Question

I. Define short-term investments, stocks, and fixed income investments.

II. Discuss the risks of short-term investments, stocks, and fixed income investments.

Cite at least two sources using APA format.

Answer 1

I. Investments which mature or have maturity for less than one year, those instruments called as short term investment alternatives. Example for this are: Commercial Papers, Certificates of Deposit, Treasury Bills, and Money Market Mutual Funds. These instruments are called as money market instruments.

Stock is nothing but equity share of any given company, which carries some value to the owner. If an investor who holds equity shares of different companies, all this holding together called as the stock of the investor. These are variable income securities.

Income or return is fixed and guaranteed on investments, is called as fixed income securities. Investment in Bonds, Treasury bills, bank deposits etc are the example for fixed income securities.

II. Risk is the probability of getting loss is called as risk in finance. In general short term investments (specially variable income securities) carries higher risk than other fixed income securities. The returns of these securities varies with market returns and other market conditions.

Best example for this is- equity stocks, where the returns varies regularly, based on market conditions. The price of a share will be depends on many factors like company performance, industry and its growth, economical conditions in the nation etc.

Fixed income securities carries lesser risk than variable income securities, the only risk will be inflation risk and maturity risk. If the inflation is higher during the investment period, then the real rate of return will be less. And if the issuer failed to repay at the time of maturity, is called as Maturity risk.

In general, variable income securities carries higher risk than fixed income securities.

References: 1. Marcus, Mohanty et al, Investments (2017) McGrahil Publication, New Delhi (Book)

2. V.K.Bhalla, Investment Management (2010) S Chand Publications, Chennai.