Discount Rates

Discount Rates

The discount rate of a security would vary based on the risk associated with it. Higher the risk higher the return would be expected from that security. Companies with higher risk would have a higher discount rate, as with the newly formed businesses which are not traded publically and therefore they have a reduced market for ownership. There is a higher risk associated with start-ups. The investment that will be made by individuals would vary depending on a number of factors (www.qfinance.com).

The risk tolerance level would vary from one individual to another, these factors may include the age factor, the older and individual gets he would less keen to invest in securities with higher risk, however the younger an individual is the greater his capability would be to accept risk. Income stability is another factor that determines the ability of an individual to make investment in securities, thus an individual with stable income can make investment in securities with higher risk (Baker & Powell, 2005). Financial strength would also contribute in making the decision for investment the greater the financial strength the higher would be the ability to take risk. Individual temperament would also form an individual decision of investment as some individuals would not be willing to their money, whereas some would be gambler by nature. Thus they would be more willing to invest in stock with greater risk.

An investor willing to accept higher risk would also expect to receive a greater return on his investment. An investor with greater ability to tolerate risk would invest in securities such as stocks in start-up companies. On the other hand an investor not willing to tolerate higher risk would invest in stable securities or highly graded bonds (Andersson, 2009).

Question (A)

US treasury notes allows investors to preserve their principal in a risk-free way. Simultaneously it allows them to get a good return and it is also considered to be a relatively liquid security (Lumby & Jones, 2003). It is safe to invest in treasury securities as they are backed by US government. However due to lack of risk associated with these securities the return that an investor would earn would be less than that of market funds and securities. Those T-bills that mature in a year or less will be listed at discount rate (www.qfinance.com). Discount rate is the rate that considers time value of money. Since US treasury ...