Making money is easy however loosing it is easier. One look at the chart for the Indian Stock Market would reveal that the markets are cyclical going up and down from time to time. Markets are also very volatile, something you will realize if you look at the last 3 days of trading and you see that the market has moved between 8522 and 8122 points, which is a difference of 400 points! Anytime, you invest money, you run a risk of not receiving all that was promised or expected but the fact is that the more you invest the more you get in terms of returns. Equity markets, on average, give higher returns than bonds and government securities. however these higher returns have a higher associated probability of losses too. Risk is essentially the volatility of the returns and in turn, you have an expectation of return that is proportionately higher, if higher a level of risk is assumed. There are two factors that determine risk. One of these factors is the Time Horizon. In this shorter time periods limit your ability to take risks however if you need money in the long term it becomes possible for you to take bigger risks. The other factor is wealth wherein people with more wealth can afford to take more risks.
[...] ( 1.13 ( 1.13 )10 t = 1 = 120 ( 1.13 + 1000 ( 0.13 ) ( 1.13 )10 Price = Rs 651.1 + Rs295 = Rs 946.1 Price to Yield and Time A basic property of a bond is that the price varies inversely with yield. As the required yield increases present value of the cash flows reduces and hence the prices of the bonds reduce. Its converse is also true. Also earlier mentioned that the price of a bond moves to its par value as it gets closer to maturity. [...]
[...] Characteristics of Debt Price at which you buy securities Par Value face value of the bond payable on redemption Clean Price quoted price Dirty price clean price plus accrued interest Income Current Income coupon rate Capital Gains price moves to par value Price changes inversely to interest rate changes Bond prices vary due to Inversely with changes in interest rate prevalent Discounted bond prices move up Changes in credit ratings (default risk) Changes in spread between a bond-class yield versus T-bills / G-secs Bonds with changes in embedded options Risks in Debt Market Interest rate risk or market risk affects the price of bonds and income Inflation risk or purchasing power risk Real interest rate risk Default risk or credit risk Other risks including specific risks call risk etc. [...]
[...] Policy Framework Recent policy initiatives include Introduction of floating rate products Electronic Negotiated Dealing System Electronic Fund Transfer Real Time Gross Settlement System Securitization Bill 2002 Asset Reconstruction Bill Calendar for G-Secs Introduction of Deep Discount Bonds, STRIPS - 2003 Derivatives products on Debt Securities June 2003 Clearing House Retail Debt Market creation through NSE Nationwide screen-based, order-driven, anonymous trading system Settlement cycle T+2 rolling like in equities Demat and bank account as usual as in equities Exchange traded interest rate derivatives Market Segments Government Securities oldest and dominant part of the debt market. [...]
[...] HPY = HPR - 1 = 0.10 = 10% Measurement of returns Holding Period Return (HPR) Holding Period Yield (HPY) Measures of Returns Annual Holding Period Return Annual HPR = HPR1/n where n = number of years investment is held Annual Holding Period Yield Annual HPY = Annual HPR 1 Consider an investment that cost $250 and is worth $350 after 2-years HPR = $350/$250 = 1.40 Annual HPR = 1.40 1/2 = 1.1832 Annual HPY = 1.1832 1 = 0.1832 = Arithmetic Mean: Geometric Mean: Measurement of Return Portfolio Computation of HPR for a portfolio: The mean HPY for a portfolio of investments is measured as the weighted average of the HPYs for the individual investments in the portfolio. [...]
[...] However, there are times in the history of markets when, equity, bonds and derivatives all make losses for you That is the ‘un-diversifiable' risk of investing, even cash under your pillow loses value and you are going to be helpless Anyhow, smarter investors spend a fortune on analyzing risks associated with investments, their portfolios and manage these risks to their best possible caliber For individual investors, a well diversified portfolio could be of 20-30 well chosen stocks and then a few mutual funds and remaining in cash and equivalents Value at Risk (VaR) Value at Risk (VaR) is what fund managers calculate on a daily basis. [...]
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