Analyze the role financial markets play in creating economic wealth in the U.S.
Financial securities ways and methods which are used by corporate for examples, those financed by the government and those owned by the small business and private institutions to raise funds for their financial operations. The financial securities are one of the safest methods which are used by the financial institutions to raise funds and also to make sure that the investors get the returns. The financial markets have a role to play in this situation, and it helps in ensuring that there is a sense of transparency between the transaction parties. Additionally, the mobilization of the financial capital to the financial institutions is often enhanced by financial markets security platform. In the United States of America, it has been pointed out by many researchers that financial markets are one of the major contributors to her ever-growing economy.
The government has different projects which need massive funds to manage, one of the sources of the financial power which the government uses to run such projects are the financial markets. The government often borrow a lot of funds, and from institution which trades on the financial issues such as the banks. They also borrow capital from the public information of bonds and others and use this money to run the projects which are beneficial to the public s such the hospitals and others (Financial Accounting Standards Board (US), (2013). Alternatively, the students are currently dependents on the loans to finish up their tertiary studies. They have a platform as provided by the financial markets to help them borrow funds and assist them to finish their education. The students later become beneficial to the entire economic stability of the USA.
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The financial markets enhance savings and through this ensure that the US economy is stable and growing. This saving is later brought back into the economy as means of investments such as the water projects, public projects and others which have been analyzed by the economist and the result found out that after a period, they pay back handsomely. This, therefore, ensures that the economic stability is prioritized and is spearheaded by the financial management within some of the major corporations which are used to provide good and services to the entire public ( Bodie, 2014). Lastly, there are situations where the US economy runs off of enough funds, and the whole works also lack the support, the financial markets step up at this moment and ensure that there are sufficient funds which can be borrowed by the government and run the project of high returns.
Provide a general overview of each of the three (3) securities you chose. Be sure to include such information as name, company it represents (if applicable), pricing, and historical performance.
The equity security is one form which creates a bulk source from which many corporate institutions in the US borrow money. The investors who use the equity security to lend money to other institutions often obtain some portion of shares within the company. Such individual has an opportunity to buy stock from the company and generate profits. Alternatively, the New York stock exchange provides a means to which one can become company shareholders through using the equity security to buy or obtain the companies' stake. Investors can also purchase shares using initial public offer when the new business wants to raise capital from its operation yet such company is not listed on the stock exchange.
The debts security is a type of safety which covers the investors and the government, especially when lending money in the form of bonds. Many companies use corporate bond as a tool which enables them to raise funds to run their projects. The government before raising money often relies on the treasury in the evaluating amount of the bond to rise. The government then makes appeals to the private’s investors and institutions and the general public to as well as the private investors to contribute some cash to them; this kind of bond is what is known as the Treasury bond. In this type of contract, the borrower is expected by the lender to pay the borrowed bond plus some interest on top of it. There are other kinds which have a low interest such as the junk bond. They have low ratings and are very risky; however, another kind can yield high concern to an investor who mid less about the risk involved.
The last type of the security, in this case, is the derivative security. This security is very critical to the investors since they act as a shield to them when they undertake some particular risky projects. This safety is important in helping investors negotiate the place appropriate for them to have their bonds sold at the desired price which is suitable for them. This type of security has various categories which are inclusive but not limited to mortgage security, collateral debt obligations, and future derivative securities and others.
Assess the current risk return relationship of each of the three (3) securities.
The financial equity security has some elements of danger in exchange in some they prefer or used by investors. The other side of it is that the outcome in this situation is often unpredictable. The equity security grants a chance to investors which enable them to obtain asset of the company informed of shears. There is a standard deviation which has been found to be one way through which investors can determine the normal fluctuations on the aware expected returns on the investments. Additionally, there exist high premiums which have high-risk stock which has an aim to encourage investors to put into consideration when making an investment decision. The influence of the investors on the type of the assets they get from the investee through the equity security is very paramount in the how these assets are controlled. Where there is a loss or gain which is as a result of the property, reflections through equity accounts are made, and hence the calculation of the investor’s portion of the income from the investments and the dividends are made (Bond & Edmans, 2011).
Debts securities have a lengthy period when obtained and are characterized by low risk to investors. In this situation, the risk is often high when the borrower defaults to pay the much-needed interest. It is worth noting that only after the bond mature is when the returns in the security are granted. Most often, the government bond is termed to be very expensive; however, they are more secure when compared to others such as the corporate bond regarding term rate of return.
The investors are always protected by the derivative security which enables them to share risks and hence minimizes the chances of the wealth losses. There is always substance of equity in the financial which is ensured by the varicose portfolios which are supported or backed up by the derivative securities. It is always the tendencies of the most investors to put their money and trust where there is a guarantee of high returns. A good example is that investors may buy a share in the particular company and sell them on the same day in case the price increases. This means that depending on the negotiation which the two parties have reached, that is the buyer and the seller, their investors are obliged to know more on whether there is a risk of the investment or the return on the security trade.
Recommend one (1) strategy for maximizing exchange for the current risk return relationship identified for each of the three (3) securities
Every investor often dreams of the deal which helps them maximize performance at minimum cost. One such way which the investors can use to ensure that the returns are maximized is to have the company's performance portfolio assessed over a given period of operations. This calculates the Return on the Profit easier, and this can ensure that the investors are assured that the equity is only obtained from the asset which is anticipated to have a high rate of return on the losses are deducted. The investors require a devastation approach to invest in the debt security. This is very important since it ensures that in case one debtor's default on the interest payments, the investors have options on the on the returns from other debtors. The coupon rate is often high at the maturity of the bond than the prevailing interest rate; this means that at the maturity, the bond often earns high returns. The maximum of income strategy can be helpful in this situation. This approach can be used in corporate bond rather than the usage on the government bond for some time. For instance, the junk bond can be beneficial to the investor since it yields more income than the coupon rates in the market.
With the derivative approach, the investors risk losing in case they are not well used. The speculation strategy is essential and can be utilized by the investors in case they want to maximize returns. Another approach is the hedging approach which ensures the stock is secured in the event of the speculation or market fluctuations. Leverage strategy is also important in this case and can be used by the investors to ensure that they get maximum return.
Suggest how the Federal Reserve and its monetary policy affect each of the three (3) securities today.
The primary role of the Federal Reserve is to control the supply of money in the stock with an aim to have the macro economic issues managed in the country. It has monitor policies which are intended to ensuring that equity security is only used on productive projects. They also ensure that the financial institutions lower either interest rate to encourage borrowing in the market. The federal reserves on the other hand also have authority to raise interest in the market as a condition to prevent firms from getting money from the citizens. This makes the federal government borrow money from the citizens to help it runs its projects through treasury. It can also manage debt by enhancing policies to reduce the rate and increase borrowing. Derivatives are used by the government to improve its monetary policies. The Federal Reserve ensures that they make short, flexible and cyclical short term interest through reserve balance supply.
Determine whether each of the three (3) securities is a good investment in the next twelve (12) months, five (5) years, and ten (10) years.
The equity security is worth investing for twelve months compared to when it is undertaken for five years. This is because investor's assets provide returns to the organization worthwhile through a financial statement. In case of five years, the investor may not know the uncertainties which may face the organization ( Meltzer, 2010). The debt security is good for a long time, for instance, five years since the more time the bond safety is left to mature, the more it earns returns. On the other hand, the derivative is sensitive, and investment depends on the prediction regarding interest rate. The duration depends on entirely the expected returns. The term, in this case, matters less.
References
Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e . McGraw-Hill Education.
Bond, P., & Edmans, A. (2011). The real effects of financial markets . Cambridge, Mass.: National Bureau of Economic Research.
Financial Accounting Standards Board (US). (2013). A ccounting for certain investments in debt and equity securities . Norwalk, Conn.: The Board.
Meltzer, A. H. (2010). A History of the Federal Reserve, Volume 2 . University of Chicago Press.
