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

1. For any Company issuing bonds usually faces 4 types of risk.

1. Interest Rate Risk
2. Market Rate Risk
3. Inflation Risk
4. Credit Risk

Some Actions that company should or can take to reduce the amount of risk involved in bonds market are:

• Issue Callable bonds which means that issuer can choose to pay off the investor before the official maturity date.
• Geographical Diversification can be done by a company and issue various bonds along different countries to minimize the risk
• Company can also do ladddering which is also known as maturity diversification in which company can issue different bonds maturing at different time frame to reduce the risk levels.

It should be clear that at no given point of time a company can be risk free while issuing bonds . Risk can be minimized not avoided.

2. Any company faces risk. Even if it is not a publicly traded company it has to face a certain risk. But the usual risk that a publicly traded company faces are:

1. Rating Risk-Credit Rating directly affects the price business will pay for finances.Shift in Rating causes larger swings in the stock prices of the publicly traded company
2. Psychological Risk- Any significant change in the stock market brings fear or assurance in the public of stock moving in particular direction which is good for publicly traded company when investors have assurance but in times of fear the investor reduces and it becomes difficult for company to have finances also fear takes larger time to recover.
3. Legislative Risk - This risk refers to the tentative relationship between the goverment and the business. Specifically this risk affects when the goverment actions will constrain some corporationor industry, hereby adversly affecting investors holding in that corporation or industry.

There are other types of risk also involved like Interest Rate risk, Inflationary Risk , Obsolence Risk etc along with the few mentioned above. To reduce the risk of investor so that he continues to invest in the market she should take the following measures:

• Analyse and determine invetor's own tolerance for risk- Every stock the investor invests in has a certain degree of risk involved in it. Investor needs to analyse the different types of risk involved and understanding the type of risks or the combination of risk that helps you to reduce your risk level. Usually two factors that help you decide the following are net worth and risk Capital .
• Do your own due diligence- Which means that before making any investment investor should do a small research about the investments that he is making or he is about to make.
• Diversify- Investor should try and diversify the portfolio to the maxim level . When the protfolio gets diversfied the risk pertaining to it also gets diversfied. Basically stating not to put alll your eggs in one basket. It should be accross different product types and economies
• Regularly Monitor- It is very important for an investor to keep check on the investment at all times keep monitoring about all the investments and the details related to the investments so that in times when he feels or has a doubt on its own investment he can reallocate the resources as necessary.
• Take advantage of investment Products- There are different types and kinds of investment products. Investor should be well aware of all of the products so as to he can take advantage of all the product types and also few goverment products like goverment bonds which are issued and the risk of investing is minimal. So investors should take oppertunity and invest in such products.