structured investment

Structured investment value after three years

The face value is AUD100,000

The coupon rate is 2.95%.

=3.85% yield to maturity

Maturity time = 3 years

The total amount of coupons is 6.

Each coupon payment is worth =100000*0.00295/2 =147.5

Semiannual yield = 0.00385 divided by 2 = 0.001925

Investment value =147.5*[1-[1/1.0019256]/0.001925+100000/1.0019256 =98854.434

According to the foregoing computation, the structured investment will sell at a loss. Because the needed yield of every three-year investment in this company is more than the coupon rate, the investment price is less than its par value.

The calculation also implies a lower coupon and which puts less money in the investor’s pocket, as the investment is highly sensitive to prevailing interest rates.

A structured investment is referred to an investment in specific single stocks. A person investing in a plain vanilla debt in the gold mining company may suffer financial risks like industry financial risk, managerial risk, diversification risks, interest rate risk, foreign exchange rate risk and market risk. Industrial risk arises when the industry that the stock issuer operates in suffers broad economic shifts and these shifts may be because of geographical challenges, natural disasters and changes in technology (Fischer and Jordan, 1999). Managerial risk is caused by incompetent managers who fail to analyze the current price trends in the market and equipping investors with the necessary current information in the market. Diversification risks are risks associated with investment in single stocks other than numerous stocks. Foreign exchange risks are associated with changes in currency exchange rates. Changes in currency exchange rates can either increase or decrease the price of assets (Reilly and Brown, 2012). The investor should understand that currency exchange rates in one country may be as a result of some factures affecting one country and not another, for example, political factors. At one point, the Australian government may be peaceful but the US government suffers political problems. This may be unfavorable to the investors in the Australian government who might have invested in foreign assets and the euro assets in us. Market risks are because of changes in the price of stocks or assets sold in the market. According to (Hiriyappa, 2008) it depends on the bull and the bear market. This is referred to as volatility and it influences the returns on investments.

In quantitative terms, individual investment returns based on security analysis exceeds returns from portfolio investment but this is only recommended in the short run. The investor should understand that it is harder to achieve diversification with the structured investment. One need to have more stocks to achieve adequate diversification. The structured investment on the asset issued by the gold mine company is riskier. It means that once the company experiences any negativity then the investment is also interfered with. Individual investments like this require more time from the investor to monitor the portfolio. Investors need to ensure that the company does not have business problems that can wipe out the investment. In summary, when the investor is trying to get more return for the least amount of risk then the investment should be diversified.

References

Fischer, D. and Jordan, R. (1999). Security analysis and portfolio management. Singapore: Prentice Hall.

Hiriyappa, B. (2008). Investment management. New Delhi: New Age International (P) Ltd., Publishers.

Reilly, F. and Brown, K. (2012). Investment analysis & portfolio management. Mason, OH: South-Western Cengage Learning.