Investments Essay

1) In 1994 the Bulgarian government issued follows on which the coupon overcompensatements were tied to the gross domestic product of the country. Im simplifying here, except basically a low level of GDP (a country-level measure of economic growth and activity) would reduce the sideline generatements on the stick tos, and a high level of GDP would increase the interest founderments. Suppose a US investor buys these bonds, what risks is the investor exposed to? (list everything which could negatively affect the investment)One of the risks associated with this bond is Interest raterisk. The prices of bonds be inversely related to rates of interest. A higher GDP of Bulgaria would mean that the price of the bond leave alone decrease, further a lower GDP would mean that the price of the bond leave alone decrease. The interestrateon a bond issetat the era it is issued, which is in 1994. The coupon in 1994 reflected the interest rate at the time of issuance, however the increase in interest, in GDP, will doctor mess unwilling to purchase bonds. In other words, the US investor will have 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 practically helpless on the GDP of the nation. There are is no fixed tally that he burn down count on.A nonher risk associated with bond is realization risk. Just as individuals inadvertence on mortgage deportments, bond issuers usher out possibly default as well. Usually, bonds issued by the government are insubordinate 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 heap easily call back the bonds before maturity so they can issue it at a lower interest rate forcing the investor to reinvest the headliner at a lower interest rate.Inflation risk is maybe the worst of the investor must endure. The GDP of Bulgaria will suffer immensely if epochal 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 any ways to manage/offset more or less of these risks?Credit risk, generally associated with any large-minded 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 attached that they are dictated by a nations GDP. The investor from the US cannot likely influence how Bulgarias GDP shall fluctuate.2) In the 1970s Yale University enforced a system for students in which the students would receive loans to pay their tuition. Repayment of the loans regard the following arrangement-after courseuation all students enrolled in the program would pay 0.4% of their one-year income per $1, 000 borrowed until the entire cohort, or caste, had nonrecreational off their debt, or until 35 years had passed, whichever came sooner. (See The New Financial send 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 wedded 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. expect he has graduated in 1978, and started to earn $100,000 annual. For this first year alone, he will have to pay Yale .8% of his annual income which is $800. This payment will not stop until each mortal in his strain, 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 class who have not yet paid theirs, possibly because these 5 people have 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 angle bracket by now. What risks are the lenders of bullion exposed to?Yale, on the other quite a little is exposed to the risk of students paying off their loans quickly. Given that Yale produces quality graduates (i.e. chair Bill Clinton), the students can easily pay back their indebtedness given their instant financial status after graduation. The time value of property is the greatest exposure of Yale. A $30,000 loan the University has given in 1974 has big 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/offset around of these risks?If one student, or a group o f students has/have the means, then he or they can but 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 terms and conditions for the loan.3) In 1997 supposed Bowie bonds were issued. These were 10 year bonds paying a 7.9% annual interest coupon, where the money for meeting the payments on the bonds was to come from the future income of medicineian David Bowie (see http//en.wikipedia.org/wiki/David_bowie if youve never perceive 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 price 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 se cured 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 large 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 form of first derivative contrac ts on the performance of busy professions. In brief, the way it would work is-we do an index which broadly captures the menstruation levels of compensation in a particular profession based on market data. If need (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.Why might people be interested in contracts valued in this way? Think of twain 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 gain 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 several(predicate) to an individual simply pickings out an insurance policy against flunk to succeed in his/her chosen profession? (for example, an aspiring musician taking out an insurance contract which pays out if the person never real 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.