P R E S E N T E D BY G R O U P 8 ( M B F 3 R D B AT C H )

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The Investment SettingChapter-1

Contents

1. What is an Investments?2. Meaning of Investment from different Perspectives3. Defining Types of Investments4. Types of Investors ~ Investments5. How will you invest your excess income?6. Why do individual invest?7. Why give up savings/investing?8. Pure Rate of Interest & Pure Time Value of Money9. Investment Risk ~Risk Premium10. Conclusion

Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income, or appreciation of the value of the instrument.

In order to drive future payment: - The time the funds are committed- The expected rate of inflation during this time period.- The uncertainty of the future payments.

What is an Investment?

What is an Investment?

Investment Income – Consumption Excess/Deficit

Saving/Borrowing Income>Consumption Excess Income Saving Income<Consumption Higher Consumption

Borrowing Income = Consume ? Excess Income ? Expand Business ? Increase Skills ? Profitability ? Cost Minimization ? Profit Maximization ?

Meaning of Investment from different Perspectives

Investment Definition in terms of Economics :

Investment is defined as the per unit production of goods .

(Which have not been consumed , but will be used for the purpose of future production)

Investment Definition in terms of Business Management:

Investment refers to tangible assets and intangible assets.

(The decision for investment is also known as capital budgeting decision)

Investment Definition in terms of Finance:

Investment refers to the purchasing of securities or other financial assets from the capital market. It also means buying money market or real properties with high market liquidity.

Example : Gold, silver, real properties, and precious items.

Investment Definition in terms of Personal Finance:

An investment is the implementation of money for buying shares , mutual funds or assets with capital risk.

Investment Definition in terms of Real Estate:

Investment is referred to as money utilized for buying property for the purpose of ownership or leasing. This also involves capital risk.

Example : Commercial Real Estate : Renting Residential Real Estate: Buying properties

Meaning of Investment from different Perspectives

Defining Types of Investments

Ownership InvestmentsHigh risk-High return investments : Stocks , Real Estate, Precious objects

Lending InvestmentsLow risk-Low return investments : Savings , Bonds

Cash EquivalentsEasy to convert back into cash : Money market funds

Close, but Not Quite Education

Not InvestmentsConsumer purchases

Types of Investors & Investments

How will you invest your excess income?

Ownership Investments Lending Investments Cash Equivalents

INVESTOR’S PREFERENCE Highest Return Lowest Risk Liquid Assets

Investors are trading a known dollar amount today for some expected future stream of payments that will be greater than the current dollar amount today.

Why do individual invest?

One PossibilityIncome< Consumption Higher Consumption BorrowingIncome>Consumption Excess Income Saving

Another possibilityFuture Return = Future Consumption Give up Saving.

Trade-off Present consumption > future consumption the reason for saving

Why do individual invest?

Individual Motives Payment for Future Children’s Education Major Willingness of Purchases Saving for Retirement

Investment Motives Profitability Liquidity Safety

Why give up savings/ investing?

Expect to receive in future > They gave upWilling to pay back in future > They borrowedCurrent Consumption > Current Income

Give upFuture Return = Future Consumption Give up

Saving

Future CurrentConsumption – Consumption= Pure rate of interest

Rate Rate

Pure Rate of Interest & Pure Time Value of Money

Pure Rate of InterestEconomics concept of the theoretical interest rate that emerges in market of loadable funds where conditions of perfect competition and certainty (Zero Risk) prevail.

Pure time value of moneyPure time value of money is the interest rate demanded by an investor for postponing his consumption and making available capital to a borrower.

Investment Risk ~Risk Premium

Future payment on investment is not certain, Investor’s preference :

Demand on IR > Nominal Risk free IR Investment Risk Additional Return + Nominal Risk Free Interest Rate Expected Return– (Risk Free Interest Rate ) Risk Premium

Risk Premium = Required Return - Risk-Free Rate Risk Free interest Rate=Real Rate of return + Expected Inflation Premium

+ Risk Premium Real Rate of Return = Nominal Rate of Return – Inflation Rate Expected Return = Real Rate of Return + Expected Inflation

Premium + Risk Premium Total Return = Current Income + Capital Gains - Capital Losses Rate of Return =(Current Income + Capital Gains - Capital

Losses) Amount Invested

Conclusion

Q-Why do individuals invest ?Q- What is an investment?Q-What do they want from their investment?Q-How do investors select investments?

How to measure the expected rate of return on an investment?

How to quantify the uncertainty risk of expected returns?

References

http://www.businessdictionary.com/definition/investment

daily@investorguide.com

www.investopedia.com

Lecture Notes

www.investorwords.com

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