Question

1. Question One
Briefly describe and explain the following investments terms (20mmarks)
a) Savings
b) Investments
c) Mutual funds
d) Bonds
e) Securities
f) Annuities
g) EAR
h) Amortizing
i) Bond valuation
j) capital

Answer 1

1.

A.

Savings refers to that part of income that is not spent and kept either in the bank, or at home for some deferred use. A higher level of savings, means higher supply of  loanable funds in the market. It helps in decreasing the interest rate. A higher savings, also leads to higher investment level.

B.

Investments refers to the buying of those goods, instruments and or other assets that can be used to do some productive activities. For example, a business buying a truck for logistics, will be considered as investments. On a similar note, buying of a plant machinery to produce goods, is also an example of investment.

C.

Mutual fund is an investment fund that invest pooled money in different type of securities as stated in the objectives of the funds. Further, mutual fund is a financial instrument, that is managed by a team of financial experts, having good understanding of the financial securities and market. It makes mututal fund to be very popular among those investors who know less about  financial securities and market.

D.

Bond is a fixed income security, that is used by the companies to raise funds from the public in the market. It makes companies to pay a fixed income on a regular basis that is also termed as coupon payment. After maturity, the principal amount or face value is returned back to the original investors. Bonds must be rated by the credit rating agencies before it is issued in the market to help people assess the risk level.

E.

Securities are the financial instruments that are used to make raise funds in the financial market of different natures. It can be fixed income securities or government sponsored treasury bills.

F.

Annuity refers to the amount of funds that is used for recurring payment or deposits on a regular basis. For example, if a person get $1000 per year for the next 10 years, then annuity payment is $1000.

F.

Effective annual rate (EAR) is the rate of return that is actually paid or received upon the investment. It is very important to calculate the EAR, as nominal rates with varying nature of compounding terms will have different EAR. For example, EAR of 6% rate compounding quarterly, will be greater than the EAR of 6% rate compounding semi-annually.

G.

Amortizing is the process to periodically writing off the cost or loan with a series of regular payments. It is used, when a loan is to be repaid, then the loan amortization schedule is prepared.

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