Fundamental analysis
Question One: What are the potential investment risks involved with interest rate securities?
Interest rate securities can be traded on the ASX, e.g. floating rate notes, convertible notes, and hybrid debt securities. This type of security is a form of bond which pays a coupon payment, either fixed or floating, plus it pays the face value upon maturity. The main risk associated with these securities is that the coupon payment (cash flow) is fixed for the life of the security unless it is a floating rate security. The investment risks associated with longer term interest rate securities are greater due to the variability of interest rates over time.
In addition a discussion and example of interest rate risk and other risks all related to securities. The student just cannot list a set of risks without relating these to the security.
Question Two : Discuss the advantages and disadvantages of BABs as:
(a) a form of investment
(b) a way of borrowing money
A BAB is paper issued by a private borrower promising to pay a certain amount of money on a specified date where the payment has been guaranteed by a bank. Bank bills carry the credit rating of the banks guaranteeing them which gives them a rating close to that of government paper. This is because banks are widely regarded as “government guaranteed”, although there is no legislative basis for this view.
The attraction of bank bills as an investment is the safety of the investment. They also provide a good return for investors looking to park money for a short period, e.g. money intended for payments of tax obligations. If the yield curve is inverse (as it was in the 1980s), these securities yield a higher return than longer-term securities. BABs are also attractive as investments when interest rates are expected to rise. Note that, in this situation, the yield curve will be normal.
BABs can be used as an investment (bought) by wholesale 'and' retail clients (in either case
Interest rate securities can be traded on the ASX, e.g. floating rate notes, convertible notes, and hybrid debt securities. This type of security is a form of bond which pays a coupon payment, either fixed or floating, plus it pays the face value upon maturity. The main risk associated with these securities is that the coupon payment (cash flow) is fixed for the life of the security unless it is a floating rate security. The investment risks associated with longer term interest rate securities are greater due to the variability of interest rates over time.
In addition a discussion and example of interest rate risk and other risks all related to securities. The student just cannot list a set of risks without relating these to the security.
Question Two : Discuss the advantages and disadvantages of BABs as:
(a) a form of investment
(b) a way of borrowing money
A BAB is paper issued by a private borrower promising to pay a certain amount of money on a specified date where the payment has been guaranteed by a bank. Bank bills carry the credit rating of the banks guaranteeing them which gives them a rating close to that of government paper. This is because banks are widely regarded as “government guaranteed”, although there is no legislative basis for this view.
The attraction of bank bills as an investment is the safety of the investment. They also provide a good return for investors looking to park money for a short period, e.g. money intended for payments of tax obligations. If the yield curve is inverse (as it was in the 1980s), these securities yield a higher return than longer-term securities. BABs are also attractive as investments when interest rates are expected to rise. Note that, in this situation, the yield curve will be normal.
BABs can be used as an investment (bought) by wholesale 'and' retail clients (in either case