government.

Further Reading

Student Loans and Paying for College (Part 2)

Student Debt with Ball and Chain
A commentary on today’s student loan situation. Image courtesy of Cognoscenti.

Let’s explore a bit more of the technical details relating to the different grants and loans out there. I won’t touch on scholarships because they vary so widely depending on the offering organization.  Just as a quick refresher grants are need-based gift aid, scholarships are merit-based gift aid, and student loans are loans that must be paid back. We will first discuss the types of federal grants then move on to the different types of federal loans.

Key Points

  • The most common federal grants offered are Federal Pell Grants, FSEOG, and TEACH grants.
  • The most common federal loans offered include Perkins loans, direct unsubsidized loans, direct subsidized loans, and direct PLUS loans.
  • Pay close attention to the Master Promissory Note (MPN), which is essentially the terms and agreements when accepting a federal loan.
  • Federal loans possess many qualities that make them superior to federal loans.

Federal Pell Grants

Federal Pell grants are federal grants granted to undergraduate students who have not earned a bachelor’s or a professional degree who exhibit a degree of financial need.  It also should be noted that you cannot receive a Federal Pell Grant if you are incarcerated or subject to an involuntary civil commitment so before you commit that crime realize it could affect your future education prospects.  The yearly distribution amount differs on a number of factors including the level of your financial need, the cost of attendance, and whether you are a full-time or part-time student. The maximum award for the July 2014-June 2015 academic year was $5,730. This number can be adjusted slightly each year, but do not expect it to jump $1,000 in one year.  You can receive the Pell Grant for 12 semester (or approximately six years). You will receive the full amount you qualify for from your attending college.  As I nagged last lesson and will nag this lesson, you must fill out the Free Application for Federal Student Aid (FASFA) in order to receive a Federal Pell Grant.

Federal Supplemental Educational Opportunity Grant (FSEOG)

The FSEOG is a federal grant granted to undergraduate students who exhibit exceptional financial need such that a Federal Pell Grant is insufficient.  A FSEOG is only available to those student who have received a Pell Grant and exhibit the most financial need.  The FSEOG is not offered at all colleges therefore contact your prospective college’s financial aid office to find out if your college offers the FSEOG. The amount of aid offered through the FSEOG ranges from $100-$4,000 depending on your financial need, the other financial aid you receive, and the availability of funds at your college.

TEACH Grant

The TEACH Grant program is a specific federal grant program that grants up to $4,000 per year to students who are completing coursework related to a career in teaching.  There are some stipulations to accepting this aid such as if you accept you must teach: in a high-need field, at an elementary or secondary school that serves low-income families, and teach at least four academic years of the eight years after you cease schooling. What happens if you do not fulfill these requirements?  The grant is transformed into a direct unsubsidized loan for your breach of contract.  In addition to completing the FASFA if you are interested in the TEACH Grant program, be sure to contact your college’s  financial aid office and ask if they participate in the program. The other stipulations are explained in the TEACH Grant Agreement to Serve which acts as the contract for the grant.

Federal Perkins Loan

The Federal Perkins Loan is a low-interest student loan offered to undergraduate and graduate students who exhibit exceptional financial need.  Once again not all colleges participate in this program so you should contact your college’s financial aid office to see if it participates in this program. The amount you are allowed to borrow depends primarily on your financial need, the amount of aid you have received, and the availability of funds at your college. Unlike the Pell Grants, not everyone who qualifies for a Perkins loan will receive a loan.  As an undergraduate you are allowed to borrow up to $5,500 up to a total of $27,500.  As a graduate you are allowed to borrow up to $8,000 per year up to a total of $60,000.  Repayment begins nine months after you graduate, leave college, or drop below half-time status.  Before the nine months has passed interest does not accrue on the loan.  In addition the interest rate on these loans is fixed at 5% (currently).  To apply for this or any of the following loans you must complete and submit your FASFA (a big surprise I know).

 The Difference between Direct Subsidized and Unsubsidized Loans

Before I describe the direct subsidized and unsubsidized loans, it is worth that the biggest difference between the two is that with a direct subsidized loan the U.S. Department of education pays for (subsidizes) the interest payments that accrue when you are in college. If a student has an unsubsidized loan interest does accrue during your time in college.

Direct Subsidized Loans

Direct subsidized loans are student loans available to undergraduate (not graduate) students who exhibit financial need and are enrolled at least half-time. Once again check with your college’s financial aid office to see if the college participates in the Direct Loan Program.  The annual award is $3,500-$5,500 depending on grade level.  One of the most notable characteristics of the direct subsidized loan  is the interest owed (the rate is now at 4.66%) is paid by the federal government as long as you are in school as at least a half-time student and the grace period during the first six months after leaving school.  Also repayment of principal is not required until this grace period of six months has ended.

Direct Unsubsidized Loans

Direct unsubsidized loans are student loans available to both undergraduate and graduate students who are enrolled at least half-time and there is no requirement for financial need to acquire the loans.  The annual award can range from $5,500-$20,500 depending on grade level and dependency status.  The difference between the unsubsidized and subsidized loan is that that while you are in school you are responsible for paying the interest that accrues on the loan and during all grace periods.  You have the option to not pay the interest at that time but if you choose this option the interest will be capitalized (added to the principal amount of money you owe) thus increasing your interest payment later down the road.  The interest rates for direct unsubsidized loans are fixed and are currently 4.66% for an undergraduate student loan and 6.21%. Similar to the subsidized loans there is a six month grace period following the first six months after leaving school during which no principal payments are required.

Direct PLUS Loans

PLUS loans are federal student loans that graduate students and parents of dependent undergraduate students can use to pay college expenses without the need to show financial need.  Not all colleges participate in the federal loan program so be sure to contact your financial aid office. One of the most notable features of the PLUS loans is that the borrower must have a “good” credit history.  The maximum loan amount is the student’s cost of attendance (which is equal to total costs of attending minus financial aid received). Accrued interest must be paid while in school else it is capitalized to the principal of the loan.  If a parent takes out the loan for his (her) student, there is no grace period and repayment of principal must begin immediately, this is not the case for a graduate student who has a grace period following the first six months of leaving school. The current interest rate on direct PLUS loans is 7.21%. I really should stop beating this dead horse, but in order to apply for the direct PLUS loans you have to complete and submit the FASFA.

Federal vs. Private Loans

I’ve outlined a lot of different options and some may not seem very generous. You may be thinking “Is that the best that is out there?” Sadly I would say yes it is.  Many aspects of federal loans make them superior to loans offered by other institutions (private loans).  These include fixed interest rates instead of variable interest rates (interest rates that could change), the student is not required to repay any principal while in school, and the need for an established credit history or cosigner in order to secure the loan.

Before you agree to any federal loan be sure to read the Master Promissory Note (MPN) that serves as the loan contract and outlines the terms of the loan.

Definitions

  1. Grant: A need based form of gift aid which usually does not require repayment
  2. Student loan: A loan made to a student in college which may either by administered by the federal government or a private financial institution.
  3. Grace period: A period of time during which principal payment of a loan may be suspended.
  4. Interest capitalization: A type of loan stipulation in which unpaid interest is added to the principal balance of a loan.
  5. Private loans: Student loans offered by a private institution.
  6. Master Promissory Note (MPN): The contract outlining the terms and conditions for most federal student loans.

 

Further Reading

Student Loans and Paying for College (Part 1)

I can’t tell if the money is coming out or going into the hat. Image courtesy of saleshq.com

So you got accepted to the school of your dreams?

Congratulations! I’m happy for you! My next question merits a bit of scary thought. How are you going to pay for attending that school? Maybe you have wealthy relatives. If so, count your blessings and the rest of this post is irrelevant for you so you can move on to something else.  For the rest of us…paying for college is no laughing matter. Cost is one of the top determinants of where an individual chooses to attend college (I was one of these individuals). As tuition continues to rise and the job market continues to flounder financial aid for students is becoming a very ubiquitous issue that merits a bit of explanation and study.

Key Points

  • There are some key differences between scholarships, grants, and student loans.
  • The FASFA is arguably the most important financial aid form to complete.
  • Scholarships, grants, and student loans are the most popular methods to pay college costs.
  • Your financial aid office at your school is your friend not your foe.

Grant, Scholarship, or Loan?

Let’s start with the good news. There are entities out there who will give you free money to attend school. These entities can be the school you choose to attend, the company your parent(s) work for, or even the federal government. This “free money” or “gift aid” is usually referred to as grants and scholarships.  Grants are financial aid packages usually given on a financial need basis. Scholarships are financial aid packages usually given on a merit basis.  It is important to note that while scholarships and grants do not usually require repayment they may still have performance conditions attached to them (ex. You cannot fall below a certain G.P.A. while attending school). The largest provider of grants is the U.S. federal government.

Here’s the bad news: this form of aid may not cover all the costs of attending college. When gift aid isn’t enough we must turn to student loans which are loans specifically provided to individuals attending universities that do require repayment. The largest provider of student loans is again the U.S. federal government though there are private student loans offered by banks, credit unions, and universities.

How a Piece of Paper Can Save You $100,000

The Free Application for Federal Student Aid (FASFA) is arguably the most important form to fill out when it comes to financial aid for paying for college.  By filing out the FASFA you are essentially revealing to the government how much of the cost of attendance your family will have to pay (the exact term for this is expected family contribution) and how much of the bill the government will cover.  Needless to say the FASFA is a pretty thorough form that will ask family net worth, family income, number of family dependents, etc.  I do not recommend lying on this form. Why? Because the information you enter is cross referenced with the friendly, neighborhood IRS (Internal Revenue Service) and the last thing someone wants is a call from the IRS regarding the apparent fraud you filled out on the FASFA.

Different states and schools have different deadlines than the federal government (the deadline page can be found here). It is very important to not miss these deadlines as you would be missing out on free money…ouch.  Usually the deadline for the upcoming school year is before the fall of that academic year (Ex. If I were attending LSU from Fall 2015 – Spring 2016 I would have to submit the FASFA before June 30, 2015.)  Another important aspect of the FASFA is that you must reapply each year you want to receive some form of financial aid.  Why? Let’s say that your second year of college your family wins the lottery (or your father loses his job).  This new source (loss) of income will show up on your FASFA and as a result the federal government will expect a larger (smaller) expected family contribution. To capture situations like this the federal government and universities require the FASFA be completed each academic year. Thus write down your log-in information and keep it in a secret, reliable place.

Scholarships

Scholarships are a merit based form of gift aid and are arguably the most sought out form of financial aid. They are offered by universities and many private and non-profit organizations.  The best ways to find these financial gold mines are contacting the university you plan to attend or performing your own private research.

A quick caveat about private research on financial aid: Beware companies that want you to pay for scholarship or grant searches.  Most of these companies want you to pay for results you could get by googling ‘’popular scholarships”.

Once you find a scholarship that you fit the criteria for, apply.  Though sometimes a pain you are sacrificing your time for a chance to lessen that financial burden (I personally applied to a scholarship offered through the finance department at my school and received $3,000 from it. Not bad for spending an hour on the application.)  Scholarships have their own deadlines and criteria so pay close attention so you don’t miss out.

Grants

Grants are a financial need based form of gift aid and take up the greatest percentage of total financial aid offered to students.  They are commonly offered by both colleges and the federal government.  The federal government has quite a few notable grant options which will be discussed in part two.

Apart from being based on financial aid vs. merit, grants function in the same way as scholarships. Based on the results of the completed FASFA different grant options may be available.  Once again grants may have terms attached to them so be sure you understand the terms of agreement when you accept the financial aid.  What do you do if the scholarships and loans are not enough? Other than working three part time jobs, you may want to consider taking on a student loan.

Student Loans

So you have crunched some numbers and discovered that the grants and scholarships just won’t cover all of the expenses. Now what?  You could put the remaining costs on a high interest credit card and bite the bullet, but I would not recommend that.  Seeing the need for a reliable source of student loans the U.S. Department of Education created a loan program to help fill the gap in paying for all of college costs. Some banks and other financial institutions began to offer student loans. The major distinction in the world of student loans is that there are federal student loans (government) and private student loans (non-government).  In many of the cases federal student loans have some key characteristics (fixed low interest rate, possible tax reductions, and post-graduation payment plans) that make them superior to most private student loans.  To apply for a federal student loan you must complete your FASFA (told you it was kind of important) and the results of the FASFA will dictate which types of federal loans you are eligible for.

 

Student with ball and chain attached
You shouldn’t feel like this. Image courtesy of McCarthy’s Weekly.

 

If there is one take away from this lesson let it be this: Your school’s financial aid office is your friend when it comes to paying for college; go to them if you have financial concerns.  For now let’s look a bit more in depth at the different types of federal grants and loans available to students.

Definitions

  1. Grant: A need based form of gift aid which usually does not require repayment.
  2. Scholarship: A merit based form of gift aid which usually does not require repayment.
  3. Student loan: A loan made to a student in college which may either be administered by the federal government or a private financial institution.
  4. Cost of attendance: The total cost of attending a particular university for a certain period of time (usually a year) and includes expected costs such as tuition, room and board, books and supplies, etc. This metric is used in calculating the amount of financial aid offered.
  5. Expected family contribution: The expected dollar amount the family of a student is expected to contribute to college expenses. This metric is used in calculating the amount of financial aid offered.

Further Reading

Lesson 8: Let’s Talk Bonds

 

Bond actors
This is not the type of “bond” I will be discussing. Image courtesy of moviepilot.com

The bond market. You may think you haven’t heard about it.  You are probably wrong. In addition to occasionally hearing about “rallies” in the bond market most Americans has heard of the $3 trillion deficit the U.S. government currently faces.  What makes up this deficit? Treasury bonds. These bonds and other securities the U.S. Treasury issues help fund the activities of the U.S. Government and have an integral role in the bond market. The bond market is comprised of many different types of bonds which can greatly vary in features. Let’s explore some basic functionality.

Key Points

  • A bond is a debt security that obligates the borrower to pay a specified amount to the investor on a given date and usually includes coupon payments.
  • A bond offers investors returns through appreciation and interest (coupon) payments.
  • A bond has many distinguishing features including par value, maturity, coupon rate, issuer, credit rating.
  • There is an inverse relationship between bond yield and bond price.

Continue reading Lesson 8: Let’s Talk Bonds

Lesson 7: Stock Market Indices

Stock Chart Going Up
Lines Going Up = Good in Finance

In the last lesson I mentioned how my father would always mention to me how “the market was up”.  Knowing now that there thousands of companies traded in the equity markets you may wonder what my father meant by “the market”. Was it that on that day he saw more green, upward arrows on MSNBC than red, downward arrows? Was it that on that particular day his stocks were doing well and he wasn’t paying attention to the other stocks? He was most likely looking at stock market indices such as the DJIA, S&P 500, or Russell 2000. These indices (or indexes) are commonly used to describe the health of the overall stock market and as a result are closely monitored day in and day out.

Continue reading Lesson 7: Stock Market Indices

All About Credit Cards (Part 2)

We have discussed some of the basic functions of the credit card. “But Colby what do these rates and acronyms mean? And this contract needs a magnifying glass to read the fine print.” Obviously we still have some material to cover concerning credit cards. The material discussed may seem eclectic but that is because when it comes to credit cards there are a bunch of seemingly unrelated pieces that add together in that tiny piece of plastic.

Key Points

  • There are different types of credit cards available.

    -Image courtesy of urban tastebuds
    Image courtesy of urban tastebuds
  • One of the most important features of a credit card is the card’s annual percentage return (APR) or the interest rate charged on the card.
  • The annual charge and the grace period are two other features to pay attention to.
  • If you have more than one credit cards in use, pay the balance on the card with the higher APR first.

Continue reading All About Credit Cards (Part 2)

Social Media Isn’t Just for Poor College Students Anymore

Image Courtesy of the Helen Brown Group

Think the only people who tweet are college students and hipsters? Think again.

Key Points

  • According to Ledbury Research, a U.K. based research group, at least 75% of high net wealth individuals (HNWI) use social media regularly.
  • 33% of the wealthy use three or more social media outlets.
  • LinkedIn is the most prominent social media website used by HNWI followed by Facebook.

Continue reading Social Media Isn’t Just for Poor College Students Anymore

Lesson 6: The Stock Market

Now that we have some working knowledge about what a stock is and how it functions let’s discuss how it is traded. The stock market is one of the most often discussed things in everyday financial life. To this day in discussions with my aging father he sometimes makes the comment “Did you see what the market did today?”  The U.S. stock market is half of the size of the U.S. bond market. So why does the stock market get all of the glory, media attention, and yelling pundits? It gets this following because it is the place where people can go from rags to riches (or vice versa) very quickly, or to be blunt it’s exciting. You will see that much of the stock market is very jargon heavy so at any point remember that the definitions of the terms can be found at the post in case you need a quick refresher. So what are the mechanics of this wondrous machine?

Continue reading Lesson 6: The Stock Market