Question

I. Define short - term investments, stocks, and fixed income investments.

II. Discuss the risks of short -term investments, stocks, and fixed income investments.

Answer 1

I. Investments with a maturity of less than one year are generally classified as short-term investments. If the stocks are sold within one year, they are classified as short-term investments as well.

Stocks is an equity investment, which represents the ownership of a company. The return on investments is mainly through stock price appreciation and the dividends yield.

Fixed income investments are debt instruments, which will have claims on the assets of the company in case of a default. They are called fixed investments because the fixed interests are paid at regular intervals.

II. The short-term investments in stocks are riskier compared to the investments in short-term fixed-income investments. This is because the stock prices are highly unpredictable in the short-term.

Stocks are riskier compared to the fixed-income investments because the fixed-income investors are given a priority when the company goes bankrupt. Interest payments are made to fixed-income investors first before the profits are shared with the equity investors.

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