FOUNDATION OF FINANCE

Foundation of Finance



Alternative Assessment - Foundation of Finance

Introduction

Investments are particularly forfeit of Present Value for Uncertain Future. These primarily involve decision-making on the type, timing, quantity and grade; particularly the elements of the investment. This also has been the basis for disinvestment for investors. Investors' main objective is to invest their money in such investments where they will be getting positive rate of return appropriately aligned for risk & inflation. Investment advisor always suggest investing the entire saving in to the balance and diversified portfolio and in that there should be equilibrated approach in security selection. This Assessment will cover Simon and David investment portfolio with respect to Short Term Trading and Bond Swap Opportunity.

Discussion

Scenario1 - Short Term Trading Opportunity

The Smiths' first investment decision involves a short term trading opportunity. In particular, David has a chance to buy a 7.5%, 25 year bond that is currently priced at $852 to yield 9%; he feels that in two years the promised yield of the issue should drop to 8%.

1. What basic trading principle is involved in this situation?

In order to understand what principles apply to the above scenario, it is essential to understand the basic concept Bond, its Characteristics and relationship.

Bond

Bonds are simply loans for companies /government which they issue for certain projects either for expansion, for development or for improvement in current existing business operations. People who purchase these bonds are termed as bondholders and for purchasing these Bond Company pay them an interest which is termed as coupon payment at predetermined intervals either semi-annually, quarterly or annually. The entire payment for bond is return back to the bondholder on the maturity date i.e. duration of the borrowing is completed (Johnson, 2011, p. 29).

Bond Principle

When investing in bond, bond price increase or decrease with respect to the fluctuation in the bond features. There are four main features of bonds that are: principle amount, maturity, coupon payment and yield. Any increase or decrease will affect the bond price (Johnson, 2011, p. 29).

Maturity: Maturity is the future date at which principle amount of the investors will be paid back. The principle of bond here is that longer the maturity, the higher will be the price. Increase in rate of interest and the bond duration are longer will leads the bond price selling at discount. Shorter maturity bonds would be having lesser discounts. Similarly, decrease in rate of interest and the duration of the bond are longer will leads the bond price selling at premium. Shorter maturity bonds would be having lesser premium (Johnson, 2011, p. 30).

Coupon Payment: Coupon Payment is the fixed payment that the investor will get on the defined intervals. The principle of bond here is that as the Coupon payment increases with increase in market interest rate and vice versa.

Yield of the bond: Bond yield is the rate which is receive by the bondholder for investment in the ...