Course Project - Final Business Report

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INVESTMENTS, INTEREST RATES, AND RISK

Investments. Interest Rates, and Risk

Investments chosen

The investments that I have considered for this project are:

1. Apple Inc.

2. Blackberry Inc.

Effect of interest rates

Two investments out of the total five investments above are based on interest rates. These are the treasury bonds and the Certificate of Deposit. In case of bonds, the price changes as the interest rate changes as the current price is the present value of all future inflows. An inverse relationship between bond prices and interest rates can be found, in the sense that, as interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. (Nielsen, 2015)

Certificate of Deposits are mainly a mechanism for the company to raise funds from the market. When the interest rates of the economy rises, low yielding CoDs lose their charm and their demand reduces. This reduces their prices. If the company intends to raise more debt, it will need to issue the deposits at a higher rate. (Seabury, 2008)

Ranking of investments

Risk is the measure of the possibility of incurring a loss on an investment. There are many measures of risk, which may be considered before making an investment. A learned investor takes into account all such measures.

Measuring risk depends on the category of the investment. For E.g., in case of stocks, the measure may be a Beta value whereas in case of bonds and deposits it may be the interest rate in the market.

In that sense, the following is the order of investments from most risky to least risky:

1. Apple Inc. – Beta 0.91

2. Blackberry – Beta 0.41

Beta is a very important measure of risk in a stock market. This is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Higher the Beta value of a stock, higher is the risk.

In case of the Deposits, it is completely governed by the market rate of interest. Compared to the stock, bonds are a safer investment because of the fact that the volatility in interest rates is more stable than in case volatility of returns on stocks. Also, the principal value of a bond is more secured than that of a stock.

Any security from the treasury is considered almost risk free as it has been issued by the Government.

Types of risks

Stocks are always affected by systematic risk and unsystematic risk. Systematic risk is the risk, which is market oriented and not particular to a company or an industry. This is also called as non-diversifiable risk or market risk. Unsystematic risk is that risk which is specific to a specific industry. This is also called as diversifiable risk or industry risk. (Investopedia, 2015)

Deposits are affected by interest rate risk and credit risk. Interest rate risk is the possibility of a decline in the value of the deposit or bond due to increase in the interest rate. Credit risk is refers to the possibility that a particular bond issuer will not be able to make expected interest rate payments and/or principal repayment.

Treasury securities are normally considered as risk free securities. However, though they are said so, these bonds are also affected by the interest rate risk and inflation risk. The investors will get the interest and principal as promised. However, the underlying bond value may undergo a change.

Bibliography Investopedia. (2015). Systematic and Unsystematic risk. Retrieved from Investopedia: http://www.investopedia.com/walkthrough/corporate-finance/4/return-risk/systematic-risk.aspx Nielsen, B. (2015). Understanding Interest Rates, Inflation And The Bond Market. Retrieved from Investopedia: http://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp Seabury, C. (2008, Nov 6). How Interest Rates Affect The U.S. Markets. Retrieved from Investopedia: http://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp