Finance For Business

PART 1

1.1 Comparison of three key financial products common stocks, bonds and preferred stocks from the perspective of an investor

Common stock example: Microsoft launch its IPO in the year 1986 on March 13 at rate of $21 per share. Total volume of trade of units was 3 million shares. Total market value of shares was $21000000. Microsoft was listed in the NASDAQ. On 31^st December total shares traded of Microsoft were 18369400 and close price was $157.70, open price was $156.77. Overall, market capitalization was $2896854380.

Figure 1Microsoft 5 years data

Bond: Bond of National Australia Bank was issued on 13^th January 2020 for five year which will matured in 2025. Par value of the bond is 1000 AUD. Overall value of the bond is 1,850,000,000 AUD. Total traded volume is 2896854380.

1.2 Analysis of five basic principles of finance

Five basic principles finance are explained below.

• Principle of risk and return: This principle state that if risk of higher level is taken in the investment amount then return percentage is high. Inverse to this, if risk level is low then return percentage also remain low. Thus, it become important for the investor to make investment in such a way that risk remain low and moderate return can be gained. In this regard risk and return both need to be compared and by making comparison investor make better investment decisions (Hudson, 2017). Example, Warren Buffett is known for making wise investment decisions. He invests only in those stocks where return is up to expected level considering risks. On media many times it repeatedly states that even share of the company perform good in the past but if he think that in the future time period stock will not be able to give sufficient return after considering risk then he do not prefer to make investment in stock of particular company.
• Time value of money principle: Time value of money is the one of the most important principle as it states that worth of money whatever today is does not always remain same. It keeps on decreasing consistently with passage of time. This is because price of commodity increase with passage of time and whatever quantity of items one buy today can not be purchased in same quantity in the future time period. Hence, before making investment in any security one need to consider future inflation rate and accordingly required rate of return must be determined so that loss can be compensate which originate due to elevation in the inflation rate (Keown, 2019). Example, Warren Buffett if think that in future time period particular company stock will grow then it makes investment in that in today time period and not wait for observing growth in it. This is because in future time period if inflation increase then same investment may prove costly because return on stock may be low or share may be overvalued due to overpurchased.
• Cash flow principle:  This principle state that when investment is made cash inflow and outflow both happened. If cash flow is higher in the earlier time period then the end time period of investment then it is good for the investor. This principle takes into consideration time value of money concept. Venture capitalist follow this principle and under this at initial stage they make investment in new business idea. There are no competitors and due to this reason profit is very high in early stage. Latter, when competitors comes in market profit growth decline.
• Principle of profitability and liquidity: This principle state that investor must make investment in the security which is highly profitable and in demand in the market. If security will have higher demand the investor can easily sale it in the market and if profit will be high then return more then inflation rate can be gained (Profitability and liquidity principle., 2020). In BSE there were not buyers for Uniflex Cables because company shares were not generating return for the investors. Thus, there was no profitability and liquidity. Due to no demand there was no liquidity of company shares in the BSE.
• Principle of diversity: This principle state that entire investment must not be made in the single security because that strategy will lead to facing of huge loss in the business. Hence, one must prepare portfolio of stocks and other securities so that loss faced in one can be offset by the profit gained on the investment. ABN Amro operate varied diversified debt equity funds through which it gives option to the investors to make diversified investment and minimize risk as well as maximize profit for them.

PART 2

2.1 Fact finding of the Australian Bond Market

1) Where the bonds are traded secondarily in Australia?

Transactions in financial markets are either organized in exchanges, Australian Securities exchange in primary market and New York Stock Exchange or over-the-counter as secondary market. An OTC trade is executed directly between two parties and is not overseen or subject to the rules of major exchanges. It has been analysed that exchange trading is really risky for the investors. Major loss can be bear by them by investing in financial market.

What are the types of bonds are traded in that market place?

There is various type of bonds that can be traded in Australian market place, it includes the following:

Fixed rate bonds: In this type of bond the interest rate is fixed for full life time. In this high amount of risk is been associated like for example maintaining credit quality risk.

Index Bond: These are basically medium term bond, in this bond it makes sure that payer receives the value which is more than inflation rate.

2) Who provide bond rating service and what are ratings used for bonds in Australia?

Bond rating services are provided by three independent agencies that are Moody's, S& P and Fitch who controls around 95 % of market share in bonds rating business. Every rating agency uses their own system of grading (Qizam and Fong, 2019). All the ratings system classify the bonds investments by the quality grade and risks. Bonds of investment grade are considered safer investment having minimal risks with minimal yield. Non investment bonds have risk with high yield.

Standard & Poor's (S& P) is oldest rating agency and accredited by Australian Securities & Investment Commission. It issues both long and short term bond's credit rating. Ratings are

• AAA, AA, A
• BBB, BB, B
• CCC, CC, C
• D

Moody's Bond rating agency is also accredited by ASIC. Primary motive of the Moody's Raating is to evaluate projected loss in default.

• Aaa, Aa, A
• Baa, Ba, B
• Caa, Ca, C

3) Difference between Australian government and corporate bonds

4) Nature of Yield to maturity

Yield to maturity refers to total return which is anticipated on bond if bond is held till it is matured. It is considered as the long term yield and is expressed as annual rate (Becker, Fang and Wang, 2016). It is also termed as internal rate of return of the investments in bonds if bonds are held by the investors till maturity, where each payments is made as the scheduled & reinvested at same rates.

Relationship between YTM and the coupon rate

Coupon rates are set when the bonds are first issued and remains fixed for life of bond. It is the rate at which the interest will be paid by the borrower company. The coupon rates are paid annually. Yield to maturity is rate of return over bond at the current market prices if they are held at maturity. They are both are related in terms of return to be provide over the borrowed funds to investors.

5) What is interest rate risk & how it affects bond price ?

The risk is danger that value of bonds or the fixed interest investment will be suffering due to change in rates of interest. Risks can be reduced by the investors by purchasing the bonds which are maturing at different time periods. The risk may also be reduced by companies using interest rate swaps.

Interest rate risks mat be termed as potential that change in the overall rates of interest will be reducing the value of bonds or fixed rate investments. Bond prices tend to be affected with the change in market rates of interests (Bergmann and Nitschke, 2016). Price of bond will rise with fall in market interests and the rise of market interests will reduce the bond price.

2.2 Fact Finding of Australian Share Market

1) Name of the Australian Stock Exchange Market

Australian stock exchange market is Australian Securities Exchange (ASX) that is also referred outside Australia as Sydney Stock Exchange. Stock exchanges provide the platform to marketers for buying & selling the securities. They are regulated by government agencies. Companies list their shares on stock exchange for raising money through sale of shares to the investors who make profit on performance of company (Kent, 2017). There are 2 trading platforms that are ASX Trade for equity securities on ASX & ASX Trade 24 for the derivatives securities. There are 2258 companies listed on ASX till may 2018 with the market cap of $2.153 trillion.

2) Market Capitalization of listed company and its computation ?

Market capitalization refers to the value of company as per the stock market. Market capitalization is computed by multiplying current market price of company with its outstanding shares. The market cap is used by the experts for determining the size of company. To determine the size of company market capitalization is important because it determines various characteristics of interest of the investors including risk.

Market Capitalization = Total shares outstanding * Market price of shares

Market Capitalization of APA Group

Number of shares outstanding = 1.18 billion

Market price of share = 11.370

Market Capitalization = 1.18 * 11.370 => 13.42 billion.

3) Oldest share in the Australian index, its measure, number of listed stock and computation of index.

The oldest listed was a banking company Bank of New South Wales that was listed on the stock exchange in 1817. The All Ordinaries known as ''All Ords'' is oldest Index of shares in Australia.

It is made of 500 biggest companies that are listed over ASX. Market cap of companies in All Ords index amounts to 95% of shares listed on ASX.

Value of stock indices are calculated by using prices of the underlying individual shares. Prices of all the shares are added and divided by total number of companies, outcome is multiplied by average trading turnover of every underlying single stock (Roca, 2018).

4) 3 year historical movement in graph of that index.

5) Trend of the movement in index.

The trend of the index between 2016 to 2019 has been fluctuating but has shown an increasing trend. The index started declining from mid 2018 and hit lowest in end of 2018. However it started raising back from 2019 till the date.

PART 3

3.1 Sensitivity Analysis.

1) Units decrease by 10%

2 ) Price per unit decreases by 10%

3) Variable Cost Increases by 10%

4) Increase of fixed cost by 10%

3.2 NPV Break even analysis when unit price decrease by 10%

Interpretation

It could be interpreted from the above calculations that the project is viable as it is producing adequate cash flows. NPV shows the project will be profitable as the present value is in positive terms. The project incomes instalment of new machine and working capital for carrying out the transactions. This is essential for the business enterprise to have positive returns from the project it is planning to adopt. The break even point at which the company will be recovering its cost of initial investment at sales of 25000 units. If the price per unit decreased by 10% then the break even units will be 32051 units. Company should adopt the project as returns generated are adequate and will help in the growth of company.

CONCLUSION

Based on the above discussion, it is concluded that there is a significant difference between equity and bonds across various parameters. Investors should make investment decisions based on their risk and return profiles. Additionally, it was noted that from 2016, the ASX has performed excellently, leading to high returns on stocks. Interest rates and bonds are highly correlated; when interest rates increase, bond values decrease. This is because higher interest rates mean firms must pay more to investors, which is detrimental to the bond value. For those using an essay typer or seeking assignment help UK, this analysis provides a clear understanding of these financial dynamics.

Also Read Sample on- Unit 5 Marketing Essentials Level 4

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