Professional Documents
Culture Documents
Financial Markets
Financial Markets
Student’s Name
University Affiliation
1. Analyze the role financial markets play in creating economic wealth in the U.S.
corporations and even small businesses owned by private investor use to raise funds with an of
financing their operations. According Lynch (2009), financial securities are a safer way of
raising funds while at the same time ensuring there are returns to the investors. Financial markets
provide a platform that ensures there is openness between the sellers and buyers of the securities
(Lynch, 2009). In addition the financial market lead to mobilization of large amounts of capital
for use within the various respective institution. In the U.S, the financial markets are major
The financial markets also enable the government to obtain funds through which it is able
to finance some of the projects. The government seek or borrow capital from the general public
and other financial institutions such as banks inform bonds and they are able to undertake some
initiate projects such as the development of infrastructures like hospitals. Through the financial
markets as well, it’s now easy for students to borrow funds in form of loans and hence they are
ensuring that saving of funds takes place. Such funds are later used in undertaking of investments
projects which are projected by financial analyst as having the ability to high yield within a
specified period of time. Therefore in general the country economy is assured of stability through
enhancement of financial management within some of the major corporation that provide goods
and service to the citizens. In case the world is undergoing financial crisis the financial markets
ensure there is reservation in borrowing from the investors and that only those projects that can
investor who is lending funds through such a mechanism is able to obtain a portion of shares
within a company. Individually, one can buy stocks from a company or else profit from buy
share of mutual funds. Through New York Stock Exchange (NYSE) also, equity securities
enable one to obtain the stakes of a company and eventually one becomes a shareholder. When a
new company want to raise capital to finance its operations before being listed in the stock
exchange, an investor can also obtain shares through Initial Public Offer (IPO).
Debt securities enable investors to lend money inform of bonds to corporations and
government. A corporate bond is used by companies to raise money to finance their intended
projects. Where government wants to raise money they usually consult the treasury in evaluating
the amount of capital they intend to raise. They then make an appeal to the general public and
private investors to contribute this money this kind of bond is usually referred to as Treasury
bond. Once a bond matures the lender of capital expects the borrower to pay a high interest rate.
However junk bonds usually have very low ratings and are very risky but they can yield high
The derivative securities, provide an investor avoid risks once they undertake in certain
investment. They provide an easier means of negotiations where one can buy and sell bonds and
stocks at the prices they feel that are more appropriate. The derivatives are classified into various
categories such as mortgage securities, future derivative securities and collateral debt obligations
among others.
3. Assess the current risk return relationship of each of the three (3) securities.
When an investor obtains equity there are likely risk as returns involved and there are no
exact predictions of the outcome which should be expected. Equity securities enable an investor
to obtain assets of a company inform of shares. However through standard deviation, it’s easier
for an investor to determine the normal fluctuations likely over the expected returns on average.
In addition there are high premiums associated with risky stock with an aim to encourage an
Since an investor owns assets from an investee through the equity securities returns it
depends on the influence they do have over the existing assets which they acquire. In case there
are gains or losses experience by an asset then through equity accounts reflections are made and
hence the investors’ portion of dividends and income from the investment are appropriately
calculated.
Debt securities are usually obtained for long periods of time and provide low risk to an
investor’s capital. The risk high where the borrower defaults to pay since the interest rate always
keeps on rising. The returns in securities are only granted after the bond has matured. Usually
government bonds are assumed to have low interest but they are more secure in terms of returns
Derivative securities enable investors to share risk and therefore any chance of loss on the
wealth is minimized. The various portfolios supported by derivative securities ensure that there is
sustenance of equity in the financial market. The investors always look to trade where there is
guarantee of high returns within a short period of time. For instance the investor may buy shares
at a certain price and later sell them once their price rises within the same day. Therefore
depending on the agreed negotiations between a buyer and a trader then as an investor, one is
free to make decisions in regard to risk and returns likely to be experienced on the securities
traded.
4. Recommend one (1) strategy for maximizing return for the current risk return relationship identified
Every investor’s objective is to maximize on returns while at the same time keeping
returns at minimum. One way of ensuring that one can maximize returns on investment through
equity is through assessing the company’s portfolio performance over its operational period
(Bond et al, 2011). This is important since it becomes easier to calculate return on benefit (ROI)
and therefore an investor is able to ensure that the equity are only obtained for those assets that
Investing in debt securities requires diversification strategy. This help in ensuring that
incase one of the borrower is unable to pay the interest then an investor has his eyes set to obtain
returns from another debtor. In addition, at maturity for instance bonds yield high returns since
the coupon rate is higher than the prevailing interest rates. Maximization of income is a strategy
that one can use through investing in corporate bond rather than government bond over long
periods of time. The junk bond for instance enable an investor to yield high returns more than the
Derivative instruments provide a tricky approach to an investors. If not well used then an
investor is likely to incur major losses. In order to ensure that there are maximum returns an
investor can deploy speculation strategy where there is betting on the future price of an asset.
Another approach is the hedging approach which aims at ensuring that there is security of stock
due to the fluctuations in the markets. Finally an investor can also use leverage strategy in order
to know when the price of shares move in a favorable direction within a volatile market. This
5. Suggest how the Federal Reserve and its monetary policy affect each of the three (3) securities today.
Federal Reserve aims at controlling the supply of money stock with an aim of ensuring
that there is control of macro-economic issues within the country. Therefore through its
monetary policies it ensures that equity securities provided are aimed investment projects that
yield great result. The monitories policies are there regulated to ensure that financial institutions
lower their interest rates hence encouraging potential investors to acquire funds through shares.
The federal reserves in other circumstances may rise the interest rates with an aim of
preventing firms from obtaining capital from the citizen. This then enables the government to
borrow capital from the public through the treasury so as to be able to finance its budgets and
other desired projects. The government is further able to manage public debt where monetary
policies are regulated to keep interest rate low and hence encouraging people to borrow.
The open markets where derivative instruments are used is a means through which the
government ensure that the monetary policies are enacted. The Federal Reserve is responsible for
creation of flexibility in securities whether seasonal, permanent or cyclical and this affects short-
term interest rates as well as other interest rates through the supply of reserve balance.
6. Determine whether each of the three (3) securities is a good investment in the next twelve (12)
months, five (5) years, and ten (10) years.
Equity securities could be worthwhile investing in the next one year as compared to
undertaking five or ten years investment. This is because as an investor one owns stakes inform
of assets in an organization and the annual financial year provides returns worthwhile through
financial statement. In case of five years, an investor is not sure of the long- horizon of a
company and therefore it’s not worthwhile to invest due to the uncertainty of risk.
Debt securities would be worth investing in over long periods of time since the more
securities such as bonds are let to mature the higher they yield returns. They are more secure as
compared to equity and derivatives and therefore yields high returns over long periods of time
Derivatives are very sensitive and their investments depends on the next prediction in
terms of interest rates by an investor. Therefore one can invest for 1 year, 5 years or even 10
years and this depends expected returns. In some portfolios, investors expect to get returns over
long period of times while under other circumstance due to the changes that emerge in terms of
Accounting for certain investments in debt and equity securities. (2013). Norwalk, Conn.: The
Board.
Bond, P., & Edmans, A. (2011). The real effects of financial markets. Cambridge, Mass.:
Lynch, T. E. (2009). Accounting for Investments in Equity Securities by the Equity and Market