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    Investments and The Risk Premium

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    Nichole Ann Fedilo
    Penalties are imposed for early withdrawals. Time deposits have higher liquidity risk compared to savings and checking accounts.

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    Investments and The Risk Premium

    Uploaded by

    Nichole Ann Fedilo
    31 views13 pages
    Penalties are imposed for early withdrawals. Time deposits have higher liquidity risk compared to savings and checking accounts.

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    Investments-and-the-Risk-Premium.pptx

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    Penalties are imposed for early withdrawals. Time deposits have higher liquidity risk compared to savings and checking accounts.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    31 views13 pages

    Investments and The Risk Premium

    Uploaded by

    Nichole Ann Fedilo
    Penalties are imposed for early withdrawals. Time deposits have higher liquidity risk compared to savings and checking accounts.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 13

    Investments and the Risk

    Premium
    Reporters: 12 ABM BARNARD
    Mexcel Maderada
    Nichole Ann Fedilo
    “The current commitment of dollars for a period
    of time in order to derive future payments that will
    compensate the investor for:
    • The time the funds are committed;
    • The expected rate of inflation during this period;
    and
    • The uncertainty of future payments.”
    The required return of any investment is dependent on the risks faced by
    the investor as the risk-return trade-off suggests.
    The riskier the investment, the higher is the required rate of return by
    the investor.
    The required return is computed as follows:
    REQUIRED Real Risk-Free Rate
    +
    RETURN OF ANY Expected Rate of Inflation
    +
    INVESTMENT Risk Premium
    MAJOR SOURCES OF RISK
    1. Business Risk
    • is related to the nature of the company’s products and its operating
    strategy.
    • Is also associated with the cost structure of the issuing company. If
    the issuing company chooses to incur higher fixed operating costs
    then its business risk increases. Higher fixed operating costs result in
    greater variability in the operating income (loss) as the sales of the
    company fluctuate.
    • Business risk is usually measure by the degree of operating
    leverage.
    2. Financial Risk
    • refers to the risk created by the
    choice of capital structure-the
    financing mix of the issuing
    company.
    3. Liquidity Risk
    • is the uncertainty that an
    investment can be converted to cash
    at a known price.
    • The presence of many ready buyers
    and sellers reduces liquidity risk.
    4. Exchange Rate Risk
    • exists if the investment is denominated in another
    currency different from that of the local currency of
    the investor.
    • An additional uncertainty exists if the investor needs
    to liquidate the foreign currency-denominated
    investment and convert it to Philippine Peso.
    5. Country Risk
    • is associated with political and economic
    uncertainty of a particular business
    environment.
    • also increases if natural disturbances usually
    occur such as typhoons and earthquakes.
    Types of
    Investments and
    the Related Risks
    Deposits
    • A sum of money placed or kept in a bank account, usually to
    gain interest.
    • A deposit is a financial term that means money held at a
    bank. A deposit is a transaction involving a transfer of
    money to another party for safekeeping. However, a deposit
    can refer to a portion of money used as security or collateral
    for the delivery of a good.
    Deposits Instruments
    1. Savings Account
    - Provides a low fixed rate of return but
    provides the convenience of availability.
    - The depositor can easily deposit and withdraw
    from the account at any banking day.
    Deposits Instruments
    2. Checking Account
    - Previously, a depositor with a checking account does not earn interest
    but now most, if not all, banks provide rate of return although the
    fixed rate is very low.
    - Clearly, the depositor can issue checks from his account to pay for
    various expenditures instead of delivering bills or coins as payments.

    - Banks charge a certain fee for the printing costs of check booklets.
    - Check issued are subject to a clearing float (usually 3 days) when
    deposited by the payee.
    Deposits Instruments
    3. Time Deposit Account
    - Usually requires a minimum amount of deposit with a fixed term to
    maturity.
    -This type of account provides a higher fixed rate of return compare to a
    savings and checking account.
    -The depositor cannot withdraw from his account before the fixed
    maturity date.

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