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Investment Options

Unit -2

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 Topics to be covered

Investment Attributes Characteristic features of financial instruments

Risk and return

Security, maturity and optional features

Finance vs. Investments

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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

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Features of Financial instruments

Creditorship Securitiesa) Public Debt Instruments

b) Private Debt Instruments

c) Special Debt Instruments

Ownership Securities

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Investment Instruments

Trade Bills Bankers’ Acceptance 

Treasury Bills

Short dated Government Securities

Commercial papers

Hundis

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New instruments introduced : Zero Coupon bonds

Non convertible debentures

Preference shares with warrants

Fully convertible cumulative preference shares

Deep discount bond

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Risk

Risk: A situation where the possible consequencesof the decision that is to be taken are known.

Uncertainty : A situation where the probabilities

cannot be estimated.

Types:a)Systematic

b)Unsystematic

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Systematic Risk

Market RiskStock variability due to investor’s attitude andexpectations .Investors can eliminate market risk bybeing conservative.

Interest rate risk

a)Long term

b) cyclical (bull and bear markets )

c) intermediate or within the cycle

d) short term

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Purchasing power riskCost 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%.

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Unsystematic Risk

Business Risk Business Cycle

Demographic factors

Political policies

Monetary policy

Environment

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Financial RiskBusiness risk is concerned with an analysis of 

income statement between revenues and EBIT

Financial risk is stated as being between EBIT and

EBT.

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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)

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Security 

Securities are traded in capital market. Shares anddebentures are examples of securities.

Portfolio is a collection of securities

(Problem.)

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Yield to maturity 

Income that the compounded rate of return willreceive from a bond purchased at a current market

and held to maturity

It equates two values:

a) Value market priceb)Present value of future payments including the

principal repayment.

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Finance vs. Investment

Stick with indexes Create a bond ladder 

Diversify

Watch your money

Understand tax consequences

Keep it simple

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Financial planningStep 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