(a) Bonds are considered as debt instrument or interest-bearing security in financial market. There are some characteristic of bonds and rules that Lim need to aware before he invests it because all of the factors can determine the value of a bond and the extent to which it fit to the portfolio.
i) Face Value – There is the amount that bondholder will get back after the maturity date. The par value is usually RM 1,000 and the bond’s price is fluctuated throughout its life in response to a number of variables. It can be long-term or short-term bond which the longer the period, the more the price will fluctuated. If the bond’s price higher than par value then is a premium bond; if the bond’s price is lower than par value then call it as a discount
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Once the short-term bonds mature and receive the principle payment, you can reinvest it again based on you expectation, market condition or economy situation in order to maximize profit and minimize risk.
Advantages:
It is easy for you to forecast and take advantage of rates due to the financial flexibility.
The bonds that you invested will be mature every few years and you have the necessary liquidity to make large purchases or respond to emergencies.
Reduce the risk associated with rising rates due to the allocating of your fixed-income portfolio in longer-term bonds, which means that have a greater impact on the value of longer maturities. However, investors will worry about the obligation of borrowers to pay back their principal due to the default risk and the interest rate that will affect the bond’s price.
(3) Bullets: When applying a bullet strategy you purchase several bonds that mature at the same time, minimizing your interest rate risk by staggering your purchases date. This is an effective way to achieve your goal of investing when you need the proceeds from the bonds at a specific
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The purchaser receives a return by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The interest payment semiannually and the greater the length until a zero-coupon bond’s maturity, the less the investor generally pays for it. Zero-coupon bond is most traded on the major exchanges and is very common. The holder of a zero-coupon bond owes income tax, even though the bondholder dos not actually receive the interest. Zero-coupon bonds are usually long-term investments, the range of maturity date in ten or more years. Although the lack of current income provided to the investors, the deep discount contribute the investors from a small amount of money into a sizeable sum over several years. It is advantages for zero-coupon bond‘s holder when the interest rates are high and can place in retirement accounts where they remain tax-sheltered. As a result, it is benefits for Lim couples when they invested due to the zero-coupon bond are suitable for long-term investment and can appreciate their capital stability after several
This paper explores the characteristics of traditional and Roth IRAs, as well as the similarities and differences between both. The main characteristic of both IRAs is that both are considered tax shelters—a way for individuals to receive reduced tax liability by decreasing one’s taxable income. Traditional IRA’s are called “deductible” because contributions made with earned income, up to specified limits, are fully or partially deductible from income depending upon factors such as adjusted gross income and filing status. Upon withdrawal, the money is then taxed as ordinary income. Roth IRAs are the antithesis—the money that you contribute here is already taxed at your marginal tax rate and the withdrawals are generally not taxed. Only money that is considered investment income is taxed. Because of the income limits of Roth IRAs, some individuals choose first to contribute to traditional IRAs or employer-sponsored programs and subsequently convert to a Roth IRA. For younger individuals with lower incomes, Roth IRAs seem to be the better choice based on the below research. The money is taxed at a lower rate and then contributed. As one ages, tax rates are probable to rise and the cost of contributing increases as a result. Saving in full measure, below the legal limit and beginning this process at a young age seems the best option for a enjoyable retirement in years to come.
The active secondary market for high-grade municipal bonds act as a mitigant to short term/ market session price volatility. Average daily trading volume in the municipal market is $10Bn. According to Merrill Lynch, the average typical bid offer spread is 1/4bps on 70% of the trades, ½bps on 20% of the trades and up to 4bps on the remaining. According to Bear Stearns and Lehman Brothers the typical bid/offer spread is 1/2bps on 75% of the trades. These tight spreads in the municipal market (particularly the high-grade market) act to mitigate against wide swings in the market which could lead to market losses on a municipal bond portfolio. Therefore, under a liquidation scenario, we feel confident that the collateral can be sold in a short time frame and with little risk of market price deterioration.
Organizations that decide to issue bonds generally go through a series of steps. Discuss the six steps.
The other four contributing factors include high-risk loans, the bust in the housing market, mortgage fraud, and speculation. High-risk loans are loans that are over leveraged, where the financing is done more than the suggested value to be given. This can result in immediate sell off when the property falls below that loan amount and to avoid further loss the banks start raising the installment. The housing market has seen pressure as a result of the over-pressure on most homeowners by increasing rates. This affects people's ability to make the payments, resulting in defaults.
Debt capital refers to money borrowed. Examples of this include bonds and short-term commercial paper. Bonds are more widely used because it provides a company with years to come up with the principal while paying interest only. Bonds are rated (i.e. AAA, AA, BB, etc.), these ratings correspond to the risk of default. The higher the rating, the lower likelihood of default and therefore a lower interest rate accepted by the lender. Short-term commercial paper is typically...
...e volatility of the bond. Zeros are extremely volatile investments. This means that if the interest rate changes, it can swing the price of the bond in either direction. However, this is only a problem if the bond is sold before maturity. If the bond is held to the mature date, the investor will receive the full face value. If the bond is sold before it matures, there could be a possibility that the investor could lose money.
The execution of our investment strategy occurred in three stages. First, we invested in t-bills and bonds according to our original set out investment plan. This was to decrease potential losses and risk associated with the declining equity market. Therefore, we invested about two hundred thousand of our funds into these low risk assets to maintain buying power. Due to inflation, we did not want to lose buying power by leaving funds in an account without earning interest. Further, we invested a small portion of funds into the commodity market. With a slumping equity market and a positive outlook on the gold commodity, we invested in Gold Corporation at the same time we invested in income assets.
Keogh, Bryan. "The Trouble with Catastrophe Bonds." Www.businessweek.com. Bloomberg Businessweek Magazine, 21 Apr. 2011. Web. 27 Oct. 2013. .
One might know that time is one of the most valuable assets in our lives. In the financial world the value of money is linked to time, primarily because investors expect progressive returns on their cash over periods of time, and they always compare the return from certain investments with the going or average returns in the market. Inflation on other hand erodes the purchasing power of money causing future value of one dollar to be less than the present value of a dollar. This paper will examine time value of money and the applications that determine successes or failures. An examination of the different vehicles that can be used to generate financial security for corporations and individuals will be provided. After defining the applications that generalize time value of money, an explanation will be offered regarding the components of interest rates by expanding on the concept that interest rate equates the future value of money with present value.
While it is very important for young individuals to start to save and invest for their retirement, there are aspects that they should consider before jumping into investing into securities. Those subjects are cash, enough insurance, should you buy a home, how secure is your job, how much risk can you handle, equities are risky, get started, do everything, be flexible, and can you save and invest too much. These ten aspects should be looked at, analyzed, and taken into very critical thought before saving and investing into securities.
While, McMillion (2004) states that default is the risk where the borrower unable to pay the loans. Default risk increased if a borrower has large number of liabilities and poor cash flow. Therefore, people who are having a high default risk stand a greater chance of loan being denied.
This is the rate of return (the discount rate) at which the net present value of the investment is zero, or that is the discount rate at which the discounted income from the project is equal to the investment costs
Also, if possible actions should be taken to ease the worries of existing bondholders and institutional investors. Management may consider sharing the debt more equally between the two divisions in an effort to prevent downgrading of the credit rating and loss of investors.
Using the Modern Portfolio Theory, overtime risk assets will provide a higher expected rate of return, as compensation to the investors for accepting a high risk. The high risk will eventually lower collecting asset classes to the portfolio, thus reducing the volatile risk, and increasing the expected rates of return. Furthermore the purpose of this theory is to develop the most optimal investments portfolio which would yield the highest rate of return while ascertaining the risk for the individual or corporate investor.
1. Nominal value( The nominal value refers to the full principal amount that bond issuer agreed to repay the bondholder or investor when the bond reach maturity. It is also known as principal value or par value.