ASSIGNMENT

ON

FIXED INCOME SECURITIES

Submitted by - Anjali Singh

Roll No - 140005
 BASIC CONCEPT OF FINANCE

Finance is defined as the provision of money at the time when it is required. Every enterprise,
whether big, medium, small, needs finance to carry on its operations and to achieve its target.
Finance begins where accounting ends.

Finance is defined as the management of money and includes activities such as investing,
borrowing, lending, budgeting, saving, and forecasting.

Finance deals with procurement of funds and their effective utilization in the business.

According to Guttmann and Doug all: “Business finance can be broadly defined as the
activity concerned with the planning, raising controlling and administrating the funds used in
the business.”
Finance is the art of planning; organizing, directing and controlling of the procurement and
utilization of the funds and safe disposal of profits to the end those individual, organizational
and social objectives are accomplished.

Management of cash and other current assets is an important task of financial manager. It
involves forecasting the cash inflows and outflows to ensure that there is neither shortage nor
surplus of cash with the firm. Sufficient funds must be available for purchase of materials,
payment of wages and meeting day-to-day expenses.

The financial manager has to decide how much to retain for ploughing back and how much to
distribute as dividend to shareholders out of the profits of the company. The factors which
influence these decisions include the trend of earnings of the company, the trend of the market
price of its shares, the requirements of funds for self- financing the future programmes and so
on. The funds procured by the financial manager are to be prudently invested in various assets
so as to maximize the return on investment:

While taking investment decisions, management should be guided by three important

principles, viz., safety, profitability, and liquidity. The financial manager takes steps to procure
the funds required for the business. It might require negotiation with creditors and financial
institutions, issue of prospectus, etc.
The procurement of funds is dependent not only upon cost of raising funds but also on other
factors like general market conditions, choice of investors, government policy, etc.

External sources of finance are those sources of finance which come from outside the business.
For example, retained earnings are an internal source of finance whereas bank loan is an
external source of finance. We can segregate external sources of funds between long-term
sources of finance and short-term sources of finance.

The term ‘External Source of Finance / Capital’ it suggests the very nature of finance/ capital.
External sources of finance are equity capital, preferred stock, debentures, term loans, venture
capital, leasing, hire purchase, trade credit, bank overdraft etc. By external sources, we mean
the capital arranged from outside the business, unlike retained earnings which are internally
generated out of the activity of a business. Capital of a company is split into smaller units
termed as “Shares”. The investors subscribing to such shares are termed as “Shareholders” of
the company. Shareholders are the owners of the company to the extent of their shareholding.

Section 2(46) of the companies Act, 1956, defined the shares “Shares means share in the
Share Capital of company, and includes stock except where a distinction between stock and
share is expressed or is implied share may or may not be represented by a sum of money; it
may be in the form of money’s worth”. a dollar received today is worth more thana dollar
received in the future due to the potential to earn interest or investment returns. It is the
foundation of many financial decisions, including investment strategies and loan repayment
plans. The principle of diversification means to spread your investment portfolio across
multiple assets to reduce risk. It is a way to protect your portfolio from the negativeimpact of
any one investment.

Holding both stocks and crypto currencies may help an investor diversify their investment
portfolio. By distributing the investment among a varietyof assets with various risks and
returns, this can reduce risk.

For instance, if the stock market declines, the value of the investor’s stocksmay go down,
while the value of their crypto currency may remain the same or even rise. Similar to this, if
there is a correction in the crypto currency market, the value of the investor’s equities may
make up for any losses. Higher the potential reward of an investment, the higher the risk
involved. Investors need to weigh the potential rewards against the potential risks before
making investment decisions.
As noted earlier, an investment’s potential benefit is often connected with its risk level. Since
they are not backed by any government or central authority and because their prices can be
extremely volatile, crypto currencies are typically seen as being riskier than equities.
Investors mightbe willing to take on more risk as a result in exchange for the possibility of
better profits. The investor’s risk appetite and investing objectives will, however, affect this.

An investor might choose to allocate a certain percentage of their portfolio to stocks and
another percentage to crypto currencies based on their investment goals and risk tolerance.
For example, an investor who is more risk-averse may allocate a higher percentage to stocks,
while an investing.

who is more risk-tolerant may allocate a higher percentage to cryptocurrencies?

Every once in a while, we make big decisions, and those big decisions affectus for the rest of
our lives. At what age do we get married? Who do we marry? Or the decision to go to college.
This is a huge decision, costing hundreds of thousands of dollars, yet we don’t apply financial
ideas to it.

The same goes for other big decisions—we buy a house, we buy a car, webuy a vacation
place—but we don’t apply financial concepts. Buying a vacation home creates a source of
inflexibility, since we have to vacation there every year. It’s important to think about
financial flexibility.

My son is a young guy fresh out of college. He just signed an employment contract, which
committed him to a no-compete clause for three years. Youcan bring your financial perspective
to that: What is the cost of that signature?

Or you can consider things like credit card debt, how much we save, wherewe save. Do we
make use of tax-advantaged vehicles? A basic financial literacy can help with retirement
savings decisions, too.

I’m not saying finance will necessarily give us all the answers. Even if collegedoes not make
financial sense for me, I may still choose to pursue my passion, but at least I will do it in an
informed way. Just about any big idea, any big decision that we make, could benefit from a
very basic level of financial literacy.
Finance tells us at a very basic level that we have to think about risk,understand what
risk is, and consider how we might deal with it. It essentially says that you can’t just
look at the most likely outcome and make decisions on that basis. You have to look at
the tail risk—that which isunlikely but still possible—and you have to think about how
costly those tails are.

Some very sophisticated, successful people have ignored the fundamental finance lessons
on risk. Some people put all their money in one stock, such as when employers give
employees a discount on company stock and people load up on it. Very basic concepts will
tell us that’s probably not a good idea. Think about what happened with Enron: People lost
their lifesavings and their jobs at the same time.

Everything is subject to risk, and finance gives us a framework to deal withit in a reasonable
way. It doesn’t have all the answers. It depends on how we feel about risk, and what our
individual risk tolerance is. But finance at least gives us that framework.

That’s a really simple idea that I see most people in America ignore and then regret later in
their lives. We have a Turkish saying: “Stretch your legsaccording to the length of your
blanket.” If your blanket is small, it’ll still warm you up, if you tuck your feet in.

That simple lesson we ignore. We are always trying to impress people withour wealth and
our power, by spending money, by showing off our possessions, our big house and our big
diamond ring and our brand-new car. But that comes at the expense of our future comfort and
peace of mind.

A lot of people find themselves with good jobs, making six-figure incomes,not being able to
make ends meet because they spend too much money. We live in a society of affluence, but
unfortunately, when we lose our jobs, when some accident occurs and our health deteriorates
and we don’t haveinsurance, it can bankrupt any one of us.

We don’t have to buy a new car, we don’t have to go to a cafe every day and have a $5 cup
of coffee. Those things add up. If we don’t watch those

things, then we have a wedding and spend $30,000 or more—if you insteadleave that money
for 40 years, you can retire on that money. Unfortunately,we don’t think of these trade-offs.
The idea that we need to delay gratification is lost.
Before we invest, we have to say: “All right, what is my pain point? What is my risk
tolerance?” Nobody can tell us that, except ourselves. We have to say: “Look, if I lose half
the money, how am I going to feel about this?”

There’s actually a name for that, “freaking out.” If you’re going to freak out with a 50% fall,
that money doesn’t belong in the stock market. This is the first lesson I tell my students: “Look
at yourself in the mirror and answer the question, ‘What will freak you out?' Only then you can
begin to invest inthe stock market. You’re investing for the long term.

There’s a very basic lesson in finance: Prices reflect information. When I lookat a price, I
should learn from it. I shouldn’t assume that the million or billion people whose interactions
led to that price are idiots.

Once I understand that prices are informative, that leads to many lessons. I’m not going to fall
for scams, first of all. We all get these offers and great deals. A very basic lesson in finance is,
“If it sounds too good to be true, it istoo good to be true.” Forget about it. Don’t get even
tempted.

Another lesson is there are reasons for the prices that we see. Why is this house selling at a
discount? There must be something wrong with it. In anefficient market, that price is telling
you something. So we need to learn from the price.

Fixed income securities are types of debt instruments that provide returns in the form of
regular and/or fixed interest payments and repayments of the principals when the security
reaches maturity. These instruments are issued by governments, corporations, and other
entities to finance their operations. They are not equity, as they do not entail an ownership
interest in a company, but they confer seniority of a claim compared to equity in cases of
bankruptcy or default. The present paper discusses various types of fixed income securities
and their risks.

The term fixed income refers to the interest payments that an investor receives,which are
based on the creditworthiness of the borrower and current interest rates.
 Generally speaking, fixed income securities such as bonds pay a higher interest, known as the
coupon, the longer their maturities are. The borrower is willing to pay more interest in return
for being able to borrow the money for a longer period of time. At the end of the security’s
term or maturity, the borrower returns the borrowed money, knownas the principal or “par
value

Fixed income securities are types of debt instruments that provide returns in the form of
regular and/or fixed interest payments and repayments of the principals when the security
reaches maturity. These instruments are issued by governments, corporations, and other
entities to finance their operations.

They are not equity, as they do not entail an ownership interest in a company, but they confer
seniority of claim compared to equity in cases of bankruptcy or default. This paper discusses
various types of fixed income securities and risks involved vis-à-vis the benefits.

Financial instruments, one of the safest investment avenues available in the market.
Portfolio Diversification Investment in fixed income securities offer a much-needed
diversification to a concentrated portfolio of equities. It is a well-known fact that equities deliver
much higher returns than debt securities, however the volatility of returns delivered by the
former is much higher than that of the latter.

To make your overall portfolio returns stable, it is imperative that you make a significant
investment in highly rated debt securities. Priority during Liquidation When the company files
for bankruptcy and goes for liquidation, it is liable to pay back to its debtors and stock holders.

However, it might not have enough assets to pay off both. In that case, lenders of the
company, who hold corporate bonds of the firm get priority over those who hold equity. This
is one more reason why debt securities.

Recurring deposits are similar to SIP Investment in Mutual funds. An individual deposits asmall
amount of money as a monthly instalment for a fixed duration that ranges from 1 year to
10 years in a recurring deposit. The interest rate is the same as that of fixed deposits.
This enables retail investors with small amounts of money to generate a good corpus of wealth
in the long runs are considered to be a safe investment avenue Repos or buybacks, Repurchase
Agreements are a formal agreement between two parties, where one party sells a security to
another, with the promise of buying it back at a later date from the buyer.

It is also called a Sell-Buy transaction. The seller buys the security at a predetermined time and
amount which also includes the interest rate at which the buyer agreed to buy the security.

The interest rate charged by the buyer for agreeing to buy the security is called Repo rate. Repos
come-in handy when the seller needs funds for short-term, s/he can just sell the securities and
get the funds to dispose. The buyer gets an opportunity to earn decent returns on the invested
money.

Different banks provide fixed deposit accounts with different maturities. Investors can opt for
FD accounts with maturity period ranging from 7 days to 10 years. 5. Recurring Deposits
Recurring deposits are similar to SIP Investment in Mutual funds. An individual deposits a
small amount of money as a monthly installment for a fixed duration that ranges from 1
year to 10 years in a recurring deposit.

The interest rate is the same as that of fixed deposits. This enables retail investors with small
amounts of money to generate a good corpus of wealth in the long run. 6. Repurchase
Agreements Also known as repos or buybacks, Repurchase Agreements are a formal
agreement between two parties, where one party sells a security to another, with the promise
of buying it back at a later date from the buyer.
 It is also called a Sell-Buy transaction. The seller buys the security at a predetermined time
and amount which also includes the interest rate at which the buyer agreed to buy the security.

The interest rate charged by the buyer for agreeing to buy the security is called Repo rate.
Repos come-in handy when the seller needs funds for short-term, s/he can just sell the
securities and get the funds to dispose. The buyer gets an opportunity to earn decent returns
on the invested money. Bankers’ Acceptance A financial instrument produced by an individual
or a corporation, in the name of the bank is known as Banker’s Acceptance.

It requires the issuer to pay the instrument holder a specified amount on a predetermined date,
which ranges from 30 to 180 days, starting from the date of issue of the instrument. It is a
secure financial instrument as the payment is guaranteed by a commercial bank.

A fixed income security is a type of investment that provides a fixed return to the investor over
a specified period of time. It is called "fixed income" because the interest payments or dividend
payments that the investor receives are fixed and known in advance.

The basic concept of fixed income securities is that the investor lends money to an issuer
(such as a corporation or government entity) and in return receives a fixed stream of income
for a specified period of time, usually until the maturity date of the security. Examples of
fixed income securities include bonds, Treasury bills, notes, and certificates of deposit (CDs).

The key feature of fixed income securities is that they offer a predetermined rate of return to
the investor, which can be attractive for those seeking stable and predictable income.
However, this also means that the potential for capital appreciation is limited compared to
other types of investments, such as stocks or real estate.

Overall, fixed income securities can be an important part of a diversified investment

portfolio, providing a steady stream of income while also mitigating some of the risks
associated with other types of investments. There are many different types of fixed income
securities, including government bonds, corporate bonds, municipal bonds, and preferred
stocks. Each type of security has its own unique characteristics, such as its yield, credit rating,
and maturity date.

Investors who are interested in fixed income securities should consider factors such as the
creditworthiness of the issuer, the level of interest rates in the market, and the duration of the
security before making an investment decision.