Question

1.One of the risks of borrowing money is changing interest rates. For example, if a company issues bond when the market rate is 7%, what happens if the market rates goes down while the bond are outstanding? Name some action a company could take to control this risk.

2.When the stock market is going up over a long period of time, investors can become complacent about the risks of being a shareholder. After the significant decline of the stock market in 2008, people have begun to rethink the risk involved in owning stock. What kinds of risks do the owners of publicly-traded companies face? What could you do, as an investor to continue to invest in the market but minimize your risk?

Answer 1

Answerr 1 : In order to remove the risk of borrowing money in changing interest rates the entity may resort in one of the following alternatives :

a.Borrow money with a floating interest rate .Floating interest rate refers that rate of interest of loan is not fixed , it would depend upon the change of rate in market.

b.In case loan has already been taken on a fixed interest rate , the entity can hedge the interest rate change risk with a interest rate swap where in it can swap its fixed rate of interest with floating rate without having to refinance the loan.

Answer 2 :In order to cotinue to invest in the market but to minimize the risk an entity should :

a.Diversify it portfolio to include various sectors , with such portfolio in case of downfall in one sector the other sector might save the overall loss in portfolio.

b.Build a portfolio with municipal bonds: Bonds are considered to be less risky than shares even in a scenario of market downfall it returns would not decrease.

c.Lower risk with Inverse ETF's : erse ETFs are securities designed to perform the exact opposite of a given index. For example, if the S&P 500 index rises 1 percent in a day, an inverse ETF for the S&P 500 would lose 1 percent over the same period of time.