Financial Markets and Institutions

Student’s Name

University Affiliation
 1. Analyze the role financial markets play in creating economic wealth in the U.S. 

Financial securities are means through which institutions such as government,

corporations and even small businesses owned by private investor use to raise funds with an of

financing their operations. According Lynch (2009), financial securities are a safer way of

raising funds while at the same time ensuring there are returns to the investors. Financial markets

provide a platform that ensures there is openness between the sellers and buyers of the securities

(Lynch, 2009). In addition the financial market lead to mobilization of large amounts of capital

for use within the various respective institution. In the U.S, the financial markets are major

contributors towards economic growth.

The financial markets also enable the government to obtain funds through which it is able

to finance some of the projects. The government seek or borrow capital from the general public

and other financial institutions such as banks inform bonds and they are able to undertake some

initiate projects such as the development of infrastructures like hospitals. Through the financial

markets as well, it’s now easy for students to borrow funds in form of loans and hence they are

able to undertake their studies easily.

Another major contribution of financial Markets in the growth of U.S economy is in

ensuring that saving of funds takes place. Such funds are later used in undertaking of investments

projects which are projected by financial analyst as having the ability to high yield within a

specified period of time. Therefore in general the country economy is assured of stability through

enhancement of financial management within some of the major corporation that provide goods

and service to the citizens. In case the world is undergoing financial crisis the financial markets

ensure there is reservation in borrowing from the investors and that only those projects that can

yield returns are undertaken.

 2. Provide a general overview of each of the three (3) securities you chose. Be sure to include such
information as name, company it represents (if applicable), pricing, and historical performance. 
Equity securities are major from through which funds are raised by corporation in U.S. An

investor who is lending funds through such a mechanism is able to obtain a portion of shares

within a company. Individually, one can buy stocks from a company or else profit from buy

share of mutual funds. Through New York Stock Exchange (NYSE) also, equity securities

enable one to obtain the stakes of a company and eventually one becomes a shareholder. When a

new company want to raise capital to finance its operations before being listed in the stock

exchange, an investor can also obtain shares through Initial Public Offer (IPO).

Debt securities enable investors to lend money inform of bonds to corporations and

government. A corporate bond is used by companies to raise money to finance their intended

projects. Where government wants to raise money they usually consult the treasury in evaluating

the amount of capital they intend to raise. They then make an appeal to the general public and

private investors to contribute this money this kind of bond is usually referred to as Treasury

bond. Once a bond matures the lender of capital expects the borrower to pay a high interest rate.

However junk bonds usually have very low ratings and are very risky but they can yield high

interest rates to an investor.

The derivative securities, provide an investor avoid risks once they undertake in certain

investment. They provide an easier means of negotiations where one can buy and sell bonds and

stocks at the prices they feel that are more appropriate. The derivatives are classified into various

categories such as mortgage securities, future derivative securities and collateral debt obligations

among others.

3. Assess the current risk return relationship of each of the three (3) securities. 
 When an investor obtains equity there are likely risk as returns involved and there are no

exact predictions of the outcome which should be expected. Equity securities enable an investor

to obtain assets of a company inform of shares. However through standard deviation, it’s easier

for an investor to determine the normal fluctuations likely over the expected returns on average.

In addition there are high premiums associated with risky stock with an aim to encourage an

investor to consider undertaking an investment.

Since an investor owns assets from an investee through the equity securities returns it

depends on the influence they do have over the existing assets which they acquire. In case there

are gains or losses experience by an asset then through equity accounts reflections are made and

hence the investors’ portion of dividends and income from the investment are appropriately

calculated.

Debt securities are usually obtained for long periods of time and provide low risk to an

investor’s capital. The risk high where the borrower defaults to pay since the interest rate always

keeps on rising. The returns in securities are only granted after the bond has matured. Usually

government bonds are assumed to have low interest but they are more secure in terms of returns

while compared to corporate bond.

Derivative securities enable investors to share risk and therefore any chance of loss on the

wealth is minimized. The various portfolios supported by derivative securities ensure that there is

sustenance of equity in the financial market. The investors always look to trade where there is

guarantee of high returns within a short period of time. For instance the investor may buy shares

at a certain price and later sell them once their price rises within the same day. Therefore

depending on the agreed negotiations between a buyer and a trader then as an investor, one is
free to make decisions in regard to risk and returns likely to be experienced on the securities

traded.

4. Recommend one (1) strategy for maximizing return for the current risk return relationship identified

for each of the three (3) securities

Every investor’s objective is to maximize on returns while at the same time keeping

returns at minimum. One way of ensuring that one can maximize returns on investment through

equity is through assessing the company’s portfolio performance over its operational period

(Bond et al, 2011). This is important since it becomes easier to calculate return on benefit (ROI)

and therefore an investor is able to ensure that the equity are only obtained for those assets that

can yield expected returns maximally once losses are deducted.

Investing in debt securities requires diversification strategy. This help in ensuring that

incase one of the borrower is unable to pay the interest then an investor has his eyes set to obtain

returns from another debtor. In addition, at maturity for instance bonds yield high returns since

the coupon rate is higher than the prevailing interest rates. Maximization of income is a strategy

that one can use through investing in corporate bond rather than government bond over long

periods of time. The junk bond for instance enable an investor to yield high returns more than the

coupon rates in the markets.

Derivative instruments provide a tricky approach to an investors. If not well used then an

investor is likely to incur major losses. In order to ensure that there are maximum returns an

investor can deploy speculation strategy where there is betting on the future price of an asset.

Another approach is the hedging approach which aims at ensuring that there is security of stock

due to the fluctuations in the markets. Finally an investor can also use leverage strategy in order
to know when the price of shares move in a favorable direction within a volatile market. This

approach is used by investors through monitoring of exchange volatility index (VIX).

5. Suggest how the Federal Reserve and its monetary policy affect each of the three (3) securities today. 

Federal Reserve aims at controlling the supply of money stock with an aim of ensuring

that there is control of macro-economic issues within the country. Therefore through its

monetary policies it ensures that equity securities provided are aimed investment projects that

yield great result. The monitories policies are there regulated to ensure that financial institutions

lower their interest rates hence encouraging potential investors to acquire funds through shares.

The federal reserves in other circumstances may rise the interest rates with an aim of

preventing firms from obtaining capital from the citizen. This then enables the government to

borrow capital from the public through the treasury so as to be able to finance its budgets and

other desired projects. The government is further able to manage public debt where monetary

policies are regulated to keep interest rate low and hence encouraging people to borrow.

The open markets where derivative instruments are used is a means through which the

government ensure that the monetary policies are enacted. The Federal Reserve is responsible for

creation of flexibility in securities whether seasonal, permanent or cyclical and this affects short-

term interest rates as well as other interest rates through the supply of reserve balance.

6. Determine whether each of the three (3) securities is a good investment in the next twelve (12)
months, five (5) years, and ten (10) years.

Equity securities could be worthwhile investing in the next one year as compared to

undertaking five or ten years investment. This is because as an investor one owns stakes inform

of assets in an organization and the annual financial year provides returns worthwhile through
financial statement. In case of five years, an investor is not sure of the long- horizon of a

company and therefore it’s not worthwhile to invest due to the uncertainty of risk.

Debt securities would be worth investing in over long periods of time since the more

securities such as bonds are let to mature the higher they yield returns. They are more secure as

compared to equity and derivatives and therefore yields high returns over long periods of time

such as from 5 to 10 years.

Derivatives are very sensitive and their investments depends on the next prediction in

terms of interest rates by an investor. Therefore one can invest for 1 year, 5 years or even 10

years and this depends expected returns. In some portfolios, investors expect to get returns over

long period of times while under other circumstance due to the changes that emerge in terms of

policies and fluctuations in interest rates.

 References

Accounting for certain investments in debt and equity securities. (2013). Norwalk, Conn.: The

Board.

Bond, P., & Edmans, A. (2011). The real effects of financial markets. Cambridge, Mass.:

National Bureau of Economic Research.

Lynch, T. E. (2009). Accounting for Investments in Equity Securities by the Equity and Market

Value Methods. Financial Analysts Journal, 31(1), 62-69.