Interest rates are the cost borrowers pay for debt. This concept is well-understood, as nearly every loan carries some amount of interest. Less understood are the dynamics between interest rates, markets, and the Federal Reserve.
Business cycles have peaks and troughs. The Federal Reserve seeks to moderate these swings by controlling the money supply. This is accomplished by adjusting the discount rate, or the rate the Federal Reserve charges member banks for loans. Higher interest rates slow lending activity and limit currency circulation. Conversely, lower interest rates encourage new loans and promote economic growth. Borrowing costs eventually “trickle-down” to household mortgages, consumer car loans, and every other debt category imaginable.
Interest rates also impact stocks, bonds, and the broader economy. Individuals often have larger appetites for stocks and goods when interest rates are low. Businesses may keep pace by hiring more staff or raising prices. The opposite can be true in a high interest rate environment. Yields increase with interest rates, making bonds and savings accounts relatively more attractive. Individuals may also curb discretionary spending when interest rates rise. Diminished demand can ease inflation.
These are merely historical patterns. Rate adjustments foretell neither prosperity nor downturn. Many forces impact economic growth and market activity. It is therefore difficult to predict rate outcomes with any precision.
We are pleased to announce BaldwinClarke’s article series: Selecting a Business Retirement Plan. The series will review retirement plan options for business owners. This article introduces readers to employer retirement benefits through a historical lens. Later articles will discuss key principles, compare options, and explore strategies.
A tight labor market demands careful attention to employee benefits. Employer-sponsored retirement plans are central to these packages. Retirement plans include pensions, 401(k)s, stock bonus plans, and numerous others. Plan designs vary, but all serve similar purposes. Retirement plans attract and retain top talent. A suitable plan also fulfills an entity’s financial goals.
Retirement preparation has always been important. Prolonged life expectancies and surging health care costs now render it a necessity. Data reveals the full extent of both trends. Mortality tables indicate that today’s 65-year-olds have a 50% chance of living to age 90. What’s more, there is nearly a 20% probability they will live to age 100.[1] Life expectancy leaps are partly attributable to health care advancements. Medical interventions repel fatal diseases and life-sustaining treatments keep our ill alive longer. These innovations, however, come at a cost. Experts estimate that an average couple may incur roughly $315,000 in retirement health care expenses.[2] Longer and more expensive retirement periods require substantial savings.
Retirement costs are widely recognized. As such, many workers embrace and even expect employer-sponsored retirement plans. Research ranks retirement plans as a top-three priority for prospective workers.[3] Moreover, three-quarters of employees say they would switch jobs for better financial benefits.[4] Businesses are responding to these concerns. In 2020, approximately two-thirds of private sector workers had access to employer-provided plans[5] and most took full advantage. Widespread participation leads to a more satisfied, engaged, and productive workforce.
Net Asset Value (NAV) is the value of an entity's assets minus the value of its liabilities. It is most commonly used when evaluating mutual funds or exchange-traded funds (ETF) and in this context is calculated at the end of each trading day.
For mutual funds and ETFs, the NAV is the price at which shares of the fund are bought or sold. It's calculated by subtracting the fund's liabilities from the current market value of its assets and then dividing by the number of outstanding shares.
Here's the formula:
NAV = (Value of Assets - Value of Liabilities) / Total number of outstanding shares
This gives the per-share value or "price" for the mutual fund shares at the end of the trading day. When you buy shares in a mutual fund, you pay the NAV per share, and when you sell, the NAV per share is the amount you receive.
It's important to note that the NAV does not necessarily reflect a fund's future performance or potential. It's simply a snapshot of the fund's value at the end of the trading day.
Basis points, often abbreviated as BP and sometimes denoted as bps or bips, are a unit of measure used in finance to describe the percentage change in the rate or value of financial instruments. One basis point is equal to 0.01% or 0.0001 in decimal form.
Basis points are used as a convenient way of expressing small changes in interest rates, yields, and equity indexes, and the differences in yields between securities. They help to clarify small percentages changes and avoid confusion around the language of these changes.
For example, if an interest rate rises from 1.5% to 1.7%, it has risen by 20 basis points. Similarly, a 0.5% fee would be expressed as 50 basis points.
