Investment Analyses 1

Question 1

Explain the difference between saving and investments

Answer 1

Saving holds funds in reverse,no risk

Investment -wealth enhancement with uncertainty

Question 2

What is the save motive ?

Answer 2

Build and preserve reserves for future use.

Risk avoidance impulse is significant
Savers rely on institutions reputation for safe-keeping
Receive interest
Institutions save via government securities and commercial paper

Sometimes inflation can make the bank fail to pay the interest

Question 3

What is the investment motive ?

Answer 3

Risk tolerance impulse , because of the possible gains also means tolerance for losing.

Type of investment
Company Shares and bonds
Less development countries government securities 
Trade commodities 
Real estate

Question 4

What is risk

Answer 4

Is the difference between expectation and outcomes is the essence of risk in finance

The greater the propensity for events to turn out differently from expectations the greater the risk

Question 5

What is return

Answer 5

Return is the the profit or return of an investment. But real return must be consider once the asset is sold

Question 6

What is financial leverage ?

Answer 6

Leverage investment is partially financed from borrowing.

Also can be explicit and implicit

Explicit is a direct borrow using for investment

Implicit is leverage that can be use indirectly, where margins can be applied

Important to mention that leverage increase return /profit but also increase losses. So means leverage increase risk

Question 7

Explain what is money markets and capital markets

Answer 7

Money markets - financial arrangement with less than a year of maturity

Capita markets -financial instruments with more than a year to maturity

Question 8

Explain what is spot and forward prices

Answer 8

Spot prices - price for immediate on the spot transaction , the buyer receive and pays the product immediately

Forward prices - price at which two parties agree to trade on an agreed future date. Buyer pays the price on the agreed date and not the spot price on that day. Normally is good for hedging

Question 9

What is over the counter and exchange traded arrangement?

Answer 9

OTC - private agreements , bespoke deals and party to party dealing

ET- deal in a public market place , standardised products traded and deal with the market. Et is regulated so can be traded

Question 10

What are financial derivatives ?

Answer 10

Financial instruments whose characteristics are derive/hedging from some other ,underlying,financial arrangement such as

Future contracts

Forward contracts

Options

Swaps