K-Flakes 2010-8 : Understanding Finance - What is an Escrow account?

Understanding Finance - What is an Escrow account?

“Escrow” is a financial asset held by a party on behalf of the other two different parties, in a transaction. The asset remains with the escrow service until the transactional obligations are fulfilled by the parties. Typically funds are kept in escrow account. Securities, funds and other assets can be held in escrow. The Escrow account providers (generally a bank) charges a commission in lieu of their services.

Example:

An escrow account can be used in the sale of a house. If there are conditions to the sale (like passing of an inspection); the buyer and seller may agree to use escrow. In this case, the buyer of the property will deposit the payment amount for the house in an escrow account held by a trusted party. This assures the seller - in the process of allowing the house to be inspected - that the buyer is capable of making payment. Once all of the conditions to the sale are satisfied, the escrow transfers the payment to the seller, and title is transferred to the buyer.

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Contents are compiled from different resources. Respective copyrights are acknowledged.

k-flakes # 2010-1: 4 different types of marketable US treasury securities

4 different types of marketable US treasury securities

US treasury securities are one of the popular investments; which is considered a very low-risk (safe) investment. Following are the 4 types of securities currently available.

1. Treasury bills

    - Short term securities with maturation less than a year.

    - Sold on discount on the face value. The investor gets the face value on maturity.

    - Investor's return = FACE VALUE - DISCOUNTED PRICE

2. Treasury Notes and Bonds

    - Long term securities. T-Note is issued with maturation between 1-10 years. T-bond is issue for more than 10 years.

    - The securities are sold on face value and interest is paid semi-annually.

    - The interest amount is the return to the investors.

3. STRIPS or Zero Coupon Bonds (ZCB)

    - Similar to T-Bills, sold on discount on the face value.

    - Like T-notes, its maturing period is longer than T-Bills.

    - This instrument is very sensitive to interest rates. As rates change, the price of a ZCB will change more than that of any other bond with similar maturity.

4. Treasury Inflation Protection Securities (TIPS)

    - The interest rate paid by TIPS is not fixed. It is linked with Inflation; i.e. interest rate = "Inflation + rate".

E.g. if the inflation is 3%; then a TIPS with 2% rate will pay 5% interest.

    - The rate is adjusted semi-annually according to the inflation change.

    - Since the return changes with inflation, the value to the security remains stable.

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Contents are compiled from different resources. Respective copyrights are acknowledged.