Example Of Essay On Long-Term Investment Decisions

Under fixed income investment, the investor gets a certain agreed amount of return over a specified period. The issuer is obliged to pay interest after a specified period, and the principle amount is paid upon maturity of the investment. Fixed income investments are crucial in that there is an assurance of a fixed and constant return on their investment. The investor gets reliable and predictable source of revenue. In addition, fixed income securities help in diversifying portfolios thus stabilizing the overall return. This helps in maximizing profits while minimizing the risks. There is a large variety of fixed income securities, giving investors the freedom to choose the best that suits their need. The investors get a higher return on their investment in the fixed income securities, and the rate of volatility of return is little.
There are other investment options offered by banks, credit unions, and thrift organizations called certificates of deposit (CDs). The financial products are very safe in the sense that they are insured thus the investor does not risk losing their money in case the financial institution goes bankrupt. CDs have a fixed term usually one month to five years with a fixed coupon rate. The investor holds the CDs until maturity when they receive the principal amount and the accrued interest. The higher the amount of money they invest in the CDs, the higher the rate of return. In most financial products, high risk is compensated with high return on the investment thus for an investor to maximize their wealth they must be willing to take maximum risks.
Another type of fixed income investment is the annuities where the investor gets regular interest income from insurance companies in exchange for payment of premiums. In cases where an investor chooses to invest in an immediate annuity they start receiving the payments from insurance companies immediately. Another financial product is the life annuity where the issuer, mostly a financial institution pays the investor a certain amount of money in given periods in exchange for a lump sum that the investor pays immediately or in regular installments. It is a form of longevity insurance where the uncertainty of one’s lifespan is transferred to the insurance company. The assumed number of years that the annuity lasts is determined by the life expectancy of the investor. The life annuities are very popular with the seniors since it provides income during retirement. If an investor decides to take the life annuities, they are paid income only as long as they live since the annuity benefits cease when one dies.
A specified period annuity, on the other hand, pays a particular amount of income to the investor or the annuitant for a number of specified years. The investment type is not suitable for retirement income as an investor may outlive the number of years that the annuity will pay. In cases where the investor opts for the specified period annuities the insurance companies pay the beneficiaries even after the investor dies.
There are cases where the government borrows money from the investors in terms of treasury bonds. Government bonds do not have any risk since the investors are assured of their principle amount and the accrued interest at maturity of the bond. The returns and cash flows of these bonds are predictable since they are calculated at the beginning of the transaction.
A corporate bond is another traditional fixed income investment where a financial company issues a debt security and sells it to the investors at a profit. The investors lend to the enterprise in terms of the corporate bonds but they must take into consideration the value of the business’s assets because in case they company goes bankrupt, the company assets can be sold to recover the amount it owes the investors. The company’s payment ability can also be determined by its projected cash flows from its operations. Corporate bonds are mainly issued in blocks of $1000 in par value leading to very high interest rates. This makes the investment very attractive to the investors who are willing to increase their earnings. Further, if the prevailing rates change, the bonds have call provisions allowing for early prepayments.
Buying bonds that are above the par value reduces the income yield of the bond. Therefore, an investor should buy bonds that are below the par value so as to increase the income yield. Bonds pay a semi-annual interest rate with a specified nominal rate. For example, if a bond's coupon rate of 7% with a par value of $1000, the investor receives half the coupon value every six months and the coupon value with the principle amount on maturity of the bond. Corporate bonds can be secured or non-secured, with non-secured ones purely dependent on the asset value of the company.
For an investor to receive a constant cash flow of $15000 per year, they should invest in a corporate bond that has a lesser par value than the prevailing one. Assuming a coupon rate of 5%, the par value can be determined by calculating the expected cash flows ($15,000) divided by the interest rate in the market plus one to the power of the number of years to maturity. This is then equated with the number of years, in this case, a twenty-year corporate bond. Instances where the investor wishes to preserve his wealth by maintaining the initial amount of bonds, they should invest in corporate bonds that are values above the par value. The investor receives the coupon payment while still having their bonds intact. An investor can also make money through sale of the bonds. For an investor to sell bonds and end up with about half of the invested amount of bonds they need to have corporate bonds that are below the par value so as to get a higher return from the selling the bonds. For an investor to sell even quantities of bonds and deplete the initial capital, they should invest in corporate bonds that are equal to the par value.
Bond mutual funds have professional management in that the portfolios are invested in individual income securities. They are low-risk investments because there is potential hedge against the volatility of the market. The funds are income generating thus they can provide the investors with high returns. Investors can take advantage of the bond mutual funds and diversify their portfolios through the funds. Unlike in other long-term investments such as the corporate bonds, mutual fund bond investors do not encounter the default risk. This is because of the massive portfolios in the fund.
One of the main mutual fund bonds is the investment grade bond which is issued by large corporations to raise capital. The bonds can be long-term, intermediate or short-term, depending on their maturity periods. Other bond mutual funds are high yield or junk, depending on the classification of the issuing company. Investing in junk bonds may lead to uncertainty about the returns and the creditability of the enterprise. They pay higher returns owing to their high levels of default risk. Another type of fund mutual bond is the international bonds issued by the government that is very vital to the investor since it helps in international diversification of risks. An investor can also invest in multi-sector bond fund which invests in various funds including corporate bonds, treasury securities, and international bonds. A convertible bond is another type of long-term investment the investor can opt. It gives the investor the right to change the bonds from corporate bonds into ordinary shares. Unlike the CDs that are affected by the coupon rates in the market, mutual fund bonds have less interest rate risks. Some of the bond mutual funds have high risk unlike the treasury bonds that are less risky. Unlike the annuities where the sum invested is insured some of the bond mutual funds such as junk bonds are perilous since an investor can lose all their deposits.
In conclusion, an investor should consider the risk and return of the investments. They should not take uncalculated risks so as to avoid losing their money. A long-term investment in a convertible bond is highly recommended since it is flexible such that an investor can change the bonds to common stock that may be more profitable. An international bond is also recommendable for long-term investments since there is minimal risk because the risks are spread over vast regions.