Q. Explain how high risk investments can end up contaminating fixed income securities - Essay Example

Risk Investments Explain how high risk investments can end up contaminating fixed income securitiesHigh-risk investments involve taking investments that are not predictable. Since the future is unpredictable, risk takers tend to invest in the high-risk investments whereas the risk averse tend to invest in the fixed income securities (Fabozzi, Davis, & Choudhry, 2006). The fixed income securities for instance bonds tend to have a fixed interest rate, and the principle amount is guaranteed. This is complete opposite of high-risk investments where the interest rate varies since it relies on market demand and supply.

In the case of taking uncalculated risks, the investor may lose the entire amount (Gazeta mercantil, 2000). This essay tries to answer how the high-risk investments contaminate fixed income securities.Although fixed income securities are safe to invest in, their earnings are relatively low thus it is wiser for an investor to invest in high-risk investments in the short run since the chances of earning more are high. The anticipated higher returns as stated above have led to the contamination of fixed income securities since an investor who aims to generate more income tends to invest in high-risk investments (International Monetary Fund, 2004).

Liquidity is another factor of contaminating fixed income securities since the high-risk investments are easily convertible to cash in comparison to the fixed income securities (The Wall Street journal, 2010). This means that fixed income securities demand is low in the open market thus in case of inflation; an investor will lose more due to the depreciation of his principle amount. In high-risk investment, the market is always open thus one can sell his stock when he anticipates that its value will reduce incase of anticipated inflation.

The risk of missing opportunity also contributes to high-risk investments contaminating fixed income securities (Moodys manual of investments, American and foreign, 1998). If the investor does not invest in a risky investment and the high returns are realized, he will curse why he did not take the risk. This makes it more possible for an investor to take the opportunity in high-risks investment more than in in the fixed income securities.ReferencesFabozzi, F. J., Davis, H. A., & Choudhry, M. (2006).

Introduction to structured finance. Hoboken, NJ: John Wiley.Gazeta mercantil. (2000). New York, N.Y: Gazeta Mercantil S.A. Editora Jornalistica.International Monetary Fund. (2004). Global financial stability report, April 2004: Market developments and issues. Washington, D.C: International Monetary Fund.Moodys manual of investments, American and foreign. (1998). New York: Moodys Investors Service.The Wall Street journal. (2010). New York: Dow Jones & Co.