Investment Options

Unit -2

Topics to be covered

Investment Attributes Characteristic features of financial instruments Risk and return Security, maturity and optional features Finance vs. Investments

Investment Attributes
Returns Capital Appreciation Conservation Aggressive Growth Speculation Form of return Periodic Cash receipts Capital Gain Safety and Security of funds Risk, Liquidity, Tax Considerations, Conveyance, Concealability

Features of Financial instruments

Creditorship Securities a) Public Debt Instruments b) Private Debt Instruments c) Special Debt Instruments Ownership Securities

Investment Instruments

Trade Bills Bankers Acceptance Treasury Bills Short dated Government Securities Commercial papers Hundis

New instruments introduced : Zero Coupon bonds Non convertible debentures Preference shares with warrants Fully convertible cumulative preference shares Deep discount bond

Risk

Risk: A situation where the possible consequences of the decision that is to be taken are known. Uncertainty : A situation where the probabilities cannot be estimated. Types: a)Systematic b)Unsystematic

Systematic Risk

Market Risk Stock variability due to investors attitude and expectations .Investors can eliminate market risk by being conservative. Interest rate risk a)Long term b) cyclical (bull and bear markets ) c) intermediate or within the cycle d) short term

Purchasing power risk Cost push or demand pull If a cost living index has a base 100 and the next year shows 105 the rate of increase in inflation is 5%.

Unsystematic Risk
Business Risk Business Cycle Demographic factors Political policies Monetary policy Environment

Financial Risk Business risk is concerned with an analysis of income statement between revenues and EBIT Financial risk is stated as being between EBIT and EBT.

Return

Determinants of the rate of return: i) The time preference risk free real rate ii)The expected rate of inflation iii) The risk associated with the investment (Problems)

Security
Securities are traded in capital market. Shares and debentures are examples of securities. Portfolio is a collection of securities (Problem.)

Yield to maturity

Income that the compounded rate of return will receive from a bond purchased at a current market and held to maturity It equates two values: a) Value market price b)Present value of future payments including the principal repayment.

Finance vs. Investment

Stick with indexes Create a bond ladder Diversify Watch your money Understand tax consequences Keep it simple

Financial planning Step 1: Commitment Step 2: Set goals Step 3: Assemble and organize information Step 4: Manage cash flow Step 5 : Self educate Step 6: Create a written plan Step 7: Engage Professionals