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Word limit Part B: 1100 words Question 2 Table 2 below shows five alternative ways to invest a 100,000 lump sum. Explain how each of the investments might be exposed to the three high-level risks: capital risk, income risk and liquidity risk. Discuss ho - Coursework Example

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The investor often has to make a choice between multiple investment opportunities that offer future cash flows that vary in timing and quantum. The…
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Word limit Part B: 1100 words Question 2 Table 2 below shows five alternative ways to invest a 100,000 lump sum. Explain how each of the investments might be exposed to the three high-level risks: capital risk, income risk and liquidity risk. Discuss ho
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Download file to see previous pages The formula used for calculating the present value of the future cash flows is as shown below: (Mayes, 1995)
When the purchase price increases from £ 105 to £ 140, the outflow increases but inflows do not change. The profit from the investment reduces to 37.31% but remains the most attractive of the three. The calculation is shown in Appendix-I.
Government bonds cannot be termed risk-free after the Greek government’s default in March/ April 2012. Bonds of face value € 200 million were exchanged new bonds of only € 35 million by a retroactive change in applicable law. This default was fully backed by the European Union and the IMF creating a precedent (Zettelmeyer, et al).
The personal financial planning process depends on a number of factors that are individual to an investor. The first of these is the opportunity cost of money which is the trade-off between present and future consumption. A second key factor is the time horizon for investment, whether the individual is looking for immediate, near-term or long term returns. Every investment decision for an investor requires an evaluation of risk versus reward. Low risk investments generally have lower returns than higher risk investments (Christopher & Elu, 2001).
The interest rate of 2% is below the inflation rate causing income erosion. If the investor is an income-tax payer, there would be a 20% tax deduction. A further risk for the investor is that the interest rate could change 2 or 3 times a year based on a change in the Bank of England rate or due to the bank’s own decision.
In Fixed term savings accounts the interest rate does not change and therefore there is no income risk due to changes in interest rates. However, the interest rate of 1.25% is lower than the inflation rate of 4% and the investor suffers from erosion of income. The interest credited is also subject to 20% tax deduction if ...Download file to see next pagesRead More
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