Personal finance is the financial management which an individual or a family unit performs to budget and spend monetary resources over time, taking into account various financial risks and future life events. When planning personal finances, the individual would consider the suitability to his or her needs of a range of banking products or investment private equity, insurance products or participation and monitoring of and- or employer-sponsored retirement plans, social security benefits, income tax management. Before a specialty in personal finance was developed, various disciplines which are related to it, such as family economics, consumer economics were taught in various colleges as part of home economics for over 100 years; the earliest known research in personal finance was done in 1920 by Hazel Kyrk. Her dissertation at University of Chicago laid the foundation of consumer economics and family economics. Margaret Reid, a professor of Home Economics at the same university, is recognized as one of the pioneers in the study of consumer behavior and Household behavior.
In 1947, Herbert A. Simon, a Nobel laureate, suggested that a decision maker did not always make the best financial decision because of limited educational resources and personal inclinations. In 2009, Dan Ariely suggested the 2008 financial crisis showed that human beings do not always make rational financial decisions, the market is not self-regulating and corrective of any imbalances in the economy. Therefore, personal finance education is needed to help an individual or a family make rational financial decisions throughout their life. Before 1990, mainstream economists and business faculty paid little attention to personal finance. However, several American universities such as Brigham Young University, Iowa State University, San Francisco State University have started to offer financial educational programmes in both undergraduate and graduate programmes in the last 30 years; these institutions have published several works in journals such as The Journal of Financial Counseling and Planning and the Journal of Personal Finance.
Research into personal finance is based on several theories such as social exchange theory and andragogy. Professional bodies such as American Association of Family and Consumer Sciences and American Council on Consumer Interests started to play an important role in the development of this field from the 1950s to 1970s; the establishment of the Association for Financial Counseling and Planning Education in 1984 at Iowa State University and the Academy of Financial Services in 1985 marked an important milestone in personal finance history. Attendances of the two societies come from faculty and graduates from business and home economics colleges. AFCPE has since offered several certifications for professionals in this field such as Accredited Financial Counselor and Certified Housing Counselors. Meanwhile, AFS cooperates with Certified Financial Planner; as the concerns about consumers' financial capability have increased in recent years, a variety of education programmes has emerged, catering to a broad audience or to a specific group of people such as youth and women.
The educational programmes are known as "financial literacy". However, there was no standardised curriculum for personal finance education until after the 2008 financial crisis; the United States President’s Advisory Council on Financial Capability was set up in 2008 in order to encourage financial literacy among the American people. It stressed the importance of developing a standard in the field of financial education; the key component of personal finance is financial planning, a dynamic process that requires regular monitoring and re-evaluation. In general, it involves five steps: Assessment: A person's financial situation is assessed by compiling simplified versions of financial statements including balance sheets and income statements. A personal balance sheet lists the values of personal assets, along with personal liabilities. A personal income statement lists expenses. Goal setting: Having multiple goals is common, including a mix of short- and long-term goals. For example, a long-term goal would be to "retire at age 65 with a personal net worth of $1,000,000," while a short-term goal would be to "save up for a new computer in the next month."
Setting financial goals helps to direct financial planning. Goal setting is done with an objective to meet specific financial requirements. Plan creation: The financial plan details how to accomplish the goals, it could include, for example, reducing unnecessary expenses, increasing the employment income, or investing in the stock market. Execution: Execution of a financial plan requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, lawyers. Monitoring and reassessment: As time passes, the financial plan is monitored for possible adjustments or reassessments. Typical goals that most adults and young adults have are paying off credit card/student loan/housing/car loan debt, investing for retirement, investing for college costs for children, paying medical expenses. Personal circumstances differ with respect to patterns of income and consumption needs. Tax and finance laws differ from country to country, market conditions vary geographically and over time.
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Foreign exchange market
The foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies. This market determines the foreign exchange rate, it includes all aspects of buying and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the Credit market; the main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. Since currencies are always traded in pairs, the foreign exchange market does not set a currency's absolute value but rather determines its relative value by setting the market price of one currency if paid for with another. Ex: US$1 is worth X CAD, or CHF, or JPY, etc; the foreign exchange market operates on several levels. Behind the scenes, banks turn to a smaller number of financial firms known as "dealers", who are involved in large quantities of foreign exchange trading.
Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the "interbank market". Trades between foreign exchange dealers can be large, involving hundreds of millions of dollars; because of the sovereignty issue when involving two currencies, Forex has little supervisory entity regulating its actions. The foreign exchange market assists international trade and investments by enabling currency conversion. For example, it permits a business in the United States to import goods from European Union member states Eurozone members, pay Euros though its income is in United States dollars, it supports direct speculation and evaluation relative to the value of currencies and the carry trade speculation, based on the differential interest rate between two currencies. In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying with some quantity of another currency; the modern foreign exchange market began forming during the 1970s.
This followed three decades of government restrictions on foreign exchange transactions under the Bretton Woods system of monetary management, which set out the rules for commercial and financial relations among the world's major industrial states after World War II. Countries switched to floating exchange rates from the previous exchange rate regime, which remained fixed per the Bretton Woods system; the foreign exchange market is unique because of the following characteristics: its huge trading volume, representing the largest asset class in the world leading to high liquidity. As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements, the preliminary global results from the 2016 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity show that trading in foreign exchange markets averaged $5.09 trillion per day in April 2016.
This is down from $5.4 trillion in April 2013 but up from $4.0 trillion in April 2010. Measured by value, foreign exchange swaps were traded more than any other instrument in April 2016, at $2.4 trillion per day, followed by spot trading at $1.7 trillion. The $5.09 trillion break-down is as follows: $1.654 trillion in spot transactions $700 billion in outright forwards $2.383 trillion in foreign exchange swaps $96 billion currency swaps $254 billion in options and other products Currency trading and exchange first occurred in ancient times. Money-changers were living in the Holy Land in the times of the Talmudic writings; these people used city stalls, at feast times the Temple's Court of the Gentiles instead. Money-changers were the silversmiths and/or goldsmiths of more recent ancient times. During the 4th century AD, the Byzantine government kept a monopoly on the exchange of currency. Papyri PCZ I 59021, shows the occurrences of exchange of coinage in Ancient Egypt. Currency and exchange were important elements of trade in the ancient world, enabling people to buy and sell items like food and raw materials.
If a Greek coin held more gold than an Egyptian coin due to its size or content a merchant could barter fewer Greek gold coins for more Egyptian ones, or for more material goods. This is why, at some point in their history, most world currencies in circulation today had a value fixed to a specific quantity of a recognized standard like silver and gold. During the 15th century, the Medici family were required to open banks at foreign locations in order to exchange currencies to act on behalf of textile merchants. To facilitate trade, the bank created the nostro account book which contained two columned entries showing amounts of foreign and local currencies. During the 17th century, Amsterdam maintained an active Forex market. In 1704, foreign exchange took place between agents acting in the interests of the Kingdom of Englan
Speculation is the purchase of an asset with the hope that it will become more valuable in the near future. In finance, speculation is the practice of engaging in risky financial transactions in an attempt to profit from short term fluctuations in the market value of a tradable financial instrument—rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, dividends, or interest. Many speculators pay little attention to the fundamental value of a security and instead focus purely on price movements. Speculation can in principle involve any tradable financial instrument. Speculators are common in the markets for stocks, commodity futures, fine art, real estate, derivatives. Speculators play one of four primary roles in financial markets, along with hedgers, who engage in transactions to offset some other pre-existing risk, arbitrageurs who seek to profit from situations where fungible instruments trade at different prices in different market segments, investors who seek profit through long-term ownership of an instrument's underlying attributes.
With the appearance of the stock ticker machine in 1867, which removed the need for traders to be physically present on the floor of a stock exchange, stock speculation underwent a dramatic expansion through the end of the 1920s. The number of shareholders increased from 4.4 million in 1900 to 26 million in 1932. The view of what distinguishes investment from speculation and speculation from excessive speculation varies among pundits and academics; some sources note that speculation is a higher risk form of investment. Others define speculation more narrowly; the U. S. Commodity Futures Trading Commission defines a speculator as "a trader who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements." The agency emphasizes that speculators serve important market functions, but defines excessive speculation as harmful to the proper functioning of futures markets. According to Benjamin Graham in The Intelligent Investor, the prototypical defensive investor is "...one interested chiefly in safety plus freedom from bother."
He admits, that "...some speculation is necessary and unavoidable, for in many common-stock situations, there are substantial possibilities of both profit and loss, the risks therein must be assumed by someone." Thus, many long-term investors those who buy and hold for decades, may be classified as speculators, excepting only the rare few who are motivated by income or safety of principal and not selling at a profit. Speculation is condemned on ethical-moral grounds as creating money from money and thereby promoting the vices of avarice and gambling. There is opinion that it serves no purposes from a human and economic perspective Nicholas Kaldor has long recognized the price-stabilizing role of speculators, who tend to out "price-fluctuations due to changes in the conditions of demand or supply," by possessing "better than average foresight." This view was echoed by the speculator Victor Niederhoffer, in "The Speculator as Hero", who describes the benefits of speculation: Let's consider some of the principles that explain the causes of shortages and surpluses and the role of speculators.
When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell; this reduces prices, helping to reduce the surplus. Another service provided by speculators to a market is that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier or possible for others to offset risk, including those who may be classified as hedgers and arbitrageurs. If any market, such as pork bellies, had no speculators, only producers and consumers would participate. With fewer players in the market, there would be a larger spread between the current bid and ask price of pork bellies.
Any new entrant in the market who wanted to trade pork bellies would be forced to accept this illiquid market and might trade at market prices with large bid-ask spreads or face difficulty finding a co-party to buy or sell to. By contrast, a commodity speculator may profit the difference in the spread and, in competition with other speculators, reduce the spread; some schools of thought argue that speculators increase the liquidity in a market, therefore promote an efficient market. This efficiency is difficult to achieve without speculators. Speculators take information and speculate on how it affects prices and consumers, who may want to hedge their risks, needing counterparties if they could find each other without markets it would happen as it would be cheaper. A beneficial by-product of speculation for the economy is price discovery. On the other hand, as more speculators participate in a market, underlying real demand and supply can diminish compared to trading volume, prices may become distorted.
Speculators perform a risk bearing role. For example, a farmer might be considering planting corn on some unused farmland. However, he might not want to do so because he is concerned that the price might fall too far by harvest time. By selling his cro
Base erosion and profit shifting
Base erosion and profit shifting refers to corporate tax planning strategies used by multinationals to "shift" profits from higher–tax jurisdictions to lower–tax jurisdictions, thus "eroding" the "tax–base" of the higher–tax jurisdictions. The Organisation for Economic Co-operation and Development define BEPS strategies as also: "exploiting gaps and mismatches in tax rules". Corporate tax havens offer BEPS tools to "shift" profits to the haven, additional BEPS tools to avoid paying taxes within the haven. BEPS tools are associated with U. S. technology and life science multinationals. Tax academics showed use of the BEPS tools by U. S. multinationals, via tax havens, maximised long–term U. S. exchequer receipts and shareholder return, at the expense of others. Initiatives to curb BEPS by the OECD, by the Trump Administration have failed. A January 2017 OECD report estimates that BEPS tools are responsible for tax losses of circa $100–240 billion per annum. A June 2018 report by tax academic Gabriel Zucman, estimated that the figure is closer to $200 billion per annum.
The Tax Justice Network estimated that profits of $660 billion were "shifted" in 2015. The effect of BEPS tools is most felt in developing economies, who are denied the tax revenues needed to build infrastructure. Most BEPS activity is associated with industries with intellectual property, namely Technology, Life Sciences. IP is described as the raw materials of tax avoidance, IP–based BEPS tools are responsible for the largest global BEPS income flows. Corporate tax havens have some of the most advanced IP tax leglislation in their statutate books. Most BEPS activity is most associated with U. S. multinationals, is attributed to the historical U. S. "worldwide" corporate taxation system. Pre the Tax Cuts and Jobs Act of 2017, the U. S. was one of only eight jurisdictions to operate a "worldwide" tax system. Most global jurisdictions operate a "territorial" corporate tax system with lower tax rates for foreign sourced income, thus avoiding the need to "shift" profits. U. S. multinationals use tax havens more than multinationals from other countries which have kept their controlled foreign corporations regulations.
No other non–haven OECD country records as high a share of foreign profits booked in tax havens as the United States. This suggests that half of all the global profits shifted to tax havens are shifted by U. S. multinationals. By contrast, about 25% accrues to E. U. countries, 10% to the rest of the OECD, 15% to developing countries. Research in June 2018, identified Ireland as the world's largest BEPS hub. Ireland is larger; the largest global BEPS hubs, from the Zucman–Tørsløv–Wier table below, are synonymous with the top 10 global tax havens: Mostly consists of The Cayman Islands and The British Virgin Islands Research in September 2018, by the National Bureau of Economic Research, using repatriation tax data from the TCJA, said that: "In recent years, about half of the foreign profits of U. S. multinationals have been booked in tax haven affiliates, most prominently in Ireland and Bermuda plus Caribbean tax havens. One of the authors of this research was quoted as saying: “Ireland solidifies its position as the #1 tax haven.”.
S. firms book more profits in Ireland than in China, Germany, France & Mexico combined. Irish tax rate: 5.7%.” Research identifies three main BEPS techniques used for "shifting" profits to a corporate tax haven via OECD–compliant BEPS tools: BEPS tools could not function if the corporate tax haven did not have a network of bilateral tax treaties that accept the haven’s BEPS tools, which "shift" the profits to the haven. Modern corporate tax havens, who are the main global BEPS hubs, have extensive networks of bilateral tax treaties; the U. K. is the leader with over 122, followed by the Netherlands with over 100. The blacklisting of a corporate tax haven is a serious event, why major BEPS hubs are OECD-compliant. Ireland was the first major corporate tax haven. An important academic study in July 2017 published in Nature, "Conduit and Sink OFCs", showed that the pressure to maintain OECD–compliance had split corporate–focused tax havens into two different classifications: Sink OFCs, which act as the terminus for BEPS flows, Conduit OFCs, which act as the conduit for flows from higher–tax locations to the Sink OFCs.
It was noted that the 5 major Conduit OFCs, Ireland, the Netherlands, the United Kingdom and Switzerland, all have a top–ten ranking in the 2018 Global Innovation Property Centre IP Index". Once profits are "shifted" to the corporate tax haven, additional tools are used to avoid paying headline tax rates in the haven; some of these tools are OCED–compliant, others became OECD–proscribed, while others have not attracted OECD attention. Because BEPS hubs need extensive bilateral tax tr
Insurance is a means of protection from financial loss. It is a form of risk management used to hedge against the risk of a contingent or uncertain loss. An entity which provides insurance is known as an insurer, insurance company, insurance carrier or underwriter. A person or entity who buys insurance is known as a policyholder; the insurance transaction involves the insured assuming a guaranteed and known small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, involves something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship; the insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured. The amount of money charged by the insurer to the Policyholder for the coverage set forth in the insurance policy is called the premium.
If the insured experiences a loss, covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster. The insurer may hedge its own risk by taking out reinsurance, whereby another insurance company agrees to carry some of the risk if the primary insurer deems the risk too large for it to carry. Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing; the Babylonians developed a system, recorded in the famous Code of Hammurabi, c. 1750 BC, practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen, or lost at sea. Circa 800 BC, the inhabitants of Rhodes created the'general average'.
This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether due to storm or sinkage. Separate insurance contracts were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates; the first known insurance contract dates from Genoa in 1347, in the next century maritime insurance developed and premiums were intuitively varied with risks. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in Enlightenment era Europe, specialized varieties developed. Property insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured more than 13,000 houses; the devastating effects of the fire converted the development of insurance "from a matter of convenience into one of urgency, a change of opinion reflected in Sir Christopher Wren's inclusion of a site for'the Insurance Office' in his new plan for London in 1667."
A number of attempted fire insurance schemes came to nothing, but in 1681, economist Nicholas Barbon and eleven associates established the first fire insurance company, the "Insurance Office for Houses," at the back of the Royal Exchange to insure brick and frame homes. 5,000 homes were insured by his Insurance Office. At the same time, the first insurance schemes for the underwriting of business ventures became available. By the end of the seventeenth century, London's growing importance as a center for trade was increasing demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house, which became the meeting place for parties in the shipping industry wishing to insure cargoes and ships, those willing to underwrite such ventures; these informal beginnings led to the establishment of the insurance market Lloyd's of London and several related shipping and insurance businesses. The first life insurance policies were taken out in the early 18th century; the first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas Allen.
Edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762. It was the world's first mutual insurer and it pioneered age based premiums based on mortality rate laying "the framework for scientific insurance practice and development" and "the basis of modern life assurance upon which all life assurance schemes were subsequently based."In the late 19th century "accident insurance" began to become available. The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in 1848 in England to insure against the rising number of fatalities on the nascent railway system. By the late 19th century governments began to initiate national insurance programs against sickness and old age. Germany built on a tradition of welfare programs in Prussia and Saxony that began as early as in the 1840s. In the 1880s Chancellor Otto von Bismarck introduced old age pensions, accident insurance and medical care that formed the basis for Germany's welfare state.
In Britain more extensive legislation was introduced by the Liberal government in the 1911 National Insurance Act. This gave the British working classes the first contributory system of insurance against illness and unemployment; this system was expanded after the Second World War under the inf
Accounting or accountancy is the measurement and communication of financial information about economic entities such as businesses and corporations. The modern field was established by the Italian mathematician Luca Pacioli in 1494. Accounting, called the "language of business", measures the results of an organization's economic activities and conveys this information to a variety of users, including investors, creditors and regulators. Practitioners of accounting are known as accountants; the terms "accounting" and "financial reporting" are used as synonyms. Accounting can be divided into several fields including financial accounting, management accounting, external auditing, tax accounting and cost accounting. Accounting information systems are designed to support related activities. Financial accounting focuses on the reporting of an organization's financial information, including the preparation of financial statements, to the external users of the information, such as investors and suppliers.
The recording of financial transactions, so that summaries of the financials may be presented in financial reports, is known as bookkeeping, of which double-entry bookkeeping is the most common system. Accounting is facilitated by accounting organizations such as standard-setters, accounting firms and professional bodies. Financial statements are audited by accounting firms, are prepared in accordance with accepted accounting principles. GAAP is set by various standard-setting organizations such as the Financial Accounting Standards Board in the United States and the Financial Reporting Council in the United Kingdom; as of 2012, "all major economies" have plans to converge towards or adopt the International Financial Reporting Standards. The history of accounting is thousands of years old and can be traced to ancient civilizations; the early development of accounting dates back to ancient Mesopotamia, is related to developments in writing and money. By the time of Emperor Augustus, the Roman government had access to detailed financial information.
Double-entry bookkeeping was pioneered in the Jewish community of the early-medieval Middle East and was further refined in medieval Europe. With the development of joint-stock companies, accounting split into financial accounting and management accounting; the first work on a double-entry bookkeeping system was published by Luca Pacioli. Accounting began to transition into an organized profession in the nineteenth century, with local professional bodies in England merging to form the Institute of Chartered Accountants in England and Wales in 1880. Both the words accounting and accountancy were in use in Great Britain by the mid-1800s, are derived from the words accompting and accountantship used in the 18th century. In Middle English the verb "to account" had the form accounten, derived from the Old French word aconter, in turn related to the Vulgar Latin word computare, meaning "to reckon"; the base of computare is putare, which "variously meant to prune, to purify, to correct an account, hence, to count or calculate, as well as to think."The word "accountant" is derived from the French word compter, derived from the Italian and Latin word computare.
The word was written in English as "accomptant", but in process of time the word, always pronounced by dropping the "p", became changed both in pronunciation and in orthography to its present form. Accounting has variously been defined as the keeping or preparation of the financial records of an entity, the analysis and reporting of such records and "the principles and procedures of accounting". Accountancy refers to the occupation or profession of an accountant in British English. Accounting has several subfields or subject areas, including financial accounting, management accounting, auditing and accounting information systems. Financial accounting focuses on the reporting of an organization's financial information to external users of the information, such as investors, potential investors and creditors, it calculates and records business transactions and prepares financial statements for the external users in accordance with accepted accounting principles. GAAP, in turn, arises from the wide agreement between accounting theory and practice, change over time to meet the needs of decision-makers.
Financial accounting produces past-oriented reports—for example the financial statements prepared in 2006 reports on performance in 2005—on an annual or quarterly basis about the organization as a whole. This branch of accounting is studied as part of the board exams for qualifying as an actuary; these two types of professionals and actuaries, have created a culture of being archrivals. Management accounting focuses on the measurement and reporting of information that can help managers in making decisions to fulfill the goals of an organization. In management accounting, internal measures and reports are based on cost-benefit analysis, are not required to follow the accepted accounting principle. In 2014 CIMA created the Global Management Accounting Principles; the result of research from across 20 countries in five continents, the principles aim to guide best practice in the d
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include corporate bonds; the bond is a debt security, under which the issuer owes the holders a debt and is obliged to pay them interest or to repay the principal at a date, termed the maturity date. Interest is payable at fixed intervals; the bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond, it is liquid on the secondary market, thus a bond is a form of loan or IOU: the holder of the bond is the lender, the issuer of the bond is the borrower, the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit or short-term commercial paper are considered to be money market instruments and not bonds: the main difference is the length of the term of the instrument.
Bonds and stocks are both securities, but the major difference between the two is that stockholders have an equity stake in a company, whereas bondholders have a creditor stake in the company. Being a creditor, bondholders have priority over stockholders; this means they will be repaid in advance of stockholders, but will rank behind secured creditors, in the event of bankruptcy. Another difference is that bonds have a defined term, or maturity, after which the bond is redeemed, whereas stocks remain outstanding indefinitely. An exception is an irredeemable bond, such as a consol, a perpetuity, that is, a bond with no maturity. In English, the word "bond" relates to the etymology of "bind". In the sense "instrument binding one to pay a sum to another", use of the word "bond" dates from at least the 1590s. Bonds are issued by public authorities, credit institutions and supranational institutions in the primary markets; the most common process for issuing bonds is through underwriting. When a bond issue is underwritten, one or more securities firms or banks, forming a syndicate, buy the entire issue of bonds from the issuer and re-sell them to investors.
The security firm takes the risk of being unable to sell on the issue to end investors. Primary issuance is arranged by bookrunners who arrange the bond issue, have direct contact with investors and act as advisers to the bond issuer in terms of timing and price of the bond issue; the bookrunner is listed first among all underwriters participating in the issuance in the tombstone ads used to announce bonds to the public. The bookrunners' willingness to underwrite must be discussed prior to any decision on the terms of the bond issue as there may be limited demand for the bonds. In contrast, government bonds are issued in an auction. In some cases, both members of the public and banks may bid for bonds. In other cases, only market makers may bid for bonds; the overall rate of return on the bond depends on the price paid. The terms of the bond, such as the coupon, are fixed in advance and the price is determined by the market. In the case of an underwritten bond, the underwriters will charge a fee for underwriting.
An alternative process for bond issuance, used for smaller issues and avoids this cost, is the private placement bond. Bonds sold directly to buyers may not be tradeable in the bond market. An alternative practice of issuance was for the borrowing government authority to issue bonds over a period of time at a fixed price, with volumes sold on a particular day dependent on market conditions; this was called a tap bond tap. Nominal, par, or face amount is the amount on which the issuer pays interest, which, most has to be repaid at the end of the term; some structured bonds can have a redemption amount, different from the face amount and can be linked to the performance of particular assets. The issuer has to repay the nominal amount on the maturity date; as long as all due payments have been made, the issuer has no further obligations to the bond holders after the maturity date. The length of time until the maturity date is referred to as the term or tenor or maturity of a bond; the maturity can be any length of time, although debt securities with a term of less than one year are designated money market instruments rather than bonds.
Most bonds have a term of up to 30 years. Some bonds have been issued with terms of 50 years or more, there have been some issues with no maturity date. In the market for United States Treasury securities, there are three categories of bond maturities: short term: maturities between one and five years; the coupon is the interest rate. This rate is fixed throughout the life of the bond, it can vary with a money market index, such as LIBOR, or it can be more exotic. The name "coupon" arose because in the past, paper bond certificates were issued which had coupons attached to them, one for each interest payment. On the due dates the bondholder would hand in the coupon to a bank in exchange for the interest payment. Interest can be paid at different frequencies: semi-annual, i.e. every 6 months, or annual. The yield is the rate of return received from investing in the bond, it refers either to The current yield, or running yield