Question

"Financial Instruments" Please respond to the following:

Suggest one key factor that a financial manager should evaluate when determining whether to invest in fixed-income securities or Treasury notes. Provide support for your rationale.

Create an argument on whether the market-value weighted or equal-value weighted is a better index of the performance of the broad stock market index. Support your answer.

Answer 1

The one key factor that a financial manager should evaluate when determining whether to invest in fixed-income securities or Treasury notes is “risk”. Fixed income securities like bonds and other such securities carry a higher amount of risk than Treasury notes. This is because Treasury notes are backed by the sovereign government and hence the risk of default is practically low. Thus a financial manager does a risk-return calculation and usually a risk averse financial manager will usually invest in Treasury notes as they carry lower credit risk, lower default risk and lower liquidity risk.

Equal-value weighted index is a better index of the performance of the broad stock market index. This is because equal-value weighted index is more diversified than the market-value weighted index. Also equal-value weighted index is based on value while the market-value weighted index is driven by momentum at large. The momentum may not always be broad based and usually is restricted to certain categories like technology stocks, finance stocks etc.