Dq help

timer Asked: Jul 30th, 2013

Question description

here is the two dqs I need responses to
I need at least one of these responses by today please. Also needs to be 200 to 250 words with citation and at least 1 reference. Thank you so much
Class mate one we need to reply to her post Chlse
According to Investopedia bonds are “A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate” (Bond, n.d.). Bonds can be taken out to fund projects, and are considered an asset along with cash and stocks, which makes them a fixed-income security (Bond, n.d.). Due to a bond being an investment, there is no guarantee on the amount that will be earned, or if the money will be lost (Bond Investment Strategies, n.d.). This means that like with any investment, there are risks.
Bonds can be purchased by anyone, but can only be taken out on large corporations or government entities (Bond Investing Basics, n.d.). They are a way for these groups to gather large sums of money to help fund their expansion, projects, or run their day to day operation (Bond Investing Basics, n.d.). There is usually a specific period of time that someone who purchases a bond will loan their money for, and it is determined by the company or government that the money is going to (Bond Investing Basics, n.d.). At the end of this period, the bond purchaser should receive their original investment, plus a certain percent earned from loaning the money (Bond Investing Basics, n.d.). There are also tax-free bonds, which can earn their purchaser less money but could come out to be more money if considering the amount of taxes a person would have to pay if a normal bond was purchased (Bond Investing Basics, n.d.). It is important to decided what type of bond would work best for each person and for what time period, because purchasing a low yielding non-taxed bond may be worth more money in the end than a higher yield taxed bond. There are also different time periods for bonds, be it short term or long term (Bond Investing Basics, n.d.). Bonds are usually paid semi-annually, or every 90 days, but this is interest only, not paying back the principal (Bond, n.d.). The interest rate on the bond depends on the credit quality of the company and the duration that the person wants to purchase the bond for (Bond, n.d.). Government bonds can usually range from 90 days to thirty years (Bond, n.d.). Corporate bonds are usually between three and ten years, but it is up to the company if they want to make their own decisions and offer longer or shorter term bonds (Bonds, n.d.).
Bonds should not be confused with stocks. Although they used to yield about the same return from the initial investment, bonds lately have been giving larger returns to their purchasers (Bond Investing Basics, n.d.). However, it is possible for people to loose money in bonds just like with stocks. Bonds have fixed interest rates, a person will get a specific amount on their return which is known at the moment the bond is purchased (Bond Investing Basics, n.d.). If the bond is withdrawn early the purchaser may loose money, and if the bond is kept until maturity the purchaser will receive the predetermined amount (Bond Investing Basics, n.d.). That is, unless the company that the bond is through goes bankrupt or shuts down, which at that point all investors will loose out on their money (Bond Investing Basics, n.d.). Choosing between short term and long term bonds should be considered as well. Each can come with different percentages and penalties for early withdrawal (Bond Investing Basics, n.d.). It is important to make sure that if going with a long term bond, that the purchaser is able to keep that bond for the whole term until it reaches maturity. Going with long term can be more risky in other ways as well. The interest on bonds is fixed, but inflation still very much affects them (Bond Investing Risks, n.d.). This means the interest payments may stay the same, but the value of the bond may drop drastically (Bond Investing Risks, n.d.).
There are also call risks where the company or government makes a person cash in their bond early and at the price that the bond is at that moment, even if it’s a lot less that it was originally purchased for (Bond Investing Risks, n.d.). Another type of risk is credit risk, where a company is unable to pay back its bonds and interest on time (Bond Investing Risks, n.d.). There are insured bonds that can be purchased which guarantee on time payments, but they usually yield lower interest (Bond Investing Risks, n.d.). Finally there is market risk. If the bond is selling really well and/or there are not enough to meet demand, a company can sell them for a lot more (Bond Investing Risks, n.d.). This also means that if the demand or popularity drops, that bond is no longer worth that much and the purchaser may loose money (Bond Investing Risks, n.d.).
Due to the fact that there are risks with buying bonds, it is important to not invest all in one bond (Bond Investing Strategies, n.d.). By choosing a portfolio of bonds from different companies, a person is safeguarding themselves from loosing their entire investment because of one bad bond purchase (Bond Investing Strategies, n.d.). A portfolio should contain government bonds, as well as company bonds from different markets and maturities (Bond Investing Strategies, n.d.). By having different types of bonds a person is protecting themselves again from one type of marking going bad, and maturities to protect themselves from the risk of bad interest rates (Bond Investing Strategies, n.d.).
Bonds are similar to stock in the fact that they are investments into a government organization or a corporation to help fund their projects and operations. However, they are different because bonds have different terms of maturity and are only usually well profitable if the money is left invested until the maturity date set by the organization. This can vary from 90 days to 30 years depending on whether it is government or corporation and what their preferences are. Bonds can be tax-free, but they are lower yielding, insured bonds are lower yielding as well. They are beneficial though because they guarantee payment incase an organization is unable to pay or if they go out of business, in which case everyone who is not insured would loose their money. There are a lot of risks to bonds, so it is important to know what to do before deciding to purchase any. It is important to have a portfolio with a lot of variety to protect oneself from markets failing or interest risks. It is also always a good idea to keep an eye on inflation, because as that rises, the amount the bond is worth drops.
Bond. (n.d.). In Investopedia. Retrieved July 26, 2013, from http://www.investopedia.com/terms/b/bond.asp
Bond Investing Basics. (n.d.). In CNN Money. Retrieved July 26, 2013, from http://money.cnn.com/magazines/moneymag/money101/lesson7/index.htm
Bond investing risks. (n.d.). In CNN Money. Retrieved July 26, 2013, from http://money.cnn.com/magazines/moneymag/money101/lesson7/index5.htm
Bond Investment Strategies. (n.d.). In Investing in Bonds. Retrieved July 26, 2013, from http://www.investinginbonds.com/learnmore.asp?catid=6&id=386

Classmate two Kvn
Bond investment is an area of finance that must be fully understood in order to have success. A main method of doing so is by not only understanding the process of handling bonds in general and determining the optimal bond for the need, but also by understanding the risks involved, which include credit risk, default risk, inflation risk event risk and more.
When considering options as far as investments go, it is important to consider numerous possibilities to ensure that one’s money is utilized properly. One manner in which a company or group is able to invest is through bonds. Bonds are a form of debt investment, in that the investor starts by lending money to a group, whether corporate or not in return for these bonds. These bonds are similar to a promise made by the borrower that the cost of the bond will be paid back in a set period of time (Eileen, 2004). Throughout the duration of this time, the borrower pays the bond holder interest on the bond. Therefore, the investor uses bonds to finance projects as they need. At the end of the specified period agreed upon, there comes a point of maturation where the principal of the bond is paid off. Examples of different types of bonds include: government, agency, corporate, municipal, and mortgage-backed and others (Ehrhardt, 2011).
As an example, a company may decide to purchase $50,000 worth of bonds. These bonds can either be of a high value or can be presented as 50 bonds worth $1,000 each. Say the period in which the investor is holding the bonds is for 10 years, annually or semiannually the investor gets paid the set interest on the bond, also known as the coupon. If the interest rate were set at 5%, then annually, the investor would get $50 from the borrower. In this manner, bonds may be considered more secure than other options of investing such as the stock market, but they still come with their risks. Understanding these risks and making the proper decisions to secure these practices will yield the best results for the investor.
One of the more important practices with bond investments is diversification. In this process, an investor will purchase bonds from different issuers. A general rule mentioned is to never place “all your assets and all your risk in a single asset class or investment.” Reason for this being that by purchasing from one location, all of your risk depends on the ability of that borrower to hold true to the agreement. If they are unable to pay the interest or principle on their bonds, then the investor has a problem. In addition, if an investor is able to purchase different types of bonds (government, corporate, etc.), then if one subdivision of the market goes under, then the investor’s risk again isn’t completely lost ("Bond investment strategies," 2010).
Investors also need to be able to understand the market and the effect that bond interest has on their plans. Companies may decide that they want to maintain possession of their bonds so they can live out their maturity in a “buy and hold” strategy. Here, the investor will keep receiving payment throughout the term of the bond usually semiannually and then receive the face value of the bond at maturity. In another situation, when the bond interest fluctuates, the investor may need to make the decision to either continue to hold the bond, otherwise it may become “callable.” A bond may be callable if interest rates are falling too low; in this scenario, the bond will be returned ahead of its maturity date and the face value of the bond will be paid earlier than expected. When the interest of a bond falls too low, the investor is no longer receiving payments comparable to expected ("Bond investment strategies," 2010).
A few other risks to be aware of include risks of default, credit, event and inflation risks. Credit and default risks are similar in the fact that the borrower might not be responsible enough to make their payments in a timely fashion. If this were to happen, just like a student loan, the borrower could default. These risks are less likely to take place when participating in mortgage backed and government loans, which are able to guarantee payments to their investors. An event risk comes about when the borrower takes a buyout, participates in a merger, or undergoes any change that reduces the value of their bonds. These events can also negatively affect the borrowers, which may cause them to not make payments on time, leading to the same consequences as the other risks. Inflation plays a role in risk because the value of the dollar may change tomorrow; the “purchasing power” of bonds may not be as strong. In addition, as inflation takes place, it can lead to higher interest rates, which in turn reduces the value of bonds ("Risks of investing," 2010).
Overall, the practice of investing in bonds is an art where the lender needs to be aware of the proper types of bonds to invest in, the current states of the borrowers, state of the market and much more. By taking all of these factors into consideration, bond investments are less of a risky game and instead a quite stable and successful method of financing.
(2010). Bond investment strategies. The Securities Industry and Financial Market Association, Retrieved from www.investinginbonds.com/learnmore.asp?catid=6&id=386
(2010). Risks of investing in bonds. The Securities Indus try and Financial Markets Association, Retrieved from www.investinginbonds.com/learnmoreasp?cati d=3&i d=383
INVESTMENT. Daily Press. Retrieved from
http://search.proquest.com.proxy.davenport.edu/docview/343311247?accountid=40195<="" span="">
Ehrhardt, M., & Brigham, E. (2011). Corporate finance: A focused approach. (4th ed., pp. 173-190). Mason, OH: South-Western Cengage Learning.

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