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The term ‘to annualize’ means to express a short-term rate as an annual rate. When a short-term calculation is converted into its annual equivalent, annualization has occurred. For instance, when an investment that gives weekly, monthly or quarterly rate is converted into an annual rate, annualization has occurred.
Generally, to annualize is to reflect or calculate a rate using a full-year basis. It is converting the rate of a short-time period to its annual equivalent.
A Little More on What is Annualization
Annualizing a rate or number requires converting it into an annual rate. For an investment, to realize an annual rate of return, the effects of compounding and reinvesting are considered on the interests and dividends being converted. In annualizing a number, the performance of a short-term rate is used to gauge the performance of the same asset or investment for a period of twelve months. Annualizing is important when evaluating the performance of an asset or investment.
Annualization is used when gauging the financial performance of a company for a period of one year. When annualizing is used, short-term numbers and rates are converted into annual rates. An annualized return of a company is based on the current or short-term rates of a company to predict future financial performance.
In loans, annualized costs cover every expense related to a particular loan and it is expressed as an annual percentage rate (APR). origination fees and interest charged on a loan are annualized to give the APR. Annualizing can also be utilized in short-term borrowings to convert short-term numbers to their annual equivalent. Annualizing the cost of a loan means that the shorter-term costs of a loan are multiplied by twelve months period.
For tax purposes, annualizing is the process of converting a tax period below one year into its annual rate equivalent. Annualizing is important in determining the amount of tax a taxpayer would pay annually. When annualizing is used in tax, the monthly earnings of a taxpayer are multiplied using a twelve-month period.
Annualization is often done in the investment world to project the annual return of an investment using the weekly, monthly or quarterly return. For instance, if a stock has a return of $2 in a week, it means in a month $8 will be realized by the investor. The monthly return will be multiplied by 12 months to give an annualized rate. This means $8 * 12 = $96 on the investment for one year.
Below are some important points to know about annualizing;
- To annualize means to convert a short-term rate or number to an annual rate. For instance, when a weekly, monthly or quarterly rate to its annual equivalent.
- To annualize a number or rate, the rate is multiplied by a 12-month period.
- Annualising is helpful in determining the financial performance of an asset, investment or company.
- Annualizing is also used for loans and tax purposes.
Special Considerations and Limitations of Annualizing
There are certain limitations of annualizing that must be considered when using annualized rate, the major limitation is the possible fluctuation of a number or rate over the period of 12 months. It is possible for the rate of investment to increase or decrease between the period of 12 months, given the market conditions and other factors. This is why it is difficult to properly forecast the return of stock accurately. Market volatility is another factor that limits the effectiveness of the annualized rate.
Reference for “Annualize”
Academics research on “Annualize”
Statistical biases and security rates of return, Cheng, P. L., & Deets, M. K. (1971). Statistical biases and security rates of return. Journal of Financial and Quantitative Analysis, 6(3), 977-994. The advent of the computer has permitted financial theorists to collect and analyze large amounts of financial data. In the field of investments some of the most important work has focused on historical rates of return in investments in common stocks. The classical study in this area is the Fisher-Lorie study [8,9] in which intern al rates of return were calculated for every security listed on the New York Stock Exchange from 1926–1965. Other studies related to the area have been complicated by Herzog , Fisher [6,7], Latané and Young , Soldofsky and Biderman , and Evans [3,4].
[PDF] High frequency finance: using scaling laws to build trading models, Dupuis, A., Olsen, R., & James, J. (2012). High frequency finance: using scaling laws to build trading models. In Handbook of exchange rates (pp. 563-582). Wiley.
Risks and financing decisions in the energy sector: An empirical investigation using firm-level data, Rashid, A. (2013). Risks and financing decisions in the energy sector: An empirical investigation using firm-level data. Energy Policy, 59, 792-799. Using a sample of 102 UK energy firms over the period 1981–2009, this paper empirically examines the effects of uncertainty on firms’ leverage decisions. The results indicate that both firms-specific and macroeconomic uncertainty have negative, sizeable, and statistically significant impacts on the UK energy sector firms’ target leverage. The results also indicate that the profitability of energy firms plays an important role in uncertainty–leverage relationship by changing the (total) effect of uncertainty on leverage. While more profitable firms appear to reduce their leverage by a relatively large amount in response to increased macroeconomic uncertainty, they are less likely to be affected by firm-specific uncertainty. These results suggest that stability in macroeconomic conditions and business activity is important to the stability of the capital structure of firms in the energy sector which would in turn be conducive to stability in their investments and production.
Implementing congestion pricing on metropolitan highway networks with self-financing public-private partnerships, DeCorla-Souza, P. (2010, October). Implementing congestion pricing on metropolitan highway networks with self-financing public-private partnerships. In Journal of the Transportation Research Forum (Vol. 45, No. 1). This paper presents a new public-private partnership model for road pricing applications either at the facility level or on a region-wide highway network. The model addresses issues of monopoly power and efficiency of delivery of transportation services. The paper also addresses issues relating to financial self-sufficiency of integrated multimodal pricing strategies and assesses the financial self-sufficiency of an ambitious region-wide pricing concept that integrates multimodal mobility choices.
PENSION FUNDS AS AN INFRASTRUCTURE FINANCING AVENUE: AN EXPLORATORY STUDY., Kavishwar, S. (2011). PENSION FUNDS AS AN INFRASTRUCTURE FINANCING AVENUE: AN EXPLORATORY STUDY. Management Dynamics, 11(2). Development of infrastructure is a sine qua non of economic development. Development of agriculture depends, to a considerable extent, on the adequate expansion and development of irrigation facilities. Industrial progress depends on the development of power and electricity generation, transport, and communication facilities. Of course, if proper attention is not paid to the development of infrastructure, it is likely to act as a severe constraint on the economic development process of the country. As evidenced, India has reemerged as one of the fastest growing economies of the world. India could unleash its full potential, provided it improves its infrastructural facilities, which are at present not sufficient to meet the growing demand of the economy. A major concern in perpetual infrastructure development is funding. Taking into consideration the current recessionary trends in world economy, slow industrialization and volatile FDI scenario, financing infrastructure development seem to be a major obstacle. Innovation in finance in the recent past has provided large number of avenues such as BOT, BOLT etc. To extend this innovation further, this paper aims to explore the use of pension funds as an option to finance infrastructure projects. The paper shall discuss the Cost-Benefit Analysis of use of Pension Funds in infrastructure financing with specific reference to India. The paper also aims to discuss the learning from similar experiments carried out in other parts of the world.