Factors Considered by Investors Each investment has a certain compensation for the investor for undertaking risk of the investment

Factors Considered by Investors
Each investment has a certain compensation for the investor for undertaking risk of the investment. Investors put their capital into those investments that they consider profitable. Profits refer to the surplus obtained from an investment. A profit is a reward for capital employed in an investment by the investor. Before getting into investment, investors consider several factors that include the business risks, financial risks in the business, liquidity risks, the exchange-rate risks, and the risks which are taken to be country-specific risks (Aharoni, 2015, 24).The risks are to be compensated by the investment in the course of the business. Investors make their investments based on the risk analysis.
Business risks refer to the uncertainty associated with the cash flow of an investment in the future. This is also connected to the operations of the investment as well as the environment which the business operates (Griffin, 2018). Business risk is an essential consideration made before a compensation scheme is considered. Financial risk is the uncertainty inherent in the ability of the business to make payments of their various debtors and the ability of the business to meet its obligations. Financial risk also forms an important consideration in the business compensation. Liquidity risks refer to the risks linked with changing the assets of the operations into cash. How fast the assets of a company including the movable and immovable assets can be changed into cash with the objective of meeting the obligations. Exchange rate risks are inherent in the foreign exchange and refer to risks that are associated with the exchange of currencies in the currency exchange market. The risks determine the compensation to the investors.
Investors also take into consideration the opportunity costs. Opportunity costs refer to the cost of the alternatives that are foregone in making the choice of an investment (Business Dictionary, n.d.). An investor normally has several choices to choose from. However, they make a choice on one of the investments which they consider feasible, possible, and acceptable socially. When the costs of all the alternatives are analyzed then the opportunity cost will be that cost that is foregone by the investor while making a decision to invest in other business. Several factors contribute to making a choice on one of the investments while leaving out other investments.
Future Value of one
Two scenarios of investment include first investing an initial amount of 2,000 for10 years at an annual rate of 5% per annum. At the end of the 10 years, the total amount of the investment will amount to23155.7851.
A=P (1+r/100) n where P=2000, initial investment, r=5% and n=10

Year
Principal
Rate
Total
1
2000
5%
£ 2,100.00
2
4,100.00
5%
£ 4,305.00
3
6,305.00
5%
£ 6,620.25
4
8,620.25
5%
£ 9,051.26
5
11,051.26
5%
£ 11,603.83
6
13,603.83
5%
£ 14,284.02
7
16,284.02
5%
£ 17,098.22
8
19,098.22
5%
£ 20,053.13
9
22,053.13
5%
£ 23,155.79
10
25,155.79
5%
£ 28,413.57

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At the end of the investing period the amount that will be available at the bank will be £ 28,413.This is because the amount will be earning interests even as there will be addition of 2,000 every year to the initial investment. When calculated at the end of 10 years the investment at the bank amounts to £ 28,413.57
For the sibling, he invests principal of 2,000 at 5% for a period of 30 years.
Annuity Calculation = C (1+i) n-1/i (Guthrie & Lemon, 2014)
= (2000(1.05)30-1)/0.05
=132,877.6950
The sibling has saved more, therefore, has more in an annuity at the end of the period which runs to 30 years compared to the 10 years annuity. The respective annuities are, therefore, £ 28,413.57 for ten years and £ 132,877.67950 for 30 years by the sibling. This is the future value of one which is the amount in future which when a series of payments are regularly made at a given rate then the amount would be achieved after some time. The amount can be kept for retirement or for any other use in the future.
Present Value of one
Siobhan’s investment target is £100,000 at the end of 18 years with interests at 7% and the interests of 10%.The annuity calculations are as follows;
Present Value, FV==C (1+i) n-1/i
PV= FV*i/ (1+i) n -1
= (100,000*0.07)/ (1.07)18-1
= 2,941.126
He will have to invest £2,941.26 at annually at the rate of 7% for 18 years to realize a value of £100,000.
When the interest rate is 10% then the annuity calculation is calculated as PV= FV*i/ (1+i) n -1. (Guthrie, 2014)
= (100,000*0.1)/ (1.1)18-1
= £ 2193.02. at 10% the amount to be invested annually to yield 100, 000 at the end of 18 years would be £2193.022.The interest rate of 10% requires a lower annual saving compared to 7% that requires relatively higher annual savings. For Siobhan to invest the amount he will need to make careful considerations on the interest rates. This is the present amount that must be contributed annually today at a specified rate which is either 10% or 7% to realize a specific amount of money in the future. If he wants to have 100, 000 at the end of 18 years then he must put aside 2193.02 every other year at 10% interest or alternatively put aside 2941.18 annually at the rate of 7% for 18 years.
Compensation of Investments
The investment which returns a profit of 15,000 annually for 20 years and has a cost of investment running to 100,000.The collective compensation after 20 years would be
={C (1+i) n-1/i}-Cost of investment.
=£27,703 at the present rate, however, when the rate of inflation is factored in then the investment would return an expected value of £27703* 98% which amounts to £27149.39.The investment would have compensated the initial amount of the investment and made a return. The present value of the compensation would be 743,942.492 owing to the inflation which makes it higher than the present rates. The investment would compensate the owners and make profits based on the operations of the business (Narayanan, 2017).
SECTION B
Commercial Banks
Commercial banks refer to financial institutions that offer services which include accepting savings, advancing loans, and offering basic financial services to members of the public. People open bank accounts for various accounts for various reasons. The reasons why people hold bank accounts with various commercial banks differ but depend on the objectives and aims of different individuals. The reasons include opening a bank account for savings purposes, holding bank accounts for money transfer purposes including the exchange of money, other reasons include to access borrowing, and for maintaining the financial flexibility. People can only save when they have bank accounts, therefore, bank accounts enhance savings and this prompts people to hold bank accounts.
Bank accounts also enable people to make transfer payments including the transfer and exchange of money in different currencies. A commercial bank facilitates the transfer of payments from different people including the transfer of payments made from employers to employees through bank accounts held in different banks. Borrowing is enhanced by commercial banks through the bank account holders. Different banks advance loans to their account holders and this also promotes individuals to open different bank accounts with different banks. Bank accounts also enhance the flexibility of the finances and proper management of the amount deposited in the accounts. The interests accrued from investments also prompts people to hold bank accounts. As a matter of policy, some employees are made to hold bank accounts by their employers. This goes a long way in managing the amounts remitted to the employees as wages and salaries.
In general, commercial banks play special roles in financial management. The roles played by the commercial banks include accepting cash deposits and keeping of valuable materials on behalf of the customers, lending money to the customers, processing important payments on behalf of their clients, issuance of bank drafts and checks where necessary, and making advisory on investments on different issues. The services offered by the commercial banks are essential which prompts individuals to open and hold bank accounts so that they can enjoy the services offered by the banks. Other companies and firms also have it as a policy that their employees must have bank accounts in order to access important payments.
Cash Reserve Ratio of HSBC Bank
HSBC is a commercial bank in the United Kingdom and it is a listed company. It, therefore, publishes its annual results. From the annual results, the cash reserve ratios can be computed for various years (HSBC, 2018). The presentation of cash reserve ratios is from the year 2000 to 2016 which is a period of 16 years. Cash reserve ratio refers to the minimum amount of the customer’s deposits which are held by commercial banks. As the deposits by consumers increase the minimum amount held by the commercial banks also increase. Commercial banks use the cash reserves for various reasons.
HSBC bank is an international bank with its operations across the world including the United Kingdom. In 2016 the risk-weighted Assets of the bank stood at £143 billion. For the years 2015, it was £124 billion. For the years 2008 and 2009, the risk-weighted asset decreased by 3% giving a total of 1,103 billion dollars (HSBC, 2018). During the entire period from 2000 to 2016, the period of 2008 to 2009 showed a decline in Cash reserve ratio. This was a conscious measure undertaken at the moment because of the financial crisis which was happening at the moment. The financial crisis is believed to have started at around 2007 and worsened into 2009 when the effects were spread across the world. Other years, however, witnessed an increased cash reserve ratio in different commercial banks. In the year 2000 the cash reserve ratio was an increase from the previous year owing to the fact that the economy has been steady during the same period of time. The operating margins have also been expanding during the same period of time and there have been movements in the tier 1 capital as recorded in the financial statements of the bank.
Role of Cash Reserve of a Bank
Cash Reserve ratio refers to the part of the customer’s deposits that we held by the bank in cash. Cash reserve ratio is used for various purposes which include being used by commercial banks to control the credit advancements, the cash reserve ratio is also kept by commercial banks so that it can control the cash held by the banks. Central banks give specifics on the amount of money that can be kept by commercial banks as cash reserve ratio. This is usually with the objective of controlling the flow of money and enhancing fiscal discipline within the banking units. There are no interests on the cash reserve ratio and individual commercial banks use it for different functions including the daily operations of the banking system (Calomiris, 2015).
Central banks apply the cash reserve ratio to control the lending and thus influencing the flow of money in the economy and to maintain fiscal discipline in the economy. To individual banks, the reserve ratio is important as it ensures that operations of the bank are not tampered with, lending us advanced and that the fiscal discipline is also maintained within the bank. Federal reserve banks also ensure that money is in distribution and the correct amount of money remain in circulation by applying the measures of cash reserve ratios. However, there is no interest that is connected to the cash reserve ratio.
An increase in cash reserve ratio is used in contractionary monetary policy while a decrease in cash reserve ratio is used in expansionary monetary policy (The Economic Times, 2015). Central bank uses cash reserve ratio to influence the lending capacity of the bank. An increase in the cash reserve ratio decreases the amount of funds available with the bank to be provided as loans to borrowers. Thus, it decreases the flow of money to the economy. In this way, an increase in cash reserve ratio is used to shrink or contract the economy. On the other hand, a decrease in cash reserve ratio increases the supply of funds available with the bank for lending purposes. As a result, the supply of money to the economy increases. A decrease in cash flow ratio is used when the central bank wishes to expand the economy through an increase in supply of money to the economy. Cash reserve ratio is an important tool that is used by the central bank to control demand and supply of money in the economy.
Cash reserve ratio is essential in the banking sector. Its importance is also from the idea that the commercial banks should not have any slight shortage of funds. The amount kept by commercial banks as reserve requirement is deemed to be below the safety requirements. The central bank preserves the rights to change the cash reserve ratio in the opinion that they need to change the demand and supply of money in any market for any reason. The cash reserve ratio remains an important tool for a supply of money in various money markets across the world. Changes in the money and the quantitative easing also factors in the cash reserve ratios advanced by central banks.
Changes in Cash Reserve Ratio over time
There have been changes in cash reserve ratio over time across the world. The changes have been influenced by economic realities of different places. The major economic influence on the change in cash reserve ratio has always been inflation. Inflation refers to the general rises in prices of commodities in an economy. Cash reserve ratio is a reserve requirement and a regulation by the central bank. In most cases, the reserve requirement has been used as a monetary policy that controls the supply and demand for money (Daily News Egypt, 2008). In theory, when the reserve requirement is set higher then commercial banks will lack money to lend out. When this happens then people will deposit in commercial banks rather than get loans. This will mop out excess money which is in circulation.
When the reserve requirement is low then banks will have more to lend out. As a result, people will proceed to the banks to get more of the loans and that will supply money when the money is short in supply. Reserve requirement, therefore, goes a long way in determining the supply of money in any economy. However, there are other theoretical approaches which include the endogenous view of money that bases the argument on money on the endogenous approaches. The perspectives are based on the argument that banking system dictates the transmission mechanisms of money and that influences the distribution of money in any economy. The changes in reserve requirement over time affect the standards of business operations in a given market. It also directly influences the investment in a given country either by the supply or demand of money that is necessitated.
Impact of Quantitative Easing by Central Banks
Quantitative Easing refers to a situation where central banks introduce a new currency to the market. Quantitative easing has its own consequences for the economy which can be either positive or negative. Quantitative easing as a process where the government through its central banks purchases most of the government securities by in the market and this bid lowers the interest rates and then new money is introduced in the market. Other theories refer to quantitative easing as a large-scale asset purchase (Williamson, 2016, 135).The quantitative easing has its effects on the exchange in that it depreciates the currency of a country and this lowers the value of money of the assets of a given country. Quantitative easing is always the last resort after the devaluation of the currency of a given country. The low exchange rate also has an effect on the interest rates and this also influences the savings and borrowings in a given country (Williamson, 2016, 165).
Quantitative have direct impacts on the savings and investments when applied. Quantitative easing also affects the rates as used in both central banks and the commercial banks. When Quantitative Easing is used in a country the first step is the introduction of currency in the market. Before the introduction of the new currency, the initial currency must be defaced. Central banks, therefore, raise the interest rates. When interest rates are raised borrowing is discouraged and savings encouraged. When interest rates are lowered by central banks people are induced to take loans and this encourages the supply of money in the market. Quantitative easing directly affects demand and supply of money to the market. Quantitative easing has a direct bearing on the business operations in a given setting and the savings and borrowings are also directly affected by the quantitative easing.
Debt Securities as a form of borrowing
Debt securities refer to a tradable liability that is held by a firm or a company. Different companies issue different types of debt securities for different reasons which include the costs involved is relatively lower compared to other forms of borrowing. Companies prefer giving bonds to bondholders owing to the lessened covenants compared to other forms of borrowing like borrowing from commercial banks (Coffee et al.2015).The loans in form of bonds and treasury bills are also less restrictive compared to the other forms of loans like loans from commercial banks and other financial institutions. The risks involved in obtaining bonded loans have fewer risks as compared to obtaining loans which have direct interests and are not in the form of bonds. The companies and firms will, therefore, go for an alternative debt that has the risks reduced, and which are less restrictive. Commercial banks and other non-bank financial institutions do not offer direct loans to that effect compared to bonds and treasury bills. Firms and companies, therefore, make choice according to their preference and choice for the bonds which are part of the debt securities.
Just like firms and companies investors are also attracted to debt securities due to the inherent advantages and the low risks which are associated with the debts. A debt in the form of bonds and securities are risk-free compared to the commercial bank loans. They have stable interests and thus they form a base preference for investors who are willing to use them as a means of raising funds for a project. Individual investors also make important decisions on involving financing and funding of projects. Even as investors look for the financing of projects they are cautiously looking for means which are not risky and which reduces the restrictions in the end.
Companies incorporate debt into their capital structure to take advantage of tax incentives and tax benefits. Interest paid by the companies on debt are tax admissible expenses which decrease the tax charge and tax liability of the company. It decreases the amount of cash flows directed towards the government in form of taxation and provides greater cash flows to shareholders of the company. In this way, debt also increases earnings per share of the company.
In the debt securities, the ability of the borrower to repay the amount determines the interest which is levied on the loan. This does not pose a serious risk to the borrower compared to the loans which are advanced by the commercial banks. Commercial banks put specified interests on their loans and this can lead to a default by the borrowers, thereby leading to the reality of the risks which are involved. The debt securities play out to the fact that borrowers and investors prefer the loans which appear in form of bonds and securities as they present low risks. The borrowings can also be used for various operations in the course of the business.
Performance on Week of 29th January 2018
The week of 29thJanuary 2018 had a performance yield recorded in the United Kingdom? However, the yield spread kept changing on the market. Presented in the table below is a presentation before the week of 29th January and the week of 29th January.
Index Returns
Previous week (%)
Yield (%)
DJI
2.09
7.77
Large Cap
2.23
7.55
Mid-cap
0.82
5.03
Small cap
0.66
4.76
NASDAQ Composite
2.31
8.76
MSCI EAFE
1.51
7.03
iShares Real Estate
1.69
-2.77

In general, there was an increase in yields from the previous week to the present week. The cash, however, remained neutral in the process. NASDAQ composite recorded the highest change from 2.31% to 8.76% followed by DJIA which recorded an increase from 2.23% to 7.77%.The lowest change was by iShares which showed a negative change from 1.69% to -2.77%.The DJIA,NASDAQ, low cap, and midcap are some of the most active stocks in the world. Their results reveal the activities of stock in the end. They also determine the activities in the entire market and this is important in providing the direction in the market.
Market Processes
The yields that have been observed are a factor of different market processes. The market processes directly yield results in the market. The behavior of the markets affects the end results. Within a period of 1 week, there are direct changes that have happened to the yields as presented by different components like DJIA, NASDAQ, Small-cap, mid-cap, and large-cap components. They have the elastic response to the changes. According to neoclassical theory, the market process is composed of disequilibrium processes. The market process is not in equilibrium and therefore will change with immediate changes in factors. The factors equate to the price adjustments, supply, and demand.
Just like it has been in the neoclassical postulations, the changes over time in the yield are also as a result of the speculations that are tied to possible future changes. Speculations remain an essential aspect of the determination of price factor. Increase or decrease in the prices is also as a result of the inflation, political environment and stability. The factors have a way in which they trigger the price disequilibrium as outlined in the neoclassical approaches. Theoretically, both neoclassical and classical approaches offer the best perception of the changes that are inherent in the market process and link the market process to the yields.

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