Investments Essay

1) In 1994 the Bulgarian government issued adhesivenesss on which the coupon succumbments were level(p) to the GDP of the country. Im simplifying here, but basic all(prenominal)y a low level of GDP (a country-level quantity of economic growth and activity) would reduce the pertain dispirit under ones skinments on the baffles, and a high level of GDP would change magnitude the affair payments. Suppose a US investor buys these beats, what put on the lines is the investor assailable to? (list everything which could negatively affect the investment)One of the ventures associated with this bond is Interest raterisk. The prices of bonds argon inversely related to rates of interest. A higher GDP of Bulgaria would sozzled that the price of the bond exit decrease, however a lower GDP would mean that the price of the bond will decrease. The interestrateon a bond issetat the time it is issued, which is in 1994. The coupon in 1994 reflected the interest rate at the time of issua nce, however the increase in interest, in GDP, will make mint unwilling to purchase bonds. In other words, the US investor will engage a difficulty reselling the bond to secondary markets should the GDP of Bulgaria increase. Should he decide to keep the bonds, and so his interest income is very much dependent on the GDP of the community. There argon is no fixed center that he goat count on.A nonher risk associated with bond is credit risk. Just as individuals inadvertence on mortgage payments, bond issuers can possibly default as well. Usually, bonds issued by the government argon immune from this risk, but nothing is risk free in issues such as credit.Call risk is another risk the investor is exposed to. The government of Bulgaria can easily call cover the bonds before maturity so they can issue it at a lower interest rate forcing the investor to reinvest the principal at a lower interest rate.Inflation risk is perhaps the worst of the investor must endure. The GDP of Bulga ria will suffer immensely if significant inflation is suffered by the country. Anything that affects the GDP of the nation will affect the interest rates of the bonds issued. Are their every ways to manage/ finish upset some of these risks?Credit risk, generally associated with any kind of credit is practically managed in investing in these bonds. Governments, generally pay out their bonds, and on time too because it will not look good for the government to default from its loans to its people or its investors. The other kinds of risks are hard to manage given that they are dictated by a nations GDP. The investor from the US cannot managely influence how Bulgarias GDP shall fluctuate.2) In the 1970s Yale University implemented a system for students in which the students would receive loans to pay their tuition. Repayment of the loans involved the following arrangement-after graduation all students enrolled in the program would pay 0.4% of their annual income per $1,000 borrowed unt il the entire cohort, or divide, had paid off their debt, or until 35 years had passed, whichever came sooner. (See The New Financial Order by Robert Shiller, 2004, Princeton University Press, page 143) What risks are the students exposed to?The students, are exposed to the risk of paying more than they owe given that the program ensured that they can finish their studies but they essentially had to pay for royalties for 35 years. Imagine a student in 1974 who borrowed $30,000 to finance his Yale education. Assuming he has gradational in 1978, and started to earn $100,000 annual. For this first year alone, he will induce to pay Yale .8% of his annual income which is $800. This payment will not stop until each person in his class, who obtained a loan from the University, has paid off his debt. The percentage of payment is fixed but the salary of this Yale grad keeps increasing yearly. Suppose this student managed to pay off his loan in 20 years, yet there are 5 people from his cla ss who energise not yet paid theirs, possibly because these 5 people wee no income, then for fifteen more years the person is indebted to Yale for .8% of his annual income that is probably in the million dollar mark bracket by now. What risks are the lenders of money exposed to?Yale, on the other hand is exposed to the risk of students paying off their loans quickly. Given that Yale produces quality graduates (i.e. President Bill Clinton), the students can easily pay back their indebtedness given their instant financial status after graduation. The time value of money is the superlative exposure of Yale. A $30,000 loan the University has given in 1974 has bigger value as compared to the $30,000 the students gave back in installment payments. The entire class might a find a way to fully pay their debts and Yale may not recover any interests for the loan extended. Are their any ways to manage/ smuggler some of these risks?If one student, or a convocation of students has/have the m eans, then he or they can just buy off the remaining loan of their classmates, to ensure that everyone is debt free from Yale and the annual payments of every shall stop. The group may in turn collect from those who cannot pay Yale yet and draw up new legal injury and conditions for the loan.3) In 1997 so-called Bowie bonds were issued. These were 10 year bonds paying a 7.9% annual interest coupon, where the money for collision the payments on the bonds was to come from the future income of participant David Bowie (see http//en.wikipedia.org/wiki/David_bowie if youve never heard of him).What is the purpose of issuing bonds of this nature (i.e. whats in it for the issuer)?David Bowie pretty much protected himself to the decline of his popularity. His bonds were issued in exchange for ten years expenditure of royalties. Bonds were issued in this instance as a security. David Bowie has benefited from this deal, he may or may not have known it at that time but the bonds secured him from music piracy which has plagued the industry at the end of the 90s.What risks are investors in the bonds exposed to?After a while, bond investors were exposed to David Bowies decline in popularity. Also, they have been exposed to the ultimate enemy of the music industry piracy. David Bowie issued the bonds on time before website like Kazaa have grown over the internet.Are their any ways to manage/offset some of these risks?The investors have exposed themselves to the ultimate risk. They have relied too much on the popularity of David Bowie at the time when David Bowie himself protected himself from his decline. Consumer tastes are highly unpredictable and I do not see a way on how the bond investors could have controlled the popularity of music piracy throughout the end of the 90s and early 2000 when they were supposed to get the royalties.4) In The New Financial Order by Robert Shiller, the author proposes livelihood insurance in the get of derivative contracts on the performa nce of particular professions. In brief, the way it would work is-we construct an index which by and large captures the current levels of compensation in a particular profession based on market data. If consider (and salary) for people in a certain profession increases then so would the index, and if demand decreases then so would the index. In other words, the index attempts to capture how good the current career prospects are in that field. wherefore might people be interested in contracts valued in this way? Think of both speculation and hedging when considering this question.People might be interested in these kinds of contract because of speculation and hedging. These people are presently employed of course. However, should the demand for their current profession grew, and various companies here and there are offering the same job at a higher compensation, then the person will not be happy at his current job. This kind of insurance will at least get him compensated for that o pportunity lost while he stays with his present employer. He speculated that he would cook in the future given that he foresees better-paying opportunities for his career, but it requires a move to another nation or state, so he entered into a contract that would allow him be compensated as he cute but remain secure in his current position.How is this proposal different to an individual simply taking out an insurance policy against failing to succeed in his/her chosen profession? (for example, an aspiring musician taking out an insurance contract which pays out if the person never actually ever gets offered a recording contract)This specific example has failure in mind. In the first example, the individual did not have to fail anything. He remains secure in his current position.