What Is the Asian Infrastructure Investment Bank (AIIB)?

The Asian Infrastructure Investment Bank (AIIB) is a new international development bank that provides financing for infrastructure projects in Asia. It began operations in January 2016.

How the Asian Infrastructure Investment Bank (AIIB) Works

The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank headquartered in Beijing. Like other development banks, its mission is to improve social and economic outcomes in its region, Asia, and beyond. The bank opened in January 2016 and now has 105 approved members worldwide, as of Jul. 30, 2022.

The History of the Asian Infrastructure Investment Bank

China’s leader Xi Jinping first proposed an Asian infrastructure bank at an APEC summit in Bali in 2013. Many observers have interpreted the bank as a challenge to international lending bodies, which some consider too reflective of American foreign policy interests such as the International Monetary Fund (IMF), the World Bank and the Asian Development Bank.

In this bank’s case, China controls half of the bank’s voting shares, which gives the perception that the AIIB will function in the interests of the Chinese government. The U.S. has questioned the bank’s governing standards and its social and environmental safeguards, perhaps pressuring allies not to apply for membership. However, despite American objections, approximately half of NATO has signed on, as has nearly every large Asian country, with the exception of Japan. The result is widely considered in an indicator of China’s growing international influence at the expense of the United States.

The Structure of the Asian Infrastructure Investment Bank

The bank is headed by a Board of Governors composed of one Governor and one Alternate Governor appointed by each of the 86 member countries. A non-resident Board of Directors is responsible for the direction and management of the Bank such as the Bank’s strategy, annual plan and budget and establishing policies and oversight procedures.

The bank staff is headed by a President who is elected by AIIB shareholders for a five-year term and is eligible for re-election once. The President is supported by Senior Management including five Vice Presidents for policy and strategy, investment operations, finance, administration, and the corporate secretariat and the General Counsel and Chief Risk Officer. Mr. Jin Liqun is the current President.

Asian Infrastructure Investment Bank Priorities

The bank’s priorities are projects that promote sustainable Infrastructure and to support countries that are striving to meet environmental and development goals. The bank funds projects linking countries in the region and cross-border infrastructure projects for roads, rail, ports, energy pipelines and telecoms across Central Asia and maritime routes in South East and South Asia and the Middle East. The bank’s priorities also include private capital mobilization and encouraging partnerships that stimulate private capital investment such as those with other multilateral development banks, governments, and private financiers.

An example of an AIIB project is a rural road connectivity initiative that will benefit approximately 1.5 million rural residents in Madhya Pradesh, India. In April 2018, the AIIB announced the project, which is also expected to improve the livelihoods, education, and mobility of the residents of 5,640 villages. The project is a U.S. $140-million jointly financed by the AIIB and the World Bank.

What Is the 2011 U.S. Debt Ceiling Crisis?

The 2011 U.S. Debt Ceiling Crisis was a contentious debate in Congress that occurred in July 2011 regarding the maximum amount of debt the federal government should be allowed.

Understanding the 2011 U.S. Debt Ceiling Crisis

The federal government has rarely achieved a balanced budget, and its budget deficit ballooned following the 2007-08 Financial Crisis. In the 2008 fiscal year, the deficit stood at $458.6 billon, widening to $1.4 trillion in 2009 as the government engaged in a massive fiscal policy response to the economic downturn.

Between 2008 and 2010, Congress raised the debt ceiling from $10.6 trillion to $14.3 trillion. In 2011, as the economy showed early signs of recovery and federal debt approached its limit once again, negotiations began in Congress to balance spending priorities against the ever-rising debt burden. 

Heated debate ensued, pitting proponents of spending and debt against fiscal conservatives. Pro-debt politicians argued that failing to raise the limit would require immediate cuts to spending already authorized by Congress, which could result in late, partial, or missed payments to Social Security and Medicare recipients, government employees, and government contractors.

Moreover, they asserted the Treasury could suspend interest payments on existing debt rather than withhold funds committed to federal programs. The prospect of cutting back on already promised spending was labeled a crisis by debt proponents.

On the other hand, the specter of a technical default on existing Treasury debt roiled financial markets. Fiscal conservatives argued that any debt limit increase should come with constraints on the growth of federal spending and debt accumulation.

Outcome of the 2011 U.S. Debt Ceiling Crisis

Congress resolved the debt ceiling crisis by passing the Budget Control Act of 2011, which became law on August 2, 2011. This act allowed the debt ceiling to be raised by $2.4 trillion in two phases, or installments.

In the first phase, a $400 billion increase would occur immediately, followed by another $500 billion unless Congress disapproved it. The second phase allowed for an increase between $1.2 trillion and $1.5 trillion, subject to Congressional disapproval as well. In return, the act included $900 billion in slowdowns in planned spending increases over a 10-year period. It also established a special committee charged with finding at least $1.5 trillion in additional savings.

In effect, the legislation incrementally raised the debt ceiling from $14.3 trillion to $16.4 trillion by January 27, 2012.

Following the passage of the act, Standard & Poor’s took the radical step of downgrading the United States long-term credit rating from AAA to AA+, even though the U.S. did not default. The report says, “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” The credit rating agency cited the unimpressive size of deficit reduction plans relative to the likely future prospects for politically driven spending and debt accumulation.

Debt Approval Process Leading to the 2011 U.S. Debt Ceiling Crisis

The U.S. Constitution gives Congress the power to borrow money. Before 1917, this power was exercised by Congress authorizing the Treasury to borrow specified amounts of debt to fund limited expenses, such as war-time military spending, which would be repaid after the end of hostilities. This kept the national debt directly linked to authorized spending.

In 1917, Congress imposed a limit on federal debt as well as individual issuance limits. In 1939, Congress gave the Treasury more flexibility in how it managed the overall structure of federal debt, giving it an aggregate limit. However, by delegating debt management authority to the Treasury, Congress was able to break the direct connection between authorized spending and the debt that finances it. 

While allowing greater flexibility to raise spending, this practice also created a need for Congress to repeatedly raise the debt limit when spending threatens to overrun available credit. Due to occasional political resistance to the idea of continually expanding the federal debt, this process of raising the debt limit has at times engendered controversy, which occurred during the 2011 Debt Ceiling Crisis.

The Bottom Line

Following the 2007-08 Financial Crisis, in an effort to slow down the severe recession as well as the persistently high unemployment rate, the government increased federal spending. As a result, the federal debt reached its limit on multiple occasions from 2008 to 2011 which led to a series of increases of the debt limit. In 2011, the Treasury asked for its borrowing capacity to be extended.

The 2011 U.S. Debt Ceiling Crisis was a contentious debate in Congress that occurred in July 2011 regarding the maximum amount of debt the federal government should be allowed. Congress resolved the debt ceiling crisis by passing the Budget Control Act of 2011, which became law on August 2, 2011. This act allowed the debt ceiling to be raised by $2.4 trillion in two phases, or installments.

What Is Annualized Total Return?

An annualized total return is the geometric average amount of money earned by an investment each year over a given time period. The annualized return formula is calculated as a geometric average to show what an investor would earn over a period of time if the annual return was compounded.

An annualized total return provides only a snapshot of an investment’s performance and does not give investors any indication of its volatility or price fluctuations.

Understanding Annualized Total Return

To understand annualized total return, we’ll compare the hypothetical performances of two mutual funds. Below is the annualized rate of return over a five-year period for the two funds:

• Mutual Fund A Returns: 3%, 7%, 5%, 12%, and 1%
• Mutual Fund B Returns: 4%, 6%, 5%, 6%, and 6.7%

Both mutual funds have an annualized rate of return of 5.5%, but Mutual Fund A is much more volatile. Its standard deviation is 4.2%, while Mutual Fund B’s standard deviation is only 1%. Even when analyzing an investment’s annualized return, it is important to review risk statistics.

Annualized Return Formula and Calculation

The formula to calculate annualized rate of return needs only two variables: the returns for a given period of time and the time the investment was held. The formula is:


$\begin{aligned} \text{Annualized Return} = &\big ( (1 + r_1 ) \times (1 + r_2) \times (1 + r_3) \times \\ &\dots \times (1 + r_n) \big ) ^ \frac{1}{n} – 1 \\ \end{aligned}$Annualized Return=​((1+r1​)×(1+r2​)×(1+r3​)×⋯×(1+rn​))n1​−1​

For example, take the annual rates of returns of Mutual Fund A above. An analyst substitutes each of the “r” variables with the appropriate return, and “n” with the number of years the investment was held. In this case, five years. The annualized return of Mutual Fund A is calculated as:


$\begin{aligned} \text{Annualized Return} &= \big ( (1 + .03) \times (1 + .07) \times (1 + .05) \times \\ &\quad \quad (1 + .12) \times (1 + .01) \big ) ^ \frac{1}{5} -1 \\ &= 1.309 ^ {0.20} – 1 \\ &= 1.0553 – 1 \\ &= .0553, \text{or } 5.53\% \\ \end{aligned}$Annualized Return​=((1+.03)×(1+.07)×(1+.05)×(1+.12)×(1+.01))51​−1=1.3090.20−1=1.0553−1=.0553,or 5.53%​

An annualized return does not have to be limited to yearly returns. If an investor has a cumulative return for a given period, even if it is a specific number of days, an annualized performance figure can be calculated; however, the annual return formula must be slightly adjusted to:


$\begin{aligned} &\text{Annualized Return} = ( 1 + \text{Cumulative Return} ) ^ \frac {365}{ \text{Days Held} } – 1 \\ \end{aligned}$​Annualized Return=(1+Cumulative Return)Days Held365​−1​

For example, assume a mutual fund was held by an investor for 575 days and earned a cumulative return of 23.74%. The annualized rate of return would be:


$\begin{aligned} \text{Annualized Return} &= ( 1 + .2374) ^ \frac{365}{575} – 1 \\ &= 1.145 – 1 \\ &= .145, \text{or } 14.5\% \\ \end{aligned}$Annualized Return​=(1+.2374)575365​−1=1.145−1=.145,or 14.5%​

Difference Between Annualized Return and Average Return

Calculations of simple averages only work when numbers are independent of each other. The annualized return is used because the amount of investment lost or gained in a given year is interdependent with the amount from the other years under consideration because of compounding.

For example, if a mutual fund manager loses half of her client’s money, she has to make a 100% return to break even. Using the more accurate annualized return also gives a clearer picture when comparing various mutual funds or the return of stocks that have traded over different time periods. 

Reporting Annualized Return

According to the Global Investment Performance Standards (GIPS)—a set of standardized, industry-wide principles that guide the ethics of performance reporting—any investment that does not have a track record of at least 365 days cannot “ratchet up” its performance to be annualized.

Thus, if a fund has been operating for only six months and earned 5%, it is not allowed to say its annualized performance is approximately 10% since that is predicting future performance instead of stating facts from the past. In other words, calculating an annualized rate of return must be based on historical numbers.

The Bottom Line

Annualized total return represents the geometric average amount that an investment has earned each year over a specific period. By calculating a geometric average, the annualized total return formula accounts for compounding when depicting the yearly earnings that the investment would generate over the holding period. While the metric provides a useful snapshot of an investment’s performance, it does not reveal volatility and price fluctuations.