🍑 INF staking is available for LIME holders with the BASE level, which requires you to have on your balance from 1 LIME or more!

😎 Token data:

• INF token in the BNB Chain network;

• Smart contract address;

• INF/USDT trading pair.

⌛️ Duration:

• February 1, 2023 - February 1, 2024

💰 Interest accrual:

• The APR rate = 36% available for any deposit.

• Increased rate APY = 43.31% is activated when you reach 20,000 INF or more on your deposit;

• Interest is accrued daily at 00:00 UTC.

💸 Withdrawal:

• Withdrawal after the end of the program. iMe fee - 0%; no waiting period.

• Scheduled withdrawal. iMe fee - 1%; waiting period is 10 days.

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🙏 Please read the detailed article about the general concepts of staking, possible risks, and terms and conditions of the 1st iMe in-app Staking program:

By ADAM HAYES

Updated Jul 19, 2022

Reviewed by AMY DRURY

Fact checked by KATRINA MUNICHIELLO

What Is an Entrepreneur?

An entrepreneur is an individual who creates a new business, bearing most of the risks and enjoying most of the rewards. The process of setting up a business is known as entrepreneurship. The entrepreneur is commonly seen as an innovator, a source of new ideas, goods, services, and business/or procedures.

Entrepreneurs play a key role in any economy, using the skills and initiative necessary to anticipate needs and bring good new ideas to market. Entrepreneurship that proves to be successful in taking on the risks of creating a startup is rewarded with profits, fame, and continued growth opportunities. Entrepreneurship that fails results in losses and less prevalence in the markets for those involved.How Entrepreneurship Works

Entrepreneurship is one of the resources economists categorize as integral to production, the other three being land/natural resources, labor, and capital. An entrepreneur combines the first three of these to manufacture goods or provide services. They typically create a business plan, hire labor, acquire resources and financing, and provide leadership and management for the business.

Entrepreneurs commonly face many obstacles when building their companies. The three that many of them cite as the most challenging are as follows:

1. Overcoming bureaucracy

2. Hiring talent

3. Obtaining financing

Economists have never had a consistent definition of "entrepreneur" or "entrepreneurship" (the word "entrepreneur" comes from the French verb entreprendre, meaning "to undertake"). Though the concept of an entrepreneur existed and was known for centuries, the classical and neoclassical economists left entrepreneurs out of their formal models: They assumed that perfect information would be known to fully rational actors, leaving no room for risk-taking or discovery. It wasn't until the middle of the 20th century that economists seriously attempted to incorporate entrepreneurship into their models.

Three thinkers were central to the inclusion of entrepreneurs: Joseph Schumpeter, Frank Knight, and Israel Kirzner.1 Schumpeter suggested that entrepreneurs—not just companies—were responsible for the creation of new things in the search for profit. Knight focused on entrepreneurs as the bearers of uncertainty and believed they were responsible for risk premiums in financial markets. Kirzner thought of entrepreneurship as a process that led to the discovery.

Types of Entrepreneur

Not every entrepreneur is the same and not all have the same goals. Here are a few types of entrepreneurs:

Builder

Builders seek to create scalable businesses within a short time frame. Builders typically pass $5 million in revenue in the first two to four years and continue to build up until $100 million or beyond. These individuals seek to build out a strong infrastructure by hiring the best talent and seeking the best investors. They have temperamental personalities that are suited to the fast growth they desire but can make personal and business relationships difficult.2

Opportunist

Opportunistic entrepreneurs are optimistic individuals with the ability to pick out financial opportunities, get in at the right time, stay on board during the time of growth, and exit when a business hits its peak.

These types of entrepreneurs are concerned with profits and the wealth they will build, so they are attracted to ideas where they can create residual or renewal income. Because they are looking to find well-timed opportunities, opportunistic entrepreneurs can be impulsive.2

Innovator

Innovators are those rare individuals that come up with a great idea or product that no one has thought of before. Think of Thomas Edison, Steve Jobs, and Mark Zuckerberg. These individuals worked on what they loved and found business opportunities through that.

Rather than focusing on money, innovators care more about the impact that their products and services have on society. These individuals are not the best at running a business as they are idea-generating individuals, so often they leave the day-to-day operations to those more capable in that respect.2

Specialist

These individuals are analytical and risk-averse. They have a strong skill set in a specific area obtained through education or apprenticeship. A specialist entrepreneur will build out their business through networking and referrals, resulting in slower growth than a builder entrepreneur.2

4 Types of Entrepreneurship

As there are different types of entrepreneurs, there are also different types of businesses they create. Below are the main different types of entrepreneurship.

Small-Business

Small business entrepreneurship is the idea of opening a business without turning it into a large conglomerate or opening many chains. A single-location restaurant, one grocery shop, or a retail shop to sell your handmade goods would all be an example of small business entrepreneurship.

These individuals usually invest their own money and succeed if their business turns a profit, which they live off of. They don't have outside investors and will only take a loan if it helps continue the business.

Scalable Startup

These are companies that start with a unique idea; think Silicon Valley. The hopes are to innovate with a unique product or service and continue growing the company, continuously scaling up as time moves on. These types of companies often require investors and large amounts of capital to grow their idea and reach multiple markets.

Large-Company

Large company entrepreneurship is a new business division created within an existing company. The existing company may be well placed to branch out into other sectors or it may be well placed to become involved in new technology.

CEOs of these companies either foresee a new market for the company or individuals within the company generate ideas that they bring to senior management to start the process.

Social Entrepreneurship

The goal of social entrepreneurship is to create a benefit to society and humankind. They focus on helping communities or the environment through their products and services. They are not driven by profits but rather by helping the world around them.

How to Become an Entrepreneur

After retiring her professional dancing shoes, Judi Sheppard Missett became an entrepreneur by teaching a dance class to civilians in order to earn some extra cash. But she soon learned that women who came to her studio were less interested in learning precise steps than they were in losing weight and toning up. Sheppard Missett then trained instructors to teach her routines to the masses, and Jazzercise was born. A franchise deal followed. Today, the company has more than 8,300 locations worldwide.3

Following an ice cream making correspondence course, two entrepreneurs, Jerry Greenfield and Ben Cohen paired $8,000 in savings with a $4,000 loan, leased a Burlington, Vt., gas station, and purchased equipment to create uniquely flavored ice cream for the local market.4 Today, Ben & Jerry’s hauls in millions in annual revenue.

Although the self-made person has always been a popular figure in American society, entrepreneurship has gotten greatly romanticized in the last few decades. In the 21st century, the example of Internet companies like Alphabet, formerly Google (GOOG), and Meta (META), formerly Facebook, both of which have made their founders wildly wealthy, have made people enamored with the idea of becoming entrepreneurs.

Unlike traditional professions, where there is often a defined path to follow, the road to entrepreneurship is mystifying to most. What works for one entrepreneur might not work for the next and vice versa. That said, there are seven general steps that most, if not all, successful entrepreneurs have followed:

Ensure Financial Stability

This first step is not a strict requirement but is definitely recommended. While entrepreneurs have built successful businesses while being less than financially flush (think of Facebook, now Meta, founder Mark Zuckerberg as a college student), starting out with an adequate cash supply and ensuring ongoing funding can only help an aspiring entrepreneur, increasing their personal runway and giving them more time to work on building a successful business, rather than worrying about making quick money.

Build a Diverse Skill Set

Once a person has strong finances, it is important to build a diverse set of skills and then apply those skills in the real world. The beauty of step two is it can be done concurrently with step one.

Building a skill set can be achieved through learning and trying new tasks in real-world settings. For example, if an aspiring entrepreneur has a background in finance, they can move into a sales role at their existing company to learn the soft skills necessary to be successful. Once a diverse skill set is built, it gives an entrepreneur a toolkit that they can rely on when they are faced with the inevitability of tough situations.

Much has been discussed about whether going to college is necessary to become a successful entrepreneur. Many famous entrepreneurs are famous for having dropped out of college: Steve Jobs, Mark Zuckerberg, and Larry Ellison, to name a few.

Though going to college isn't necessary to build a successful business, it can teach young individuals a lot about the world in many other ways. And these famous college dropouts are the exception rather than the norm. College may not be for everyone and the choice is personal, but it is something to think about, especially with the high price tag of a college education in the U.S.

It is not true that majoring in entrepreneurship is necessary to start a business. People that have built successful businesses have majored in many different subjects and doing so can open your eyes to a different way of thinking that can help you in establishing your business.

Treasury inflation-protected securities (TIPS) are a type of Treasury security issued by the U.S. government. TIPS are indexed to inflation in order to protect investors from a decline in the purchasing power of their money.

As inflation rises, rather than their yield increasing, TIPS instead adjust in price (principal amount) in order to maintain their real value.

KEY TAKEAWAYS

• Treasury Inflation-Protected Security (TIPS) is a Treasury bond that is indexed to an inflationary gauge to protect investors from the decline in the purchasing power of their money.

• The principal value of TIPS rises as inflation rises while the interest payment varies with the adjusted principal value of the bond.

• The principal amount is protected since investors will never receive less than the originally invested principal.

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Treasury Inflation-Protected Securities (TIPS)

Understanding Treasury Inflation-Protected Securities (TIPS)

The principal value of TIPS rises as inflation rises. Inflation is the pace at which prices increase throughout the U.S. economy, as measured by the Consumer Price Index (CPI). Inflation becomes an issue when there isn't a commensurate rise in real wage growth to offset the negative effects of rising prices.1

TIPS are a popular asset for both protecting portfolios from inflation as well as profiting from it because they pay interest every six months based on a fixed rate determined at the bond's auction. However, the interest payment amounts can vary since the rate is applied to the adjusted principal or value of the bond. If the principal amount is adjusted higher over time due to rising prices, the interest rate will be multiplied by the increased principal amount. As a result, investors receive higher interest or coupon payments as inflation rises. Conversely, investors will receive lower interest payments if deflation occurs.1

TIPS are issued with maturities of five, 10, and 30 years and are considered a low-risk investment because the U.S. government backs them. At maturity, TIPs return the adjusted principal or the original principal, whichever is greater.1 

TIPS can be purchased directly from the government through the Treasury-direct system, in $100 increments with a minimum investment of $100, and are available with 5-, 10-, and 30-year maturities.1

Some investors prefer to get TIPS through a TIPS mutual fund or exchange-traded fund (ETF). Purchasing TIPS directly, however, allows investors to avoid the management fees associated with mutual funds.

In late 2021 into 2022, inflation fears have increased in the U.S. As a result, investors have begun to move into TIPS at an increasing pace.2

What if you had started investing years ago?

Find out what a hypothetical investment would be worth today.

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TIPS' Price Relationship to Inflation

TIPS are important since they help combat inflation risk that erodes the yield on fixed-rate bonds. Inflation risk is an issue because the interest rate paid on most bonds is fixed for the life of the bond. As a result, the bond's interest payments might not keep up with inflation. For example, if prices rise by 3% and an investor's bond pays 2%, the investor has a net loss in real terms.

TIPS are designed to protect investors from the adverse effects of rising prices over the life of the bond. The par value—principal—increases with inflation and decreases with deflation, as measured by the CPI. When TIPS mature, bondholders are paid the inflation-adjusted principal or original principal, whichever is greater.1 

Suppose an investor owns $1,000 in TIPS at the end of the year, with a coupon rate of 1%. If there is no inflation as measured by the CPI, the investor will receive $10 in coupon payments for that year. If inflation rises by 2%, however, the $1,000 principal will be adjusted upward by 2% to $1,020. The coupon rate will remain the same at 1%, but it will be multiplied by the adjusted principal amount of $1,020 to arrive at an interest payment of $10.20 for the year.

Conversely, if inflation were negative, known as deflation, with prices falling 5%, the principal would be adjusted downward to $950. The resulting interest payment would be $9.50 over the year. However, at maturity, the investor would receive no less than the principal amount invested of $1,000 or an adjusted higher principal, if applicable.1

The interest payments during the life of the bond are subject to being calculated based on a lower principal amount in the event of deflation, but the investor is never at risk of losing the original principal if held to maturity. If investors sell TIPS before maturity in the secondary market, they might receive less than the initial principal.1

Advantages and Disadvantages of TIPS

Due to the ability to increase the principal along with inflation, the interest rate returned to investors is lower than would be available for other fixed-income securities. The interest paid increases with any adjustments to the principal. These investments are nearly risk-free as the U.S. government backs the debt, and the investor will receive the full price invested returned when the TIP matures.1

The semiannual inflation adjustments of a TIPS bond are considered taxable income by the IRS even though investors won't see that money until they sell the bond or it reaches maturity.3 Some investors hold TIPS in tax-deferred retirement accounts to avoid tax complications. However, it's important that investors contact a tax professional to discuss any potential tax ramifications of investing in TIPS.

TIPS usually pay lower interest rates than other government or corporate securities, so they are not necessarily optimal for income investors. Their advantage is mainly inflation protection, but if inflation is minimal or nonexistent, their utility decreases. Another risk associated with TIPS is the previously mentioned potential for a higher tax bill.

Pros

• The principal increases with inflation meaning that at maturity, bondholders are paid the inflation-adjusted principal

• Investors will never be paid less than their original principal when TIPS mature

• Interest payments increase as inflation increases since the rate is calculated based on the adjusted principal balance

Cons

• Interest rate offered is usually lower than most fixed-income bonds that do not have an inflation adjustment

• Investors might be subject to higher taxes on increased coupon payments

• If inflation does not materialize while TIPS are held, the utility of holding TIPS decreases

Example of TIPS

Below is a comparison of the 10-year TIPS as compared to the 10-year Treasury note, both issued and auctioned by the U.S. Treasury Department. Treasury notes (T-Notes) are intermediate-term bonds maturing in two, three, five, seven, or 10 years. They provide semiannual interest payments at fixed coupon rates.4

As a historical example, on March 29, 2019, the 10-year TIPS was auctioned with an interest rate of 0.875%.5 On the other hand, the 10-year Treasury note was auctioned March 15, 2019, with an interest rate of 2.625% per year.6

We can see that the 10-year note pays more interest (meaning that investors will receive higher coupon payments from the 10-year note as compared to the TIPS investment). However, if inflation rises, the principal on the TIPS will increase, allowing for the coupon payments to rise while the 10-year note is fixed for the life of the bond. Although TIPS protect against inflation, the offset is typically a lower yield than bonds with similar maturities.

How Can I Buy Treasury TIPS?

You can buy TIPS directly from the U.S. Treasury's TreasuryDirect website, with a minimum purchase of $100.7 You can also typically buy them through your broker. There are also several mutual funds and ETFs that invest in TIPS and other inflation-linked securities that you can buy and sell like ordinary shares of stock.

Can I Buy TIPS for My IRA?

Yes. You can include TIPS and funds that hold TIPS in an individual retirement account; however, you cannot use the TreasuryDirect service to buy them directly in an IRA. Instead, you would need to rely on the broker holding your retirement account.

What Yields Do TIPS Have?

Often the yields on TIPS are negative. This is because after taking into account the effects of inflation, the real yield is negative. For instance, if standard 2-year Treasuries yield 1% but inflation is 2%, then the real yield is -1%. TIPS are meant to keep up with inflation, not beat inflation, thus you can have a nominal yield on TIPS that is positive but a real yield that is effectively zero. Note that while the yield on TIPS may be negative, their principal value will increase with inflation, which can generate capital gains.

Why Does the Treasury Issue TIPS?

TIPS first appeared in 1997, and the official reason for their appearance is that there was strong demand from the investing public for inflation-linked government securities.8 Some economists, however, have been puzzled by the government's continued issuance of TIPS since they amount to a more expensive way to borrow than traditional Treasuries.9

What Maturities do Treasury TIPS Come in?

The original TIPS were set at 20 years maturity. In 2009, 20-year TIPS were discontinued in favor of 30-year TIPS. The U.S. Treasury presently issues 5-year, 10-year, and 30-year TIPS.8

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In economics, the triple bottom line (TBL) maintains that companies should commit to focusing as much on social and environmental concerns as they do on profits. TBL theory posits that instead of one bottom line, there should be three: profit, people, and the planet. A TBL seeks to gauge a corporation's level of commitment to corporate social responsibility and its impact on the environment over time.

In 1994, John Elkington—the famed British management consultant and sustainability guru—coined the phrase "triple bottom line" as his way of measuring performance in corporate America. The idea was that a company can be managed in a way that not only makes money but which also improves people's lives and the well-being of the planet.1

KEY TAKEAWAYS

• The concept behind the triple bottom line is that companies should focus as much on social and environmental issues as they do on profits.

• The TBL consists of three elements: profit, people, and the planet.2

• The triple bottom line aims to measure the financial, social, and environmental performance of a company over time.

• TBL theory holds that if a firm looks at profits only, ignoring people and the planet, it cannot account for the full cost of doing business.

Understanding the Triple Bottom Line (TBL)

In finance, when speaking of a company's bottom line, we usually mean its profits. Elkington's TBL framework advances the goal of sustainability in business practices, in which companies look beyond profits to include social and environmental issues to measure the full cost of doing business. Triple-bottom-line theory says that companies should focus as much attention on social and environmental issues as they do on financial issues.

TBL theory also says that if a company focuses on finances only and does not examine how it interacts socially, it is not able to see the whole picture and therefore cannot account for the full cost of doing business.

According to TBL theory, companies should be working simultaneously on these three bottom lines:

• Profit: This is the traditional measure of corporate profit—the profit and loss (P&L) account.

• People: This measures how socially responsible an organization has been throughout its history.

• Planet: This measures how environmentally responsible a firm has been.2

Profits do matter in the triple bottom line—just not at the expense of social and environmental concerns.

Challenges of Applying the Triple Bottom Line

The following are challenges that companies can face when applying the triple bottom line.

Measuring the TBL

A key challenge of the TBL, according to Elkington, is the difficulty of measuring the social and environmental bottom lines.2 Profitability is inherently quantitative, so it is easy to measure. What constitutes social and environmental responsibility, however, is somewhat subjective. How do you put a dollar value on an oil spill—or on preventing one—for example?

Mixing Inverse Elements

It can be difficult to switch gears between priorities that are seemingly antithetical—such as maximizing individual financial returns while also doing the greatest good for society. Some companies might struggle to balance deploying money and other resources, such as human capital, to all three bottom lines without favoring one at the expense of another.

Ignoring the TBL Framework

There can be dire repercussions when companies ignore the TBL in the name of profits. Three well-known examples of this are:

• Destruction of the rainforest

• Exploitation of labor

• Damage to the ozone layer

Consider a clothing manufacturer whose best way to maximize profits might be to hire the least expensive labor possible and to dispose of manufacturing waste in the cheapest way possible. These practices might well result in the greatest possible profits for the company, but at the expense of miserable working and living conditions for laborers, and harm to the natural environment and the people who live in that environment.

Examples of Companies That Subscribe to TBL or Similar Concepts

Today, the corporate world is more conscious than ever of its social and environmental responsibility. Companies are increasingly adopting or ramping up their social programs. Consumers want companies to be transparent about their practices and to be considerate of all stakeholders. Many consumers are willing to pay more for clothing and other products if it means that workers are paid a living wage and the environment is being respected in the production process.

The number of firms—of all types and sizes, both publicly and privately held—that subscribe to the triple-bottom-line concept, or something similar, is staggering. Here are a handful of these companies:

Ben & Jerry's

Ben & Jerry's is the ice cream company that made conscious capitalism central to its strategy. As stated on its website, "Ben & Jerry's is founded on and dedicated to a sustainable corporate concept of linked prosperity."3 The company opposes the use of recombinant bovine growth hormone (rBGH) and genetically modified organisms (GMOs) and fosters myriad values such as fair trade and climate justice.4

LEGO

The LEGO Group (privately held; Billund, Denmark) has formed partnerships with organizations like the nongovernmental organization (NGO) World Wildlife Fund. In addition, LEGO has made a commitment to reducing its carbon footprint and is working towards 100% renewable energy capacity by 2030.5

In addition to partnering with the World Wildlife Fund, the LEGO Group has also pledged to transition to renewable bioplastics. The first plant-derived set of LEGO toys was launched in 2019.6

Mars

Mars Incorporated (privately held; McLean, Va.) has a sustainable cocoa initiative called Cocoa for Generations. It requires cocoa farmers to be fair trade certified to ensure they follow a code of fair treatment to workers providing labor. In exchange for certification, Mars provides productivity technology and buys cocoa at premium prices.7

Starbucks

Starbucks Corporation (SBUX), has been socially and environmentally focused since its inception in 1971. The company has hired more than 30,000 veterans since 2013 and is committed to hiring 5,000 more per year going forward.89

What Are the 3 Elements of the Triple Bottom Line (TBL)?

The triple bottom line is an accounting framework that incorporates three dimensions of performance: social, environmental, and financial. These three facets can be summarized as "people, planet, and profit."2

How Is TBL Different From the Financial Bottom Line?

Including social, human, and environmental capital along with a company's financial capital makes it possible to get a more accurate picture of a company's impact on society.

Who Came Up With the Triple Bottom Line?

The triple bottom line was conceived by entrepreneur and business writer John Elkington in 1994 while at the think tank SustainAbility, and it was later incorporated into the oil company Shell's first sustainability report in 1997.10

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The Troubled Asset Relief Program (TARP) was an initiative created and run by the U.S. Treasury to stabilize the country’s financial system, restore economic growth, and mitigate foreclosures in the wake of the 2008 financial crisis. TARP sought to achieve these targets by purchasing troubled companies’ assets and stock.

KEY TAKEAWAYS

• The Troubled Asset Relief Program (TARP) was instituted by the U.S. Treasury following the 2008 financial crisis.

• TARP stabilized the financial system by having the government buy mortgage-backed securities and bank stocks.

• From 2008 to 2010, TARP invested $426.4 billion in firms and recouped $441.7 billion in return.

• TARP was controversial at the time, and its effectiveness continues to be debated.

How the Troubled Asset Relief Program (TARP) Worked

Global credit markets came to a near standstill in September 2008 as several major financial institutions, such as Fannie Mae, Freddie Mac, and American International Group (AIG), experienced severe financial problems. Lehman Brothers went bankrupt, and investment companies Goldman Sachs and Morgan Stanley changed their charters to become commercial banks in an attempt to stabilize their capital situations.

To prevent the situation from completely spiraling out of control, Treasury Secretary Henry Paulson pioneered the Troubled Asset Relief Program (TARP). It was signed into law by President George W. Bush on October 3, 2008, with the passage of the Emergency Economic Stabilization Act.

Alison Czinkota / Investopedia

TARP's original purpose was to increase the liquidity of the money markets and secondary mortgage markets by purchasing the mortgage-backed securities (MBS), and through that, reduce the potential losses of the institutions that owned them.

Later, TARP's aim was modified slightly to allow the government to buy equity in banks and other financial institutions. TARP initially gave the Treasury purchasing power of $700 billion; the Dodd-Frank Wall Street Reform and Consumer Protection Act (simply referred to as Dodd-Frank) later reduced the $700 billion authorization to $475 billion.

TARP funds were used to purchase stock in banks, insurance companies, and auto-makers, and to loan funds to financial institutions and homeowners.

The U.S. government bought preferred stock in eight banks: Bank of America/Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street, and Wells Fargo. The banks were required to give the government a 5% dividend that would increase to 9% in 2013, encouraging banks to buy back the stock within five years.

From the program’s inception until October 3, 2010 (the deadline for extending funds), $245 billion was used to stabilize banks, $27 billion went to programs to increase credit availability, $80 billion went to the U.S. auto industry (specifically, GM and Chrysler), $68 billion was used to stabilize AIG, and $46 billion went to foreclosure-prevention programs, such as Making Home Affordable.

The provisions of TARP demanded that companies involved lose certain tax benefits and, in many cases, placed limits on executive compensation and forbade fund recipients from awarding bonuses to their top 25 highest-paid executives. Even so, by 2009, bailed-out firms paid some $20 billion to key personnel—sardonically referred to as TARP bonuses.

The Legacy of TARP

In December 2013, the Treasury wrapped up TARP and the government concluded that its investments had earned more than $11 billion for taxpayers. To be more specific, TARP recovered funds totaling $441.7 billion from $426.4 billion invested. The government also claimed that TARP prevented the American auto industry from failing and saved more than one million jobs, helped stabilize banks, and restored credit availability for individuals and businesses.

TARP is still controversial. Advocates say it saved the U.S. financial system and shortened the financial crisis while critics charge the initiative just gave Wall Street an unnecessary boost.

Even so, economists, politicians, and financial professionals still debate TARP's merits and wonder if it had been necessary. Critics charge the program did little to help the housing markets, which remained depressed for years. Some say it did not go far enough—that the government should have insisted on an equity stake in the financial firms it was bailing out to control their future practices.

Instead, critics opine that TARP's no-strings loans essentially acted as a reward for bad behavior, sending a message of "act irresponsibly and we'll help you out"—and establishing a dangerous precedent of dependency.

TARP also did not endear the government to the American public, which saw Wall Street reap benefits—including those notorious bonuses—and return to profitability, even as individuals struggled with debt, unemployment, and foreclosures in the wake of the Great Recession.

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"Third World" is an outdated and derogatory phrase that has been used historically to describe a class of economically developing nations. It is part of a four-part segmentation that was used to describe the world’s economies by economic status. Third World falls behind First World and Second World but was ahead of Fourth World, though Fourth-World countries were hardly recognized at all. Today, the preferred terminology is a developing nation, an underdeveloped country, or a low- and middle-income country (LMIC).

Defining Developing Nations

There can be a few ways to divide up the world for purposes of economic segmentation. Classifying countries as First, Second, Third, and Fourth World was a concept created during and after the Cold War, which ran from approximately 1945 to the 1990s.

In general, nations are typically characterized by economic status and key economic metrics like gross domestic product (GDP), GDP growth, GDP per capita, employment growth, and an unemployment rate. In developing countries, low production rates and struggling labor market characteristics are usually paired with relatively low levels of education, poor infrastructure, improper sanitation, limited access to health care, and lower costs of living.

Developing nations are closely watched by the International Monetary Fund (IMF) and the World Bank, which seek to provide global aid for the purposes of projects that help to improve infrastructure and economic systems comprehensively.1 Both organizations refer to these countries as lower-middle or low-income countries.

Developing nations, or LMIC, can be the target of many investors seeking to identify potentially high returns through possible growth opportunities, though risks are also relatively higher. While developing countries are generally characterized as performing poorer economically, innovative and industrial breakthroughs can lead to substantial improvements in a short amount of time.

KEY TAKEAWAYS

• A Third World country is an outdated and offensive term for a developing nation characterized by a population with low and middle incomes, and other socio-economic indicators.

• The International Monetary Fund, World Bank, and World Trade Organization allow for certain benefits and contractual term provisions for countries that meet certain types of economic status classifications.

History of Developing Nations Classifications

The classification of nations as First World or Third World emerged during and after the Cold War. First-World countries were known as the most highly industrialized nations whose views aligned with the North Atlantic Treaty Organization and capitalism.

Second-World countries supported communism and the Soviet Union. Most of these countries were formerly controlled by the Soviet Union. Many countries of East Asia also fit into the Second-World category.

Third-World countries included nations in Asia and Africa that were not aligned with either the United States or the Soviet Union. Now, in part because the Soviet Union no longer exists, the definition of Third World is outdated and may be considered offensive to many.

Alfred Sauvy Coined the Term

Alfred Sauvy, a French demographer, anthropologist, and historian, is credited with coining the term Third World during the Cold War. Sauvy observed a group of countries, many former colonies, that did not share the ideological views of Western capitalism or Soviet socialism. "Three worlds, one planet," wrote Sauvy in a 1952 article published in L'Observateur.2

Dividing the World

In the modern-day, most countries on Earth fall into one of three general categories that some refer to as developed, emerging, and frontier. The world segmentations have somewhat migrated to fit within these categories overall.

The developed countries are the most industrialized with the strongest economic characteristics. The emerging countries are classified as such because they demonstrate significant strides in various economic growth areas though their metrics are not as stable. The frontier markets often closely mirror the old Third-World classification and often show the lowest economical indicators.

Frontier Markets List

The evolutions of the worldly segmentations have become historic and obsolete. As such, one barometer for assessing a list of developing countries is MSCI’s Frontier Markets Index.3 This index includes the following countries:

• Croatia

• Estonia

• Iceland

• Lithuania

• Kazakhstan

• Romania

• Serbia

• Slovenia

• Kenya

• Mauritius

• Morocco

• Nigeria

• Tunisia

• WAEMU

• Bahrain

• Jordan

• Oman

• Bangladesh

• Pakistan

• Sri Lanka

• Vietnam4

Other Definitions of Developing Nations

The World Trade Organization (WTO), also provides another point of reference. The WTO divides countries into two classes: developing and least developed. There are no criteria for these classifications so countries self-nominate, though statuses can be contested by other nations.5

The WTO segregation comes with certain rights for developing country status. For example, the WTO grants developing countries longer transition periods before implementing agreements that aim to increase trading opportunities and infrastructure support related to WTO work.

As an offshoot of the WTO, the Human Development Index (HDI) is another economic status metric developed by the United Nations to assess the social and economic development levels of countries. The HDI measures and then ranks a country based on schooling, life expectancy, and gross national income per capita.

The World Health Organization and the United Nations uses Least Developed Countries (LDC) to describe a set of 48 countries with low socioeconomic developmental indicators. This list is reassessed every few years. These indicators are a combination of gross national income, human assets (nutrition, life expectancy, secondary school education, adult literacy), and economic vulnerability (population size, remoteness, merchandise export concentration, agriculture, exports, and natural disaster preparedness).

• Afghanistan

• Angola

• Bangladesh

• Benin

• Bhutan

• Burkina Faso

• Burundi

• Cambodia

• Central African Republic

• Chad

• Comoros

• Democratic Republic of the Congo

• Djibouti

• Equatorial Guinea

• Eritrea

• Ethiopia

• Gambia

• Guinea

• Guinea-Bissau

• Haiti

• Kiribati

• Lao People's Democratic Republic

• Lesotho

• Liberia

• Madagascar

• Malawi

• Mali

• Mauritania

• Mozambique

• Myanmar

• Nepal

• Niger

• Rwanda

• Sao Tome and Principe

• Senegal

• Sierra Leone

• Solomon Islands

• Somalia

• South Sudan

• Sudan

• Timor-Leste

• Togo

• Tuvalu

• Uganda

• United Republic of Tanzania

• Vanuatu

• Yemen

• Zambia67

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Rational choice theory states that individuals use rational calculations to make rational choices and achieve outcomes that are aligned with their own personal objectives. These results are also associated with maximizing an individual's self-interest. Using rational choice theory is expected to result in outcomes that provide people with the greatest benefit and satisfaction, given the limited option they have available.

KEY TAKEAWAYS

• Rational choice theory states that individuals rely on rational calculations to make rational choices that result in outcomes aligned with their own best interests.

• Rational choice theory is often associated with the concepts of rational actors, self-interest, and the invisible hand.

• Many economists believe that the factors associated with rational choice theory are beneficial to the economy as a whole.

• Adam Smith was one of the first economists to develop the underlying principles of the rational choice theory.

• There are many economists who dispute the veracity of the rational choice theory and the invisible hand theory.

Understanding Rational Choice Theory

Many mainstream economic assumptions and theories are based on rational choice theory. Rational choice theory is associated with the concepts of rational actors, self-interest, and the invisible hand.

Rational choice theory is based on the assumption of involvement from rational actors. Rational actors are the individuals in an economy who make rational choices based on calculations and the information that is available to them. Rational actors form the basis of rational choice theory. Rational choice theory assumes that individuals, or rational actors, try to actively maximize their advantage in any situation and, therefore, consistently try to minimize their losses.

Economists may use this assumption of rationality as part of broader studies seeking to understand certain behaviors of society as a whole.

Self-Interest and the Invisible Hand

Adam Smith was one of the first economists to develop the underlying principles of the rational choice theory. Smith elaborated on his studies of self-interest and the invisible hand theory in his book “An Inquiry into the Nature and Causes of the Wealth of Nations,” which was published in 1776.1

The invisible hand itself is a metaphor for the unseen forces that influence a free market economy. First and foremost, the invisible hand theory assumes self-interest. Both this theory and further developments in the rational choice theory refute any negative misconceptions associated with self-interest. Instead, these concepts suggest that rational actors acting with their own self-interest in mind can actually create benefits for the economy at large.

According to the invisible hand theory, individuals driven by self-interest and rationality will make decisions that lead to positive benefits for the whole economy. Through the freedom of production, as well as consumption, the best interests of society are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade. Economists who believe in the invisible hand theory lobby for less government intervention and more free-market exchange opportunities.

Advantages and Disadvantages of Rational Choice Theory

There are many economists who dispute the veracity of the rational choice theory and the invisible hand theory. Dissenters have pointed out that individuals do not always make rational, utility-maximizing decisions. The field of behavioral economics is a more recent intervention into the problem of explaining the economic decision-making processes of individuals and institutions.

Behavioral economics attempts to explain—from a psychological perspective—why individual actors sometimes make irrational decisions, and why and how their behavior does not always follow the predictions of economic models. Critics of rational choice theory say that, of course, in an ideal world people would always make optimal decisions that provide them with the greatest benefit and satisfaction. However, we don't live in a perfect world; in reality, people are often moved by emotions and external factors.

The Nobel laureate Herbert Simon, who rejected the assumption of perfect rationality in mainstream economics, proposed the theory of bounded rationality instead. This theory says that people are not always able to obtain all the information they would need to make the best possible decision. Simon argued that knowledge of all alternatives, or all consequences that follow from each alternative, is realistically impossible for most decisions that humans make.2

Similarly, the economist Richard Thaler pointed out further limitations of the assumption that humans operate as rational actors. Thaler's idea of mental accounting shows how people place greater value on some dollars than others, even though all dollars have the same value.3 They might drive to another store to save $10 on a $20 purchase but they would not drive to another store to save $10 on a $1,000 purchase.

Like all theories, one of the benefits of rational choice theory is that can be helpful in explaining individual and collective behaviors. All theories attempt to give meaning to the things we observe in the world. Rational choice theory can explain why people, groups, and society as a whole make certain choices, based on specific costs and rewards.

Rational choice theory also helps to explain behavior that seems irrational. Because a central premise of rational choice theory is that all behavior is rational, any action can be scrutinized for its underlying rational motivations.

Pros of Rational Choice Theory

• Helpful in explaining individual and collective behaviors

• All theories attempt to give meaning to the things we observe in the world.

• Can help to explain behavior that seems irrational

Cons of Rational Choice Theory

• Individuals do not always make rational decisions.

• In reality, people are often moved by external factors that are not rational, such as emotions.

• Individuals do not have perfect access to the information they would need to make the most rational decision every time.

• People value some dollars more than others.

Examples of Rational Choice Theory

According to rational choice theory, rational investors are those investors that will quickly buy any stocks that are priced too low and short-sell any stocks that are priced too high.

An example of a rational consumer would be a person choosing between two cars. Car B is cheaper than Car A, so the consumer purchases Car B.

While rational choice theory is logical and easy to understand, it is often contradicted in the real world. For example, political factions that were in favor of the Brexit vote, held on June 23, 2016,4 used promotional campaigns that were based on emotion rather than rational analysis. These campaigns led to the semi-shocking and unexpected result of the vote—the United Kingdom officially decided to leave the European Union. The financial markets then responded in kind with shock, wildly increasing short-term volatility, as measured by the CBOE Volatility Index (VIX).

Rational behavior may not involve receiving the most monetary or material benefit; the benefit of a particular choice could be purely emotional or non-monetary. For example, while it is likely more financially beneficial for an executive to stay on at a company rather than take time off to care for their new newborn child, it is still considered rational behavior for them to take time off if they feel that the benefits of the time spent with their child outweigh the utility from the paycheck they receive.

Rational Choice Theory FAQs

What Is Rational Choice Theory?

The key premise of rational choice theory is that people don’t randomly select products off the shelf. Rather, they use a logical decision-making process that takes into account the costs and benefits of various options, weighing the options against each other. 

Who Founded Rational Choice Theory?

Adam Smith, who proposed the idea of an "invisible hand" moving free-market economies in the mid-1770s, is usually credited as the father of rational choice theory. Smith discusses the invisible hand theory in his book “An Inquiry into the Nature and Causes of the Wealth of Nations,” which was published in 1776.1

What Are the Main Goals of Rational Choice Theory?

The main goal of rational choice theory is to explain why individuals and larger groups make certain choices, based on specific costs and rewards. According to rational choice theory, individuals use their self-interests to make choices that will provide them with the greatest benefit. People weigh their options and make the choice they think will serve them best.

What Is Rational Choice Theory in International Relations?

States, intergovernmental organizations, nongovernmental organizations, and multinational corporations are all made up of human beings. In order to understand the actions of these entities, we must understand the behavior of the humans running them. Rational choice theory helps to explain how leaders and other important decision-makers of organizations and institutions make decisions. Rational choice theory can also attempt to predict the future actions of these actors.

What Are the Strengths of Rational Choice Theory?

One of the strengths of rational choice theory is the versatility of its application. It can be applied to many different disciplines and areas of study. It also makes reasonable assumptions and compelling logic. The theory also encourages individuals to make sound economic decisions. By making sound economic decisions, it is possible for an individual to acquire more tools that will allow them to further maximize their preferences in the future.

The Bottom Line

The majority of classical economic theories are based on the assumptions of rational choice theory: individuals make choices that result in the optimal level of benefit or utility for them. Further, people would rather take actions that benefit them versus actions that are neutral or harm them. Although many criticisms of rational choice theory exist—because people are emotional and easily distracted, and therefore, their behavior does not always follow the predictions of economic models—it is still widely applied across different academic disciplines and fields of study.

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An onerous contract is an accounting term that refers to a contract that will cost a company more to fulfill than what the company will receive in return.

The term is used in many countries worldwide, where international regulators have determined that such contracts must be accounted for on balance sheets. The United States has a different system, based on generally accepted accounting principles, or GAAP, as set forth by the U.S.-based Financial Accounting Standards Board.

KEY TAKEAWAYS

• An onerous contract is an accounting term defined under the International Financial Reporting Standards (IFRS), used in many countries around the world.

• Companies that follow those standards are required to report any onerous contracts they're committed to on their balance sheets.

• In the United States, companies typically follow a different set of accounting standards and generally don't have to account for their onerous contracts.

Understanding Onerous Contracts

The International Accounting Standards (IAS) defines an onerous contract as "a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it."1

The term "unavoidable costs" also has a specific meaning for accounting purposes. The IAS defines it as "the lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfill it."1

Onerous Contract Example

An example of an onerous contract might be an agreement to rent a property that is no longer needed or that can no longer be made use of profitably. For instance, suppose a company signs a multiyear agreement to rent office space, then moves or downsizes while the agreement is still in effect, leaving the office space, which it now has no use for, vacant. Or consider a mining company that has signed a lease to mine for coal or some other commodity on a piece of land, but at some point during the term of the contract, the price of that commodity falls to a level that makes extracting it and bringing it to market unprofitable.

Special Considerations

The rules for how onerous contracts should be treated in a company's financial statements are part of the International Financial Reporting Standards (IFRS), for which the IAS Board is the independent standard-setting body. The governing body, the IFRS Foundation, is a not-for-profit organization based in London.2

International Accounting Standard 37 (IAS 37), "Provisions, Contingent Liabilities, and Contingent Assets," classifies onerous contracts as "provisions," meaning liabilities or debts that will accrue at an uncertain time or in an unknown amount. Provisions are measured using the best estimate of the expenses required to satisfy the current obligation.3

Under IAS 37, any business or company that identifies a contract as onerous is required to recognize the current obligation as a liability and to list that liability on its balance sheet. This process is meant to be undertaken at the first indication that the company expects a loss from the contract.1

The IFRS and IASB standards are used by companies in many countries throughout the world, although not in the United States. The U.S. requires companies to follow another set of standards under GAAP. Under GAAP, losses, obligations, and debts on committed onerous contracts typically are not recognized or dealt with. However, the FASB has been working with the IASB to establish compatible standards worldwide.

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A limited liability company (LLC) is a business structure in the U.S. that protects its owners from personal responsibility for its debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.

While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of a partnership rather than an LLC.

KEY TAKEAWAYS

• The limited liability company is a corporate structure that protects its owners from being personally pursued for repayment of the company's debts or liabilities.

• Regulation of LLCs varies from state to state.

• Any entity or individual can be a member of an LLC with the notable exceptions of banks and insurance companies.1

• LLCs do not pay taxes on their profits directly. Their profits and losses are passed through to members, who report them on their individual tax returns.2

Understanding a Limited Liability Company (LLC)

Limited liability companies are permitted under state statutes, and the regulations governing them vary from state to state. LLC owners are generally called members.

Many states don't restrict ownership, meaning anyone can be a member including individuals, corporations, foreigners, foreign entities, and even other LLCs. Some entities, though, cannot form LLCs, including banks and insurance companies.1

An LLC is a formal partnership arrangement that requires articles of organization to be filed with the state. An LLC is easier to set up than a corporation and provides more flexibility and protection for its investors.

LLCs may elect not to pay federal taxes directly. Instead, their profits and losses are reported on the personal tax returns of the owners. The LLC may choose a different classification, such as a corporation.2

If fraud is detected or if a company fails to meet its legal and reporting requirements, creditors may be able to go after the members.3

The wages paid to members are deemed operating expenses and are deducted from the company's profits.

Forming an LLC

Although the requirements for LLCs vary by state, there are generally some commonalities. The very first thing owners or members must do is to choose a name.

Articles of organization can then be documented and filed with the state. These articles establish the rights, powers, duties, liabilities, and other obligations of each member of the LLC. Other information included on the documents includes the names and addresses of the LLC's members, the name of the LLC's registered agent, and the business' statement of purpose.

The articles of organization are filed, along with a fee paid directly to the state. Paperwork and additional fees must also be submitted at the federal level to obtain an employer identification number (EIN).4

Advantages and Disadvantages of LLCs

The primary reason business owners opt to register their businesses as LLCs is to limit the personal liability of themselves and their partners or investors. Many view an LLC as a blend of a partnership, which is a straightforward business agreement between two or more owners, and a corporation, which has certain liability protections.

Although LLCs have some attractive features, they also have several disadvantages. Depending on state law, an LLC may have to be dissolved upon the death or bankruptcy of a member. A corporation can exist in perpetuity.

An LLC may not be a suitable option if the founder's ultimate objective is to launch a publicly traded company.

Limited Liability Company vs. Partnership

The primary difference between a partnership and an LLC is that an LLC separates the business assets of the company from the personal assets of the owners, insulating the owners from the LLC's debts and liabilities.

Both LLCs and partnerships are allowed to pass through their profits, along with the responsibility for paying the taxes on them, to their owners.2 Their losses can be used to offset other income but only up to the amount invested.

If the LLC has organized as a partnership, it must file Form 1065. (If members have elected to be treated as a corporation, Form 1120 is filed.)5

In an LLC, a business continuation agreement can be used to ensure the smooth transfer of interests when one of the owners leaves or dies. Without such an agreement in place, the remaining partners must dissolve the LLC and create a new one.

What Is a Limited Liability Company?

A limited liability company, commonly referred to as an “LLC”, is a type of business structure commonly used in the United States. LLCs can be seen as a hybrid structure that combines features of both a corporation and a partnership. Like a corporation, LLCs provide their owners with limited liability in the event the business fails. But like a partnership, LLCs “pass-through” their profits so that they are taxed as part of the owners’ personal income.2

What Are Limited Liability Companies (LLCs) Used for?

The LLC has two main advantages:

• It prevents its owners from being held personally responsible for the debts of the company. If the company goes bankrupt or is sued, the personal assets of its owner-investors cannot be pursued.

• It allows all profits to be passed directly to those owners to be taxed as personal income.2 That avoids "double taxation" of both the company and its individual owners.

What Are Some Examples of LLCs?

LLCs are more common than many realize. Alphabet, the parent company of Google, is an LLC, as are PepsiCo Inc., Exxon Mobil Corp., and Johnson & Johnson.6

There are many much smaller LLCs. There are variations that include sole proprietorship LLCs, family LLCs, and member-managed LLCs.

Many physicians' groups are registered as LLCs. This helps protect the individual doctors from personal liability for medical malpractice awards.

Are Limited Liability Companies Taxed Differently Than Corporations?

Yes. In the case of a corporation, profits are first taxed at the corporate level and then taxed a second time once those profits are distributed to the individual shareholders.7 This “double taxation” is decried by many businesses and investors.

Limited liability companies, on the other hand, allow the profits to be passed directly to the investors so that they are taxed only once, as part of the investors’ personal income.2

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A jumbo certificate of deposit is a CD that requires a higher minimum balance obligation than that required by traditional CDs. In return, the jumbo CD pays a higher rate of interest. A CD is a type of savings account that pays fixed or variable interest in exchange for depositors leaving their funds in the account until a specified date of maturity.

KEY TAKEAWAYS

• A jumbo CD usually has a minimum balance requirement of $100,000.

• Although jumbo CDs have higher minimum balance requirements than traditional CDs, in return they pay a higher interest rate.

• Jumbo CDs pay investors a fixed rate of interest, helping to stabilize returns in an investment portfolio by partly offsetting market risk.

Understanding Jumbo CDs

Traditional CDs typically offer a higher rate of return than do standard savings accounts or interest-bearing checking accounts. In this same vein, the jumbo CD will pay an even higher rate than is offered by traditional CDs. Jumbos receive a higher rate because they require a larger minimum investment than the standard CD. Most jumbo CDs start at $100,000, but some financial institutions offering them may have a few products with lower entry points.1

Jumbo CDs are considered risk-free investments, because they’re insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). Credit unions also market jumbo CDs, and these funds find protection under the National Credit Union Administration (NCUA).

Investors receive the premium—based on the fixed interest rate—as compensation for not having access to their money over the life of the account. A one-year jumbo CD that pays 1.5% interest, for example, may require that the funds remain locked up in the account for one year. Jumbo CDs can have term lengths as short as a few days or as long as a decade. However, the standard range is between three months and five years. And the longer the term, the higher the interest rate returned on the funds invested.

Upon maturity of the CD, the financial institution returns the investor’s principal. Early withdrawals may be possible, depending on the terms of the product purchased. However, the investor will pay a penalty for early termination of the contract.

$250,000

The amount up to which the FDIC insures CDs.2

Advantages of Jumbo CDs

Large institutional investors are the typical customer for jumbo CDs. These large institutions include banks, some large corporations, and pension funds. Primarily, this is due to the high minimum balance requirements. These customers use jumbo CDs as a temporary investment vehicle, as some issuers have tenures for as little as seven days. The short-term maturitie

s allow institutional investors and companies to earn interest on idle money for short periods before rolling the funds into other ventures. These Jumbo CDs are instruments for treasury management of large corporations and money market instruments for large investors.

Other than being paid to park their funds in these products, large investors use them as instruments to reduce their portfolio’s market risk exposure. Market risk arises when the prices in the stock market fluctuate over time. As a result, stock portfolios can earn high returns, but they can also incur large losses. The steady interest paid on jumbo CDs helps offset and reduce the risk of negative returns that can happen from holding stocks.

A business seeking a loan or other type of financing from a bank can pledge its jumbo CD as collateral, which is an asset held by a lender as security for a loan in the event the borrower falls behind or defaults on the loan payments. If the borrower defaults on the timely submission of payments, the lender can seize the collateral to recoup any losses. However, CDs held in retirement accounts cannot be pledged as collateral for loans.

Jumbo CDs can be used as collateral for loans.

Disadvantages of Jumbo CDs

Although jumbo CDs have positive aspects of higher rates and FDIC protection, there are disadvantages to investing in them. Historically, jumbo CDs have paid a much higher rate than traditional CDs and savings accounts. Nevertheless, the differences between those returns have narrowed in recent years, making a jumbo CD a less-compelling investment.

Inflation risk

Jumbo CDs don’t typically keep up with inflation. If the inflation rate in the economy is 2%, for example, and the interest rate on the CD is 2.5%, the investor is only earning 0.5% in real terms. To make an investment in a jumbo CD worthwhile, investors would need to lock in their funds for longer terms, resulting in a higher rate.

Early-withdrawal penalties

Should the holder need these funds before the jumbo CD matures, withdrawing them would result in a financial penalty, which could be a fee assessed by the bank for the loss of interest earned to date. Each bank will have specific rules and guidelines for early withdrawals. If it’s likely that the funds might be needed before the CD’s maturity, investors might be better off investing the funds in an account that doesn’t have withdrawal restrictions, such as a high-interest savings account.

Interest rate risk

Another worry for jumbo CD investors is interest rate risk. This comes when current market interest rates rise above the one offered by the jumbo CD. If interest rates rise while investors are holding a Jumbo CD, they miss out on the higher rates they could have had if these funds had been available to invest elsewhere.

Reinvestment rate risk

Conversely, if interest rates fall during the holding period, at maturity the investor may not be able to reinvest the funds at a rate comparable to the CD. This hazard is known as reinvestment risk. Although jumbo CDs pay a higher rate at the onset as compared to other products, investors must weigh the pros and cons to ensure they don’t wind up with a lower return in the long term.

Pros

• Jumbo CDs offer a steady rate of interest for the length of the holding term.

• Jumbo CDs typically pay a higher interest rate than do traditional CDs or savings accounts.

• The steady interest paid on jumbo CDs can partly offset the portfolio’s market risk of negative returns from holding stocks.

• Jumbo CDs carry a guarantee of up to $250,000 per account by the FDIC or the NCUA.

Cons

• Jumbo CDs pay a lower return than many other fixed-rate investments, such as bonds.

• In a rising market interest rate environment, jumbo CDs face interest rate risk, as investors might hold a CD paying a lower rate.

• Jumbo CDs don’t typically keep up with inflation, meaning prices could rise at a faster rate than the CD’s rate of return.

• Investors cannot access their funds in jumbo CDs before maturity without incurring an early-withdrawal penalty.

• Jumbo CDs can have high minimum balance requirements.

Examples of Jumbo CDs

According to MagnifyMoney.com, Veridian Credit Union, founded in Waterloo, Iowa, in 1934, offers many types of CDs, including jumbo CDs.3 Examples of the jumbo rate as of Feb. 1, 2021, include:

• A nine-month jumbo CD with a minimum $100,000 deposit pays 0.40%

• An 18-month jumbo CD with a minimum $100,000 deposit pays 0.50%

Please note: The interest rates being offered can change at any time for new CDs and might be different depending on the state in which the depositor is located.

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In statistics, heteroskedasticity (or heteroscedasticity) happens when the standard deviations of a predicted variable, monitored over different values of an independent variable or as related to prior time periods, are non-constant. With heteroskedasticity, the tell-tale sign upon visual inspection of the residual errors is that they will tend to fan out over time, as depicted in the image below.

Heteroskedasticity often arises in two forms: conditional and unconditional. Conditional heteroskedasticity identifies nonconstant volatility related to prior period's (e.g., daily) volatility. Unconditional heteroskedasticity refers to general structural changes in volatility that are not related to prior period volatility. Unconditional heteroskedasticity is used when future periods of high and low volatility can be identified.

Image by Julie Bang © Investopedia 2019 

KEY TAKEAWAYS

• In statistics, heteroskedasticity (or heteroscedasticity) happens when the standard errors of a variable, monitored over a specific amount of time, are non-constant.

• With heteroskedasticity, the tell-tale sign upon visual inspection of the residual errors is that they will tend to fan out over time, as depicted in the image above.

• Heteroskedasticity is a violation of the assumptions for linear regression modeling, and so it can impact the validity of econometric analysis or financial models like CAPM.

While heteroskedasticity does not cause bias in the coefficient estimates, it does make them less precise; lower precision increases the likelihood that the coefficient estimates are further from the correct population value.

The Basics of Heteroskedasticity

In finance, conditional heteroskedasticity is often seen in the prices of stocks and bonds. The level of volatility of these equities cannot be predicted over any period. Unconditional heteroskedasticity can be used when discussing variables that have identifiable seasonal variability, such as electricity usage.

As it relates to statistics, heteroskedasticity (also spelled heteroscedasticity) refers to the error variance, or dependence of scattering, within a minimum of one independent variable within a particular sample. These variations can be used to calculate the margin of error between data sets, such as expected results and actual results, as it provides a measure of the deviation of data points from the mean value.

For a dataset to be considered relevant, the majority of the data points must be within a particular number of standard deviations from the mean as described by Chebyshev’s theorem, also known as Chebyshev’s inequality. This provides guidelines regarding the probability of a random variable differing from the mean.

Based on the number of standard deviations specified, a random variable has a particular probability of existing within those points. For example, it may be required that a range of two standard deviations contain at least 75% of the data points to be considered valid. A common cause of variances outside the minimum requirement is often attributed to issues of data quality.

The opposite of heteroskedastic is homoskedastic. Homoskedasticity refers to a condition in which the variance of the residual term is constant or nearly so. Homoskedasticity is one assumption of linear regression modeling. It is needed to ensure that the estimates are accurate, that the prediction limits for the dependent variable are valid, and that confidence intervals and p-values for the parameters are valid.

The Types Heteroskedasticity

Unconditional

Unconditional heteroskedasticity is predictable and can relate to variables that are cyclical by nature. This can include higher retail sales reported during the traditional holiday shopping period or the increase in air conditioner repair calls during warmer months.

Changes within the variance can be tied directly to the occurrence of particular events or predictive markers if the shifts are not traditionally seasonal. This can be related to an increase in smartphone sales with the release of a new model as the activity is cyclical based on the event but not necessarily determined by the season.

Heteroskedasticity can also relate to cases where the data approach a boundary—where the variance must necessarily be smaller because of the boundary's restricting the range of the data.

Conditional

Conditional heteroskedasticity is not predictable by nature. There is no telltale sign that leads analysts to believe data will become more or less scattered at any point in time. Often, financial products are considered subject to conditional heteroskedasticity as not all changes can be attributed to specific events or seasonal changes.

A common application of conditional heteroskedasticity is to stock markets, where the volatility today is strongly related to volatility yesterday. This model explains periods of persistent high volatility and low volatility.

Special Considerations

Heteroskedasticity and Financial Modeling

Heteroskedasticity is an important concept in regression modeling, and in the investment world, regression models are used to explain the performance of securities and investment portfolios. The most well-known of these is the Capital Asset Pricing Model (CAPM), which explains the performance of a stock in terms of its volatility relative to the market as a whole.1 Extensions of this model have added other predictor variables such as size, momentum, quality, and style (value versus growth).

These predictor variables have been added because they explain or account for variance in the dependent variable. Portfolio performance is explained by CAPM. For example, developers of the CAPM model were aware that their model failed to explain an interesting anomaly: high-quality stocks, which were less volatile than low-quality stocks, tended to perform better than the CAPM model predicted. CAPM says that higher-risk stocks should outperform lower-risk stocks.

In other words, high-volatility stocks should beat lower-volatility stocks. But high-quality stocks, which are less volatile, tended to perform better than predicted by CAPM.

Later, other researchers extended the CAPM model (which had already been extended to include other predictor variables such as size, style, and momentum) to include quality as an additional predictor variable, also known as a "factor." With this factor now included in the model, the performance anomaly of low volatility stocks was accounted for. These models, known as multi-factor models, form the basis of factor investing and smart beta.

The Fundamentals of Corporate Finance and Accounting

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0:46 Equivalent Annual Cost (EAC) Understanding the Equivalent Annual Cost (EAC) Equivalent annual cost (EAC) is used for a variety of purposes, including capital budgeting. But it is used most often to analyze two or more possible projects with different lifespans, where costs are the most relevant variable.

Other uses of EAC include calculating the optimal life of an asset, determining if leasing or purchasing an asset is the better option, determining the magnitude of which maintenance costs will impact an asset, determining the necessary cost savings to support purchasing a new asset, and determining the cost of keeping existing equipment.

The EAC calculation factors in a discount rate or the cost of capital. Cost of capital is the required return necessary to make a capital budgeting project—such as building a new factory—worthwhile. Cost of capital includes the cost of debt and the cost of equity and is used by companies internally to judge whether a capital project is worth the expenditure of resources.

KEY TAKEAWAYS Equivalent annual cost (EAC) is the annual cost of owning, operating, and maintaining an asset over its entire life. EAC is often used by firms for capital budgeting decisions, as it allows a company to compare the cost-effectiveness of various assets that have unequal lifespans. EAC allows managers to compare the net present values of different projects over different periods, to accurately determine the best option. The Formula for the Equivalent Annual Cost \begin{aligned} &\text{EAC} = \frac{ \text{Asset Price} \times \text{Discount Rate} }{ 1 - ( 1 + \text{Discount Rate})^{-n} } \ &\textbf{where:} \ &\text{Discount Rate} = \text{Return required to make project} \ &\text{worthwhile} \ &n = \text{Number of periods} \ \end{aligned} ​

EAC= 1−(1+Discount Rate) −n

Asset Price×Discount Rate ​

where: Discount Rate=Return required to make project worthwhile n=Number of periods ​

How to Calculate the Equivalent Annual Cost Take the asset price or cost and multiply it by the discount rate. The discount rate is also called the cost of capital, which is the required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. In the denominator add 1 + the discount rate and raise the result as an exponent to the number of years for the project. Subtract the result by 1 and divide the numerator figure by the denominator. Many financial online calculators are available to calculate EAC. Example of the Equivalent Annual Cost As stated earlier, EAC allows managers to compare NPVs of different projects over different periods, to accurately determine the best option. Consider two alternative investments in machinery equipment:

1. Machine A has the following:

An initial capital outlay of $105,000 An expected lifespan of three years An annual maintenance expense of $11,000 2. Machine B has the following:

An initial capital outlay of $175,000 An expected lifespan of five years An annual maintenance expense of $8,500 The cost of capital for the company making the decision is thus 5%.

Next, we calculate the EAC, which is equal to the net present value (NPV) divided by the present value annuity factor or A(t,r), while taking into account the cost of capital or r, and the number of years in question or t.

The annuity factor is calculated as follows:

\begin{aligned} &\text{Annuity Factor} = \frac{ 1 - \frac{ 1 }{ ( 1 + r ) ^ t} }{ r } \ &\textbf{where:} \ &r = \text{Cost of capital} \ &t = \text{Number of periods} \ \end{aligned} ​

Annuity Factor= r 1− (1+r) t

1 ​

​

where: r=Cost of capital t=Number of periods ​

Using the formula above, the annuity factor or A(t,r) of each project must be calculated. These calculations would be as follows:

\begin{aligned} &\text{Machine A, A(t, r)} = \frac{ 1 - \frac{ 1 }{ ( 1 + .05) ^ 3 } }{ .05 } = 2.72 \ \end{aligned} ​

Machine A, A(t, r)= .05 1− (1+.05) 3

1 ​

​ =2.72 ​

\begin{aligned} &\text{Machine B, A(t, r)} = \frac{ 1 - \frac{ 1 }{ ( 1 + .05) ^ 5 } }{ .05 } = 4.33 \ \end{aligned} ​

Machine B, A(t, r)= .05 1− (1+.05) 5

1 ​

​ =4.33 ​

Next, the initial costs must be divided by the annuity factor or A(t,r) while adding in the annual maintenance cost. The calculation for EAC is:

\begin{aligned} &\text{EAC Machine A} = \frac{ $105,000 }{ 2.72 } + $11,000 = $49,557 \ \end{aligned} ​

EAC Machine A= 2.72 $105,000 ​ +$11,000=$49,557 ​

\begin{aligned} &\text{EAC Machine B} = \frac{ $175,000 }{ 4.33 } + $8,500 = $48,921 \ \end{aligned} ​

EAC Machine B= 4.33 $175,000 ​ +$8,500=$48,921 ​

By standardizing the annual cost, a manager in charge of a capital budgeting decision where cost is the only issue would select Machine B because it has an EAC that is $636 lower than Machine A.

The Difference Between the Equivalent Annual Cost and the Whole-life Cost Whole-life cost is the total expense of owning an asset over its entire life, from purchase to disposal, as determined by financial analysis. It is also known as a "life-cycle" cost, which includes purchase and installation, design and building costs, operating costs, maintenance, associated financing costs, depreciation, and disposal costs.

Whole-life cost also takes into account certain costs that are usually overlooked, such as those related to environmental and social impact factors.

The equivalent annual cost (EAC) is the annual cost of owning, operating, and maintaining an asset over its entire life while the whole life cost is the total cost of the asset over its entire life.

Limitations of Using the Equivalent Annual Cost A limitation with EAC, as with many capital budgeting decisions, is that the discount rate or cost of capital must be estimated for each project. Unfortunately, the forecast can turn out to be inaccurate, or variables can change over the life of the project or life of the asset that's be considered.

The Fundamentals of Corporate Finance and Accounting Whatever your learning style, understanding corporate finance and accounting is easy when you can choose from 183,000 online video courses. With Udemy, you’ll be able to learn accounting terminology and how to prepare financial statements and analyze business transactions. What’s more, each course has new additions published every month and comes with a 30-day money-back guarantee. Learn more about Udemy and sign up today.

A code of ethics is a guide of principles designed to help professionals conduct business honestly and with integrity. A code of ethics document may outline the mission and values of the business or organization, how professionals are supposed to approach problems, the ethical principles based on the organization's core values, and the standards to which the professional is held.

A code of ethics, also referred to as an "ethical code," may encompass areas such as business ethics, a code of professional practice, and an employee code of conduct.

KEY TAKEAWAYS

• A code of ethics sets out an organization's ethical guidelines and best practices to follow for honesty, integrity, and professionalism.

• For members of an organization, violating the code of ethics can result in sanctions including termination.

• In some industries, including banking and finance, specific laws govern business conduct. In others, a code of ethics may be voluntarily adopted.

• The main types of codes of ethics include a compliance-based code of ethics, a value-based code of ethics, and a code of ethics among professionals.

• A focus on climate change has become an integral part of companies' codes of ethics, detailing their commitment to sustainability.

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Code of Ethics

Understanding Codes of Ethics

Business ethics refers to how ethical principles guide a business's operations. Common issues that fall under the umbrella of business ethics include employer-employee relations, discrimination, environmental issues, bribery, insider trading, and social responsibility.

While many laws exist to set basic ethical standards within the business community, it is largely dependent upon a business's leadership to develop a code of ethics.

Both businesses and trade organizations typically have some sort of code of ethics that their employees or members are supposed to follow. Breaking the code of ethics can result in termination or dismissal from the organization. A code of ethics is important because it clearly lays out the rules for behavior and provides the groundwork for a preemptive warning.

While a code of ethics is often not required, many firms and organizations choose to adopt one, which helps to identify and characterize a business to stakeholders.

Given the importance of climate change and how human behavior has led to severely impacting the climate, many companies have taken to include climate factors in their code of ethics. These principles include manners in which the company is dedicated to operating sustainably or how they will shift to doing so.

In many cases, this commitment to sustainability adds to the costs of a company, but because consumers are becoming more focused on the types of businesses they choose to engage with, it is often worth the cost to maintain a good public image.

Regardless of size, businesses count on their management staff to set a standard of ethical conduct for other employees to follow. When administrators adhere to the code of ethics, it sends a message that universal compliance is expected of every employee.

Types of Codes of Ethics

A code of ethics can take a variety of forms, but the general goal is to ensure that a business and its employees are following state and federal laws, conducting themselves with an ideal that can be exemplary, and ensuring that the business being conducted is beneficial for all stakeholders. The following are three types of codes of ethics found in business.

Compliance-Based Code of Ethics

For all businesses, laws regulate issues such as hiring and safety standards. Compliance-based codes of ethics not only set guidelines for conduct but also determine penalties for violations.

In some industries, including banking, specific laws govern business conduct. These industries formulate compliance-based codes of ethics to enforce laws and regulations. Employees usually undergo formal training to learn the rules of conduct. Because noncompliance can create legal issues for the company as a whole, individual workers within a firm may face penalties for failing to follow guidelines.

To ensure that the aims and principles of the code of ethics are followed, some companies appoint a compliance officer. This individual is tasked with keeping up to date on changes in regulation codes and monitoring employee conduct to encourage conformity.

This type of code of ethics is based on clear-cut rules and well-defined consequences rather than individual monitoring of personal behavior. Despite strict adherence to the law, some compliance-based codes of conduct do not thus promote a climate of moral responsibility within the company.

Value-Based Code of Ethics

A value-based code of ethics addresses a company's core value system. It may outline standards of responsible conduct as they relate to the larger public good and the environment. Value-based ethical codes may require a greater degree of self-regulation than compliance-based codes.

Some codes of conduct contain language that addresses both compliance and values. For example, a grocery store chain might create a code of conduct that espouses the company's commitment to health and safety regulations above financial gain. That grocery chain might also include a statement about refusing to contract with suppliers that feed hormones to livestock or raise animals in inhumane living conditions.

Code of Ethics Among Professionals

Financial advisers registered with the Securities and Exchange Commission (SEC) or a state regulator are bound by a code of ethics known as a fiduciary duty. This is a legal requirement and also a code of loyalty that requires them to act in the best interest of their clients.

Certified public accountants, who are not typically considered fiduciaries to their clients, still are expected to follow similar ethical standards, such as integrity, objectivity, truthfulness, and avoidance of conflicts of interest, according to the American Institute of Certified Public Accountants (AICPA).

Example of Code of Ethics

Many firms and organizations have adopted a Code of Ethics. One good example comes from the CFA Institute (CFAI), the grantor of the Chartered Financial Analyst (CFA) designation and creator of the CFA exams. CFA Charterholders are among the most respected and globally recognized financial professionals. According to the CFAI's website, Members of CFA Institute, including CFA Charterholders, and candidates for the CFA designation must adhere to the following Code of Ethics:

• Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.

• Place the integrity of the investment profession and the interests of clients above their own personal interests.

• Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.

• Practice and encourage others to practice professionally and ethically that will reflect credit on themselves and the profession.

• Promote the integrity and viability of the global capital markets for the ultimate benefit of society.

• Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Code of Ethics FAQs

What Are the Five Codes of Ethics?

All companies will have a different code of ethics with different areas of interest, based on the industry they are involved in, but the five areas that companies typically focus on include integrity, objectivity, professional competence, confidentiality, and professional behavior.1

What Is a Code of Ethics in Business?

A code of ethics in business is a set of guiding principles intended to ensure a business and its employees act with honesty and integrity in all facets of its day-to-day operations and to only engage in acts that promote a benefit to society.

What Is a Code of Ethics for Teachers?

A code of ethics for teachers defines the primary responsibilities of a teacher to their students and the role of the teacher in the student's life. Teachers are required to show impartiality, integrity, and ethical behavior in the classroom.2

What Is an Example of a Code of Ethics?

An example of a code of ethics would be a business that drafts a code outlining all the ways the business should act with honesty and integrity in its day-to-day operations, from how its employees behave and interact with clients, to the types of individuals it does business with, including suppliers and advertising agencies.

What Is the Difference Between a Code of Ethics and a Code of Conduct?

A code of ethics is broader in its nature, outlining what is acceptable for the company in terms of integrity and how it operates. A code of conduct is more focused in nature and instructs how a business' employees should act daily and in specific situations.1

The Bottom Line

A code of ethics is a guiding set of principles intended to instruct professionals to act in a manner that is honest and that is beneficial to all stakeholders involved. A code of ethics is drafted by a business and tailored to the specific industry at hand, requiring all employees of that business to adhere to the code.

The moral choices of businesses have evolved, from the industrial age to the modern era. In the world we live in today, working conditions, how a business impacts the environment, and how it deals with inequality are all areas that society deems important that perhaps two centuries ago it did not as much. A code of ethics helps ensure that businesses will always act with integrity.

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