INVESTMENTS

INVESTMENT
 Theoutlay of money usually for income or
profit.
 Thesum invested or the property
purchased.
Objectives:
 Explain the risk-return trade-off
 Identify
the features of basic investment
instruments particularly their risk and return
characteristic
 Measure and minimize investment risk
using simple examples
Risk-Return Trade-off

Risk reference
*The choices we make when faced with simple
life decisions such as eating in a restaurant,
purchasing something, choosing what movies to
watch.
Answer these question and compare
your answer with your classmates.
*You were assigned to arrange the x-mas party of your class and
you were looking for a venue outside the school. How would you
go about searching for location.
1. Call the mobile or landline number of the venue to ask for the
detail of the place.
2. Visit the location two weeks before the party to personally talk
to the administrative staff.
3. Search the internet then select a venue. Go to the venue
together with your classmates on the day of the party itself.
4. Send an email message to the administrative office inquiring
about the availability and rates.
 Which option did you choose?
 Are your choices the same with your classmates?
 Which one were the most preferred responses?

You will probably observe that different

individuals have different answers. Each individual’s
choices exhibit a different risk reference.
Risk aversion
 It means that individuals maximizing returns for a
given level of risk or minimize risk if the returns are
the same.
 Risk is define here as the uncertainty of returns.
This definition encompasses the possibility of
both gains and losses.

 This bring us to another basic concept in finance

which is the Risk-Return Trade-off.

 Individuals won’t take on additional risk unless

compensated by an additional return.
Investment and Risk Premium

 Business Risk
 Financial Risk
 Liquidity Risk
 Exchange Rate Risk
 Country Risk
Business Risk – related to the nature of the
company’s products and its operating
strategy.
- it is also associated with the cost structure
of the issuing company.
Financial Risk – refers to the risk created by the
choice of capital structure.
Liquidity Risk – is the uncertainty that an investment
can be converted to cash at a known price.
 Exchange Rate Risk – exist if the investment is
dominated in another currency different
from that of the local currency investor.

 Country Risk – is associated with political and

economic uncertainty of a particular
business environment.
Types of investments
 Deposits
 Government Securities
 Corporate Debt Securities
 Equity Securities
 Deposits

Deposit instruments are provided by financial institutions,

mostly banks. The major deposit instruments include the
following:
1. Saving Accounts – provides a low fixed rate of return
but provides the convenience of availability.
2. Checking Account – previously checking account
does not earn interest but now most, if not all,
banks provide a rate of return although the fixed
rate is very low.
3. Time deposit account – usually requires a minimum
amount of deposit with a fixed term maturity.

-This types of account provides a higher fixed

rate of return compared to a savings and
checking account.
Government Securities

 Government securities fall under the category of

debt securities and most of them are classified
as fixed income instruments.
 The National Government through the Bureau of
Treasury issues debt securities known as Treasury
bills and Treasury bonds.
Corporate Debt Securities

 Corporation issue debt instruments in the form of

commercial papers and corporate bonds.
 Corporate papers are short term instruments
issued by corporation for their immediate needs.
 Corporate bonds are characterized by its
maturity, par value and coupon rate. The
maturity date of the bond defines the date of
repayment of the remaining principal and the
last coupon interest.
Equity Securities

 Stocks are financial instruments that represent

ownership in a corporation.
 Equity securities are classified under two main
categories:
1. Common Stock
2. Preferred Stock