Financial Proj

Which of the five investments do you think are most highly affected by the level of interest rates in the economy? Why?

Bank of America Bank Certificates. I think this is the most likely investment to be affected by interest rates because of the nature of business it deals in. For instance, the bank enters into contracts with its debtors (loan beneficiaries) such as fixed interest mortgages and loans. If it turns out that the interest rates rise above the agreed levels, they cannot raise them to hedge against possible losses. Their profits will be adversely affected in the case of such an eventuality.

The investments in the merchandise industry are least affected by interest rates because they deal in a variety of products supplied from several industries and the possible loss is diversified in its products (Campbell, 2005).

Rank the five investments in order of the most risky to the least risky and explain in detail why you ranked them in that manner

US Federal Bonds are the least risky because they will always pay the interest rate on them. This will be paid even if it will have to cumulate to next years. Actually there is ‘zero’ risk investing in them. They are also backed by the creditworthiness of the government.

El Pollo Loco and Dollar Tree fall in the same industry so they considerably fall in the same class of risks. They come before GoPro because of the diversified nature of products the companies deal in. Their revenues flows are less likely to be affected by seasons and business cycles. They can diversify products to preserve revenue flows.

GoPro is the fourth least risky (second most risky) because of the line of business it deals in. It deals in cameras whose demands can easily be affected by business cycles and fluctuations and they may have little or nothing to do to preserve undesirable revenue fluctuations.

Bank of America Bank Certificates is the most risky because it suffers highest due to interest rate fluctuations and it has a lot of its assets in the hands of debtors who may default on their payment. Their profits also take long to actualize. For example, a mortgage loan closed today may run for as long as 30 years (Ghysels, 2012).

What types of risk do you think affects each of the investments?

References

Campbell, J. Y. (2005). The term structure of the risk-return tradeoff. No. w11119. . National Bureau of Economic Research.

Ghysels, E. P.-C. (2012). "There is a risk-return trade-off after all. Journal of Financial Economics 76: 509-548.