Question

1. Imagine you inherited $50,000 and you want to invest it to meet two financial goals: (a) to save for your wedding, which you plan to have in two years, and (b) to save for your retirement a few decades from now. How would you invest the money? Explain your answer.

2. If you were considering investing in the bond market, how could information provided by Standard Y Poor’s and Moody’s Investor’s Service help you?

3. You invest 6,000 dollars in 1995 in a 401K account. In 2012, the 401K is worth 400,000 dollars. This is an example of the law of compounding. Explain how compounding works and why it's important to start investing when you're young.

4. Why do companies like callable bonds? Why do investors generally dislike them?

5. If you were thinking about investing in the securities market, would you prefer individual stocks, bonds, mutual funds, or ETFs? Explain your choice by comparing the advantages and disadvantages of each.

Answer 1

(1) Investment that to done for the purpose of savings for marriage can be either done in bonds of any company or in mutual funds or in financial institutions or equity and derivative market for the period of 2 years. Similarly amount to be invested for the purpose of retirement is basically for long term and that can be invested in long term bonds , Fixed deposits with banks and other financial institutions and long term investment in mutual funds,equity market and so on.

(2) Standard Y Poors and Moody's Investor Service are basically the leading index and credit rating agencies that provide the credit ratings of the companies in which investor willing to invest.Credit rating provided by these agencies help investor to know the credit worthiness of the company in which they are going to invest and wether their amount is safe with the  companies or not.

(3)Compounding in general term means reinvesting the earnings to generate additional earnings over the period of time.It works like such we make some investment and then we earned some return on that investment this is called simple interest that we have earned on the investment made.After earning suppose we invest the earning too to make additional income this is called compounding that is investing earnings and getting additional income than again repeating the process again and again.

We should start investing in early age to get the benefit of copounding over the period of time. We will have great amount of savings if we start saving in early age as we will be benefitted with the compounding effects over our asset and income.

(4)Callable bonds is a long term fixed coupon bonds where the issuer enjoys a call option that is right to buy th bond from the investor prior to maturity at a predetermined price known as the call price.Obviously issuer will exercise the call option if the interest rates falls such that the issuer can issue new bonds of lower coupon and used the proceeds to refund the old bonds of higher coupon.This will result in the interest savings for the remaining maturity that is why company likes callable bonds. The investor in a callabe bond therefore suffers call risks that is a risk of bond being called at a time when interest rates are low and the investor lefts to reinvest the entire call proceeds at a lower rates somewhere else that is why investor dislikes callable bonds.

(5)

Options	Advantages	Disadvantages	When to invest
Stocks	High return	High Risk	When we have good risk tolerance level that is we are risk taker and want higher returns.
Bonds	Low risk	Fixed low return	When we are bearish and risk averse
Mutual funds	low risk than stocks	higher returns than bonds	when we can take some risk to earn more
ETF's	low risk	medium return	when they are looking for safe havens