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SUMMER INTERNSHIP PROGRAM
ANALYSIS OF VARIOUS FINANCIALPRODUCTS
June
2010
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A
PROJECT REPORT
ON
ANALYSIS OF VARIOUS FINANCIAL
PRODUCTS IN INVESTMENT.
SUBMITTED BY
PRAVEEN P KASHYAP
MBA 4TH SEM
SCHOOL OF COMMERCE & MANAGEMENT
SCIENCES, NANDED
SUBMITTED TO
REGIONAL DISTRIBUTION
HEAD OF KARVY
MR. RAVI GAIKWAD
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Acknowledgement:
It Is indeed a matter of immense pleasure to work as a summer
trainee in an organization KARVY STOCK BROCKING
LIMITED & completing this project with them and submittingthis final project report is a learning experience itself.
The last two months with KARVY STOCK BROCKING LIMITED
had been full of learning and sense of contribution towards the
organization. I would like to thank Mr. Ravi Gaikwad REGIONAL
HEAD OF DISTRIBUTION at KARVY STOCK BROCKING LIMITED for
giving me opportunity for learning and contributing to their
organization through this project.
During the actual project work Mr.Pramod Bode has been a
source of inspiration through this constant guidance, personal
interest, Encouragement and Help. I convey my sincere thanks to
him. In spite of his busy schedule he always found time to guide
me through the project. I am also grateful to him for giving me
the freedom to work on my project. As a student of SCHOOL OF
COMERCE & MANAGEMENT SCIENCES, I would like to express
my gratitude towards my Faculty Guide , Dr.
(PROF.)V.N.LATURKAR for her valuable guidance , keen
interest, inspiration and of course moral support throughout my
project.
At last I would like to thank one and all who directly and
indirectly helped me out during the making of this project.
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P
raveen P Kashyap
ROLL NO.07
M.B.A.4th sem
Executive Summary:
The Project was carried out for study and analyzing the
investment in various financial products to special reference of
KARVY STOCK BROCKING LTD. IN PUNE.
In this Project report I have made an analysis that what is the
Investment Pattern, What is the Prospect and How various
financial products have emerged a better Investment option in
India Recent Years giving the Investor Higher returns, Liquidity,
Safety against Traditional Investment avenues like Bank-FD, Postoffice Saving, Investment in Volatile Stock Market Etc.
But at the same time its being having a great learning for me due
to slowdown in the market due to the effect of U.S market.
With the Growth of The Indian economy Due to various economic
Factors Including Industrialization, Growth of Infrastructure and
service industries, increased Foreign direct investment and
foreign Institutional Investment, the Indian Companies havegrown to become Global business Giant.
So, the Market Capitalization of the Indian companies has grown
which has resulting in a building of a strong capital market.
People are also now more willing to invest and are ready to take
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risk. All this Development has proved to be a good atmosphere for
investments in India.
Now a days Investment is saving has assumed great importance.
The Investment offers a Wide array of Schemes to suit theCustomers Different Investment Objective as per their Financial
Position, Risk Taking Capabilities, their income and many other
factors.
So the whole report is made on the study of various assumptions
of the present Global market.
Objective Of Report :
Theoretical Knowledge without Practical Experience is like a Body
without Soul. So without Practical implementations, theory
remains no use. Hence we need to gain the Practical Experience.
And what better would be, then a Project work for the same.Also
as a part of our MBA curriculum, we need to undergo the training
Programmed for minimum of 60 days, in a company.I selected tostudy the various investment options in India , which pools the
funds & Reduces risk by investing in different diversified assets.I
studied as to how this industry proves to an option for the
investors, by studying the Performance of market for few months
considering their past values.
Hence this is a project work on a ANLYSIS OF VARIOUS
FINANCIAL PRODUCTS.
The following is the main objective of project:
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The project helps to establish an understanding which allowsthe investor to balance risk and reward according to theindividuals goals, risk tolerance and investment horizon.
A thorough understanding of the various investment optionsavailable in the market and a comparative analysis of thesame in accordance with the investors needs.
The other objective is to study the present scenario of themarket both capital and money market in Indian context.
Building contact with the prospective clients and designing aportfolio which will provide a balance between risk andreturn.
Companys Profile:
Overview:
KARVY, is a premier integrated financial services provider, and
ranked among the top five in the country in all its business
segments, services over 16 million individual investors in various
capacities, and provides investor services to over 300 corporate,
comprising the who is who of Corporate India.
KARVY covers the entire spectrum of financial services such as
Stock broking, Depository Participants, Distribution of financial
products - mutual funds, bonds, fixed deposit, equities, InsuranceBroking, Commodities Broking, Personal Finance Advisory
Services, Merchant Banking & Corporate Finance, placement of
equity, IPOs, among others.
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Karvy has a professional management team and ranks among the
best in technology, operations and research of various industrial
segments.The Investment policies in India have come a long way,
especially after the introduction of the section 80(c) by the UPA
Government, which gives an average investor to save first onelakhs rupees of their annual income as rebate.
This new amendment provides the investors to invest more in tax
saving schemes as per decided by the norms of this acts. The tax
savings areas where an investor can invest are Personal Provident
Fund (PPF), Tax Saving Bonds, National Saving Certificate, Equity
Link Saving Schemes (ELSS), Unit Link Insurance Policy Schemes
(ULIPS) etc.
Now-a days ELSS and ULIPs gives high returns, investors are
more keen to invest in these schemes and more over the new
ULIPs schemes provider are now giving capital guarantee also i.e.
they give this assurance that if the market crashes the investor
will at least receive their invested capital.
Early Days:-
In 1982, a group of Hyderabad-based practicing Chartered Accountants startedKarvy Consultants Limited with a capital of Rs.1, 50,000 offering auditing andtaxation services initially. Later, it forayed into the Registrar and Share Transferactivities and subsequently into financial services. All along, Karvy's strong workethic, professional background leveraged with Information Technology enabled itto deliver quality to the individual.
A decade of commitment, professional integrity and vision helped Karvy achieve aleadership position in its field when it handled the largest number of issues everhandled in the history of the Indian stock market in a year. Thereafter, Karvy madeinroads into a host of capital-market services, - corporate and retail - which provedto be a sound business synergy.
Today, Karvy has access to millions of Indian shareholders, besides companies,banks, financial institutions and regulatory agencies. Over the past one and half
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decades, Karvy has evolved as a veritable link between industry, finance andpeople. In January 1998, Karvy became the first Depository Participant in AndhraPradesh. An ISO 9002 company, Karvy's commitment to quality and retail reachhas made it an integrated financial services company.
Karvy Stock Broking Ltd is a member of National Stock Exchange (NSE),Bombay Stock Exchange (BSE) and The Hyderabad Stock Exchange.
Karvy is one of the premier integrated financial intermediaries in the country,which is into businesses such as Merchant Banking, Stock Broking, DepositoryParticipant Services, Financial Products Distribution, Mutual Fund Servicing, andRegistrar and Transfer Agents.
Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flowsfreely towards attaining diverse goals of the customer through varied services.Creating a Plethora of opportunities for the customer by opening up investmentvistas backed by research-based advisory services. Here, growth knows no limitsand success recognizes no boundaries. Helping the customer create waves in his
portfolio and empowering the investor completely is the ultimate goal.It is anundisputed fact that the stock market is unpredictable and yet enjoys a high successrate as a wealth management and wealth accumulation option. The difference
between unpredictability and a safety anchor in the market is provided by in-depthknowledge of market functioning and changing trends, planning with foresight andchoosing options with care. This is what Karvy provide in their Stock Brokingservices.
Karvy offer trading on a vast platform; National Stock Exchange, Bombay Stock
Exchange and Hyderabad Stock Exchange. More importantly, they make tradingsafe to the maximum possible extent, by accounting for several risk factors and
planning accordingly. They are assisted in this task by their in-depth research,constant feedback and sound advisory facilities. Their highly skilled research team,comprising of Technical
Analysis as well as fundamental specialists secure result-oriented
information on market trends, market analysis and market
predictions.
To empower the investor further they have made serious effortsto ensure that their research calls are disseminated
systematically to all their stock broking clients through various
delivery channels like email, chat, SMS, phone calls etc.
In the future, their focus will be on the emerging businesses and
to meet this objective, they have enhanced their manpower and
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revitalized their knowledge base with enhances focus on Futures
and Options as well as the Commodities business.
Vision of Karvy:-
To achieve & sustain market leadership, Karvy shall aim for
complete satisfaction, by combining its human & technological
resources, to provide world class quality services. In the process
the company shall strive to meet & exceed customer satisfaction
& set industry standards.
Mission of Karvy:-
Karvy mission is to be a leading, preferred service provider to our
customer, & they aim to achieve this leadership position by
building an innovative, enterprising, & technology driven
organization, which will set the highest standards of service &
business ethics.
Karvy An overview of the business
Stock Brokin Distribution
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Mutual FundsIPOs Equity, BondsDebt productsLoans Housing, Personal,Auto
Karvy GroupKarvy Group
NSE and BSEmembershipEquity, Derivatives
and Debt marketoperations600+ terminals220,000+ accountsAround 4.5% marketshare (NSE Cash)
Participant with bothNSDL and CDSL
640,000+ accounts
Amongst the top DPs inthe country
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Membership with twoexchanges NCDEX /MCX
CommoditiesInsurance BrokingDirect broker IRDAregistration received in Jan2005
KarvyKarvy Achievements: Achievements:
Indias #1 Registrar& Securities Transfer Agent
Amongst the Top 5 Stock Brokers(4.5% market share)
Among the Top 3 Depository Participants
Investment BankingCategory 1 Investment Banker registeredwith SEBIAmong top 10 Investment bankers in IndiaIPOs, Debt placements, corporaterestructuring etc.
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Largest Network of Branches & Business Associates
Largest Independent Distributor for Financial Products
Amongst Top 10 Investment Bankers
Adjudged as one of The Top 50 IT Users In India by MISAsia
ISO 9000:2000 Certified operations by DNV
Full fledged IT driven operations
KARVY Group Companies:
KARVY Consultants Limited
KARVY Computershare Private Limited
KARVY Investor Services Limited
http://www.karvyglobal.com/AboutUs/KCPL.asphttp://www.karvyglobal.com/AboutUs/KISL.asphttp://www.karvyglobal.com/AboutUs/KISL.asphttp://www.karvyglobal.com/AboutUs/KCBL.ASPhttp://www.karvyglobal.com/AboutUs/KCPL.asp -
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KARVY Commodities Broking Private Limited
KARVY Insurance Broking Private Limited
KARVY Global Services Limited
KARVY Realty & Services (India) Limited
KARVY Stock Broking Limited
PROJECT:
ANALYSIS OFVARIOUS
FINANCIAL PRODUCTS
http://www.karvyglobal.com/AboutUs/KCBL.ASPhttp://www.karvyglobal.com/AboutUs/KIBL.ASPhttp://www.karvyglobal.com/AboutUs/KGSL.ASPhttp://www.karvyglobal.com/AboutUs/KINC.ASPhttp://www.karvyglobal.com/AboutUs/KSBL.asphttp://www.karvyglobal.com/AboutUs/KCBL.ASPhttp://www.karvyglobal.com/AboutUs/KIBL.ASPhttp://www.karvyglobal.com/AboutUs/KGSL.ASPhttp://www.karvyglobal.com/AboutUs/KINC.ASPhttp://www.karvyglobal.com/AboutUs/KSBL.asp -
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IN
INVESTMENT
IntroductionPlanning of financial products
Marketing of financial product means not only selling but also
providing the financial product to the client at right time, at right
place and according to their requirement.
Marketing of financial products has to be carefully planned and
executed in order to avoid mistakes that can be costly and hard
to recover from. With heavy competition, financial institutionshave to be aware of the current market trends and must keep
informing their clients about their latest service or products to
make sure that their clients use them.
Some Marketing Tips For Financial Products:
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Direct mailing is tactic that is relatively cheap and can beused to reach target markets of your choice. The job can beout-sourced, and your operating costs are well within thebudget. It can also be effective in recruiting potential
customers easily. Cold calling is another marketing strategy, but it is not used
much owing to the enormous drain on time and labor as wellas costs and low rate of new customer recruitment.
Offering items having your brand identity serves to remindexisting customers as well as those you deal with on aregular basis about your financial services as well asproducts. Post-it note pads, pens, coffee mugs, key chains,pen torches, etc., are items that are generally used as
promotional items. Using the media to effectively advertise your products. The
TV, radio, newspaper, magazines, cinemas, etc., are verygood sources for targeting your advertisements. Keep youradvertisements short and make sure they tell people howthey can benefit from using your services or products.
Getting celebrities to endorse the product or service isanother effective marketing tip.
Types of Financial Products:
Mutual Fund Insurance Stock Broking Commodity Bonds and Fixed Deposit
Mutual fund
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Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital
market instruments such as shares, debentures and other securities. The income
earned through these investments and the capital appreciation realized is shared byits unit holders in proportion to the number of units owned by them. It also, offers
an opportunity to invest in a diversified, professionally managed basket of
securities at a relatively low cost.
Stock broking
stock broking where you can invest your money in stock market
in two ways:
1. Primary Market
2. Secondary Market
Primary market:
Primary markets bring together buyers and sellers - either directly or through
intermediaries - by providing an arena in which sellers investment propositions
can be priced, brought to the marketplace, and sold to buyers. In this context, the
seller is called the issuer and the price of whats sold is called the issue price.
It is the initial market for any item or service. It also signifies an initial market for
a new stock issue.
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Secondary Market:
Secondary Markets are the stock exchanges and the over-the-counter market.
Securities are first issued as a primary offering to the public. When the securities
are traded from that first holder to another, the issues trade in these secondary
markets.
Commodity:
Commodity Futures are contracts to buy specific quality of a particular commodity
at a future date. It is similar to the Index futures and Stock Futures but the
underlying happens to be commodities instead of Stocks and Indices.
Major Commodity Exchanges
Multi-Commodity Exchange in India Ltd, Mumbai (MCX).
National Commodity and Derivative Exchange of India, Mumbai (NCDEX).
National Multi Commodity Exchange, Ahemdabad (NMCE).
Insurance:
A human life is also an income-generating asset. This asset also
can be lost through unexpectedly early death or made non-
functional through sickness & disabilities caused by accidents.
Accidents may or may not happen. Death will happen, but the
timing is uncertain. If it happens around the time of one's
retirement, when it could be expected that the income will cease,
the person concerned could have made some other arrangementsto meet the continuing needs. But if it happens much earlier when
the alternate arrangements are not in place, insurance is
necessary to help the dependents.
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Bonds and Fixed Deposit:
Bonds and fixed deposit are most safer financial product to invest
in. Investment in these type of funds means investor is most
concerned about the security of their finance rather than returns,
where it is believed that high risk and high return.Now to market
or sell the above explained financial products, we have existing or
prospective clients to focus, they are mentioned below:
Target Audience
To market these various types of financial product the targetaudiences are:
Retail segment clients as well as high net worth clients.
Cooperative Banks
Corporate bodies
Once the financial product are focused to market(sell) the target
audience, the financial consultant set the portfolio goal, that howthe investment is to carried out in the proper effective manner to
minimize the risk and maximize the profit which has been
explained below.
Setting Portfolio Goals:
The liquidity of an investment signifies the ease or ability to
convert investments to cash without a substantial loss in the
principal or original amount invested. The rate of return pertains
to an investment's gain or loss over a specific time period. Return
levels usually parallel risk levels; meaning a high-risk level
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investment may yield a higher return. The risk tolerance of a
client will play a major role in portfolio management, as comfort
levels towards potential for loss differ greatly among
investors.After setting the portfolio goal of the client, further
various technique are used to analyze the portfolio in order to
achieve the set goals.
Portfolio Analysis:
Various analytical techniques are utilized by financial firms to
manage a client portfolio. BCG analysis involves plotting
investment products on a graph according to their market share
and market growth rate. The product is then defined by one of
four categories: stars, dogs, question marks, or cash cows. A cash
cow represents a high market share and low growth, while a star
represents high growth and high market value. Cash cow
investments are important diversifying tools as they can generate
revenue to fuel question marks. Another analysis technique
known as Contribution Margin Analysis takes revenues, costs,
competitor reactions and current portfolio investment effects and
calculates which products to add or subtract.
Portfolio management firms should provide analysis that includes
historical trends and potential yields, as well as outline
investment scenarios and prospective earnings. Advisors should
work directly with the client to establish initial goals and
objectives, and be able to explain measures necessary to take in
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order to achieve them. Portfolio management advisors will gather
information on current holdings and assets and determine which
investments will yield the appropriate return while remaining
within the client's risk tolerance. At times, the referral from a
friend, family member, or colleague can be the first step in finding
a portfolio management advisor who can best fit an individual's
investment strategy.
Now the question comes which is , once all the
steps are followed till portfolio analysis, what isthe investment objective behind this?
Objective of Investment:
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(1) Safety of funds:
The investment should be preserved, not be lost and remain in a returnable position
in cash or kind.
(2) Liquidity:
The portfolio must consist of such securities, which could be encased without any
difficulty or involvement of time to meet urgent need for funds. Marketability
ensures liquidity to the portfolio.
(3) Reasonable return:
The investment should earn a reasonable return to upkeep the declining value of
money and be compatible with opportunity cost of the money in terms of current
income in the form of interest or dividend.
(4) Appreciation in capital:
The money invested in portfolio should grow and result into capital gains
(5) Tax planning:
Efficient portfolio management is concerned with composite tax planning covering
income tax, capital gains tax, wealth tax, and gift tax.
(6) Risk avoidance:
Risk avoidance and minimization of risk are important objectives of portfolio
management. Portfolio managers achieve these objectives by effective investment
planning and periodical review of the market situation and economic environment
affecting the financial market.
Benefits of the study:
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The results of the study is crucial to the investors like high
network client, retailers and also to the person keep a track
record of different financial products. It gives a best available
option to client for investment.This is the one of the memorial
days in my life, I have studied many things during this project.
Objectives:
The following would be the objective of my project:
(financial product view point)
To find best possible investment option for customeraccording to his/her requirement.
To generate best possible personal financial planning ofclients.
To determine strategic investment technique. To diversify the risk i.e. minimizing the risk and
maximizing the profit. To suggest tax evasion technique.
Objective towards corporate tie ups view point:
To provide all type of customized service To provide all types of financial service under one roof.
Limitations:
Difficult to change the fixed mindset client. Lesser expose to stock broking and commodity broking.
Methodology
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Adopted for individual investor
Gaining the fundamental knowledge of financialterminology and the financial product to be sold.
Gathering of data base related to the potential client and
contacting them to fix up the meeting. Briefing the future of financial product available for
promotion considering the personal investment need ofthe potential client.
Follow up of the clients in order to finalization of sales ofthe financial products.
Communication with company guide in order to get thefeedback about the methodology of convincing thepotential client and asking for the required investments.
MAIN TEXT
My project is all about Analysis of financial products in
investments. Karvy Stock Broking ltd as a Broking House keeps
the different companies product, which helps the clients to go for
that type of products which cater their needs according to their
requirement.
My focus of study are various financial products which is further
explained in details in the report.
Mutual Fund:
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As it is defined above a Mutual Fund is a trust that pools the savings of a number
of investors who share a common financial goal. The money thus collected is then
invested in capital market instruments such as shares, debentures and other
securities. The income earned through these investments and the capitalappreciation realized is shared by its unit holders in proportion to the number of
units owned by them. Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a diversified, professionally
managed basket of securities at a relatively low cost. The flow chart below
describes broadly the working of a mutual fun
Advantages of Mutual Funds:
The advantages of investing in a Mutual Funds are:
Professional Management
Diversification
Convenient Administration
Return Potential
Low Costs
Liquidity
Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated
The graph indicates the growth of assets over the years.
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GROWTH IN ASSETS UNDER MANAGEMENT:
The above graph has explained that how the growth of assets has shown the
upward trend while the same has been invested in mutual funds.
Types Of Mutual Fund:
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Mutual Funds have specific investment objectives such as growth
of capital, safety of principal current income or tax exempt
income, one can select one fund or any number of different funds
to help one meets ones specific goals. In general terms there are
7 types of mutual fund, that is:-
1. Open-End Funds
2. Close-End funds
3. Large Cap Funds
4. Mid-Cap Funds
5. Equity Funds
6. Balanced Funds
7. Growth Funds
Mutual fund schemes:
Open Ended Schemes:
Open-ended schemes do not have a fixed maturity period.
Investors can buy or sell units at NAV- related prices from and to
the mutual fund on any business day. These schemes have
unlimited capitalization, open-ended schemes do not have a fixed
maturity, there is no cap on the amount you can buy from the
fund and the unit capital keep growing. These funds are not
generally listed on any exchange.Open-ended schemes are
preferred for their liquidity. Such funds can issue and redeem
units any time during the life of schemes. Hence unit capital of
open-ended funds can fluctuate on a daily basis. The advantages
of open ended schemes are: -
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1. Any time exit option.
2. Any time enter option.
Closed ended schemes:
Close-ended schemes have fixed maturity periods. Investors can
buy into these funds during the period when these funds are open
in the initial issue. After that such scheme cannot issue new units
except in case of bonus or right issue. However after the initial
issue you can buy or sell units of the schemes on the stock
exchange where they are listed. The market price of the unit
could vary from the NAV of the schemes due to demand and
supply factor.
How long to keep INVESTMENT to get maximum returns:
Technically open-ended funds you can withdraw your investments
even within a week, but to get desired returns positive time frame
is required are:
Funds Time Period
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.The past performance of the MUTUAL FUNDS is not indicative of
future performance.
THE RISK RETURNS GRAPHS FOR VARIOUS FUNDS:
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The above Graph shows the Risk and Returns generated by
different Funds. Liquid Funds are less Risky and also generate less
Liquid
Funds
Income
Funds
Balanced
Funds
Equity
Funds
Sector
Funds
RISKSR
E
T
U
R
N
S
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Returns where as Sector Funds are more Risky but generate more
Returns by the example of above two Funds it is clear that Risk
and Returns are directly proportional to each other. Other Funds
like Equity Funds, Balanced Funds and Income Funds are also
gives the same percentage of Returns as the Risk involved.
Comparison between Open ended and close Ended
Schemes
Top 10 Open Ended - Equity: Diversified - Since Launch Return
FundNAV (Date) Returns (%)
Return as
on
Tata EquityOpportunities
42.31 (16-may)
71.04 5/16/2007
Sundaram Select
Midcap
68.39 (16-
may)63.46 5/16/2007
HSBC Equity50.80 (16-
may)58.33 5/16/2007
Magnum EmergingBusinesses
21.44 (16-may)
54.81 5/16/2007
DSPML Top 100
Equity
40.59 (16-
may)52.54 5/16/2007
http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1656http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1656http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1386http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1386http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1481http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=2415http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=2415http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1540http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1540http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1656http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1656http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1386http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1386http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1481http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=2415http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=2415http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1540http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1540 -
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Kotak
Opportunities
20.97 (16-
may)50.59 5/16/2007
Birla Mid Cap
45.02 (16-
may) 50.02 5/16/2007
Prudential ICICI
Dynamic
43.83 (16-
may)49.70 5/16/2007
Nifty Junior BeES51.31 (16-
may)48.27 5/16/2007
Top 10 Closed Ended - Equity: Tax Planning - Since Launch Return
Fund
NAV
(Date)
Return
s (%)
Return
as on
UTI MEPUS29.09 (16-
April)
48.444/16/200
6
Birla Tax plan '98147.26 (16
-April)38.73
4/16/200
6
Franklin India Tax shield
'98
86.30 (16-
April)29.99
4/16/200
6
Franklin India Tax shield
'97
90.02 (16-
April)
26.934/16/200
6
Franklin India Tax shield
'99
51.26 (16-
April)25.42
4/16/200
6
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Sundaram Taxsaver '9853.04 (16-
April)22.52
4/16/200
6
Sundaram Taxsaver '9728.63 (16-
April)21.86
4/16/200
6
BoB ELSS '9732.34 (14-
April)15.21
4/14/200
6
Morgan Stanley Growth37.96 (16-
April)13.93
4/16/200
6
Standard Chartered
Enterprise Equity
10.02 (15-
April) 0.20
4/15/200
6
In above two tables if you compare open ended scheme to close ended schemes
you found that highest return given by Tata Equity Opportunities which is an open
ended scheme is 71.04% compare to highest return given in closed ended is given
by UTI MEPUS which is 48.44%.If you can see there is clear difference of 23%
return between both schemes.
In case of marketing of mutual fund
First comes participants, involved are Mutual Fund Company, client and third
party service provider (i.e. Karvy stock broking ltd.).
Secondly the cycle, which is its working procedure. Basically the company come
up with the different funds offer either it is existing or new fund offer where themain aim is to sell it off to the target consumer, then the role of third party service
provide comes in the picture. Where the broking house bridge the gap between the
company and the clients in promoting and selling of the different funds.
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Thirdly comes the profit that means the benefit which goes to all the three parties
i.e. company, client and as well as broking house. The company is benefited in the
form of profit, what they get after selling of their different Mutual fund products.
Where the client is benefited in different ways.
1. By investing in mutual fund client can save the tax. There are various
companies mutual fund which come under ELSS (Equity Link Saving
Scheme) where investing in such type of mutual fund , investor can avail the
tax exemption.
2. In other words we can say to get a quick money one should go for mutual
fund investment, this is because when the same money is there in the bank
then one should be going to get only nine percent of return out of it but if the
fund is invested in the good Mutual fund scheme then on can expect at least
20% return in the worst case scenario and maximum of return that the
Mutual fund has given is around 65%.
Lastly the broking house gets benefited by getting the brokerage on the number
and the amount of funds and scheme sold.
Fourthly growth prospective of the Mutual Fund companies, it has a wide
future prospective, because always everyone wants to have tax exemption for
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which people go for mutual fund investment, because of this mutual fund company
is growing. And apart from what is mention, by looking the brand name of the
company and its goodwill people normally go for Mutual Fund investment . So it
has to be seen that it has the wide future.
Lastly a question arise what is the challenge faced by the mutual fund companies.
The answers which we get are the competition between different companies
products and fund. This is how different companies come up with the new funds
and scheme which cater the customers requirement, in this case companies try to
provide as much benefit in their plan which tackle the competition with one
companies to another. And Karvy stock broking ltd provides difference product of
different companies to the target audience, and here the role of Karvy becomes
crucial to all organization because it is none other than Karvy who is going to
provide all the product of different companies under one roof and in order to build
its own goodwill in the market Karvy promote and sell that companies product
which are really doing well in the market and has a good past track record of more
than five years.
In this regard we can take the example of SBI Mutual
Fund.
Mutual fund of SBI:
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SBI Mutual fund ( A partner for Life)
It is a joint venture between SBI and societe Generale Assets
Management.
Name of the Trustees Company: SBI Mutual Fund Trustee
Company Private Limited.
Dividend Policy: Dividend will be distributed from the available
distributable surplus after the deduction of the income
distribution tax and the applicable surcharge, if any. The Mutual
Fund is not guaranteeing or assuring any dividend.
Applicable NAV: For sale of magnums: in respect of valid
applications received up to 3 p.m. by the mutual fund at any
designated centers along with a local cheque or a demand draft
payable at par at the place where the application is received, the
closing NAV of the day on which application is received, the
closing NAV of the day on which application is received shall be
applicable.
Daily Net Asset Value (NAV) Publication: The NAV will be declared
on all business days and will be published in 2 newspapers. NAV
can also be visited on www.sbimf.com and www.amfiindia.com
Tax treatment for the investors: as per the taxation law is force as
at the date of the document, and as per the provisions contained
in the finance act, 2006. There are certain tax benefits that are
available to the investors and to the mutual fund.
It however noted that the tax benefits described in this document
are as available under the present taxation laws and are available
http://www.sbimf.com/http://www.amfiindia.com/http://www.sbimf.com/http://www.amfiindia.com/ -
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subject to fulfillment of stipulated conditions. The information
given is included only for general purpose regarding the law and
practice currently in focus I n India and the investors should also
aware that the relevant fiscal rules or their interpretation may
change.
Few scheme of SBI Mutual Fund are:
Scheme name option minimum amnt (Rs.)
1. Magnum Balance Fund. Growth & dividend 1000
2. Magnum Index Fund Growth & dividend 5000
3. Magnum Equity Fund Growth 2000
4. Magnum Global Fund Growth & dividend 5000
5. Magnum Madcap Fund Growth 5000
The strength point of the SBI Mutual Fund is firstly, the Fund
Manager Mr. Sanjay Sinha & Jayesh shroff secondly, consistency
grow rate along with the good will of the company.
The expenses of the scheme are loading structure recurring
expenses.
TOP MUTUAL FUNDS THE INVESTORS ARE INVESTING:
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MUTUAL FUNDS
0%
10%
20%
30%
40%
50%
60%
1
MF
%I
NVESTME
HDFC
FRANKLIN
TEMPLETON
SBI
RELIANCE
BIRLA
SUNDARAM
ICICI
From the chart, we can see that most of people invests in SBI
mutual funds as it is giving good returns. Also some people
regularly invest in HDFC & FRANKLIN TEMPLETON due to its
returns and its performance.
CONSIDERATION BEHIND INVESTMENT IN MF:
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HIGHER
RETURNS
14%DIVIDENDS
4%
DIVERSIFICATI
ON OF RISK
82%
HIGHER RETURNS
DIVIDENDS
DIVERSIFICATION OF
RISK
From the chart, it is very clear that the basic consideration behind
investment in mutual funds is diversification of risk and also for
getting higher returns.
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Insurance
A human life is also an income-generating asset. This asset also
can be lost through unexpectedly early death or made non-
functional through sickness & disabilities caused by accidents.
Accidents may or may not happen. Death will happen, but the
timing is uncertain. If it happens around the time of one's
retirement, when it could be expected that the income will cease,
the person concerned could have made some other arrangements
to meet the continuing needs. But if it happens much earlier when
the alternate arrangements are not in place, insurance is
necessary to help the dependents.
In case of a human being, he may have made arrangements for
his needs after his retirement. These would have been made on
the basis of some expectations like he may live for another 15
years, or that his children will look after him. If any of these
expectations do not come true, the original arrangement would
become inadequate and there could be difficulties.
Living too long can be as much a problem as dying too young.
These are risks, which need to be safeguarded against. Insurance
takes care of it.
Need of Insurance
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To provide cash to meet various routine expenses of the
family on or immediately after the death of the income
earner of the family.
To prevent the familys accustomed standard of living even
after the death of the breadwinner.
To provide continuous flow of funds for the living spouse.
To allocate income funds for the childrens education
To provide a retirement income throughout old age.
To provide a reliable savings plan for the future.
To supplement income when earning power is reduced oreroded by illness, accident or any handicap.
To furnish surplus earnings for the investors should disaster
strike.
Role of Life Insurance:
Life insurance as Investment
Insurance is an attractive option for investment. While most
people recognize the risk hedging and tax saving potential of
insurance, many are not aware of its advantages as an
investment option as well. Insurance products yield more
compared to regular investment options, and this is besides theadded incentives offered by insurers.
INSURANCE is a unique investment avenue that delivers sound
returns in addition to protection.
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Life insurance as Risk cover
First and foremost, insurance is about risk cover and protection
financial protection, to be more precise to help outlast lifes
unpredictable losses. Designed to safeguard against losses
suffered on account of any unforeseen event, insurance provides
you with that unique sense of security that no other form of
investment provides. By buying life insurance, you buy peace of
mind and are prepared to face any financial demand that would
hit the family in case of an untimely demise.
Life insurance as Tax planning
Insurance serves as an excellent tax saving mechanism too. The
Government of India has offered tax incentives to life insurance
products in order to facilitate the flow of funds into productive
assets. Under Section 88 of Income Tax Act 1961, an individual is
entitled to a rebate of 20 per cent on the annual premium
payable on his/her life and life of his/her children or adult
children. The rebate is deductible from tax payable by the
individual or a Hindu Undivided Family. This rebate is can be
availed up to a maximum of Rs 12,000 on payment of yearly
premium of Rs 60,000. By paying Rs 60,000 a year, you can buy
anything upwards of Rs 10 lakh in sum assured. (Depending upon
the age of the insured and term of the policy) This means that
you get an Rs 12,000 tax benefit. The rebate is deductible from
the tax payable by an individual or a Hindu Undivided Family.
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Types of Insurance Plans:
Term Insurance policy:
A term insurance policy is a pure risk cover for a specified period
of time. What this means is that the sum assured is payable only
if the policyholder dies within the policy term. For instance, if a
person buys Rs 2 lakh policy for 15-years, his family is entitled to
the money if he dies within that 15-year period.
What if he survives the 15-year period? Well, then he is not
entitled to any payment; the insurance company keeps the entire
premium paid during the 15-year period. So, there is no element
of savings or investment in such a policy. It is a 100 per cent risk
cover. It simply means that a person pays a certain premium to
protect his family against his sudden death. He forfeits the
amount if he outlives the period of the policy. This explains whythe Term Insurance Policy comes at the lowest cost.
Whole life policy:
As the name suggests, a Whole Life Policy is an insurance coveragainst death, irrespective of when it happens.Under this plan,
the policyholder pays regular premiums until his death, following
which the money is handed over to his family.
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This policy, however, fails to address the additional needs of the
insured during his post-retirement years. It doesn't take into
account a person's increasing needs either. While the insured
buys the policy at a young age, his requirements increase over
time. By the time he dies, the value of the sum assured is too low
to meet his family's needs. As a result of these drawbacks,
insurance firms now offer either a modified Whole Life Policy or
combine in with another type of policy.
Endowment Policy:
Combining risk cover with financial savings, an endowment policy
is the most popular policies in the world of life insurance. In an
Endowment Policy, the sum assured is payable even if the insured
survives the policy term. If the insured dies during the tenure of
the policy, the insurance firm has to pay the sum assured just as
any other pure risk cover.
A pure endowment policy is also a form of financial saving,
whereby if the person covered remains alive beyond the tenure of
the policy, he gets back the sum assured with some other
investment benefits.
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In addition to the basic policy, insurers offer various benefits such
as double endowment and marriage/ education endowment plans.
The cost of such a policy is slightly higher but worth its value.
Money back policy:
These policies are structured to provide sums required as
anticipated expenses (marriage, education, etc) over a stipulated
period of time. With inflation becoming a big issue, companies
have realized that sometimes the money value of the policy iseroded. That is why with-profit policies are also being introduced
to offset some of the losses incurred on account of inflation.
A portion of the sum assured is payable at regular intervals. On
survival the remainder of the sum assured is payable. In case of
death, the full sum assured is payable to the insured. The
premium is payable for a particular period of time.
Annuities and pension:
In an annuity, the insurer agrees to pay the insured a stipulated
sum of money periodically. The purpose of an annuity is to
protect against risk as well as provide money in the form of
pension at regular intervals.
Over the years, insurers have added various features to basic
insurance policies in order to address specific needs of a cross
section of people.
ULIPs:
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ULIP is an acronym for Unit Linked Insurance Plan. ULIPs are
distinct from the more familiar with profits policies sold for
decades by the Life Insurance Corporation. With profits policies
are called so because investment gains (profits) are distributed to
policyholders in the form of a bonus announced every year. ULIPs
also serve the same function of providing insurance protection
against death and provision of long-term savings, but they are
structured differently.
In with profits policies, the insurance company credits the
premium to a common pool called the life fund after setting
aside funds for the risk premium on life insurance and
management expenses.
Every year, the insurer calculates how much has to be paid to
settle death and maturity claims. The surplus in the life fund left
after meeting these liabilities is credited to policyholders
accounts in the form of a bonus. In a ULIP too, the insurer deducts
charges towards life insurance (mortality charges), administration
charges and fund management charges. The rest of the premium
is used to invest in a fund that invests money in stocks or bonds.
They number of units represents the policyholders share in the
fund.
The value of the unit is determined by the total value of all the
investments made by the fund divided by the number of units. If
the insurance company offers a range of funds, the insured can
direct the company to invest in the fund of his choice. Insurers
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usually offer three choicesan equity (growth) fund, balanced
fund and a fund, which invests in bonds.
In both with profits policies as well as unit-linked policies, a large
part of the first year premium goes towards paying the agents
commissions.
Working of ULIP:
The unit-linked plans work as under:
The premium paid by the client, less any charges to be deducted,
is used to buy units in the fund selected by the client at the days
unit price. So, more units are added to the clients account each
time he pays a premium. If he unit price on that day is relatively
high, the client gets less number of units and if the unit price is
relatively low, then he gets more number of units.
In order to pay the regular monthly costs an equivalent numbers
of units are cancelled and are computed as cost to be deducted
divided by unit price on that day.
The value of the fund depends on the unit price, which in turn is
determined from the market value of the underlying assets as
seen earlier. Thus, Fund Value = Unit Price x Number of units
The ideal time to buy a unit-linked plan is when one can expect
long-term growth ahead. This especially so if one also believes
that current market values (stock valuations) are relatively low.
BSLI has given superior returns on all its investment funds.
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Stocks and Shares:
Quite simply, if you own a stock, you own a piece of the company.
You own a share of every bit of what the company owns even theCEOs limousine, if you please. What more, even while you are apart owner you neednt walk into the company headquarters evenonce.
Great? While all this sounds nice, its just a notional picture of stocks. Rarely do
stock investors get so much control. Even manage a free ride in the limousine! So
whats the truth?
If those little valuable pieces of paper called share certificatescarry your name on them, you can say you have equity inthe company whose name appears on the top of thecertificate. Equity is the part ownership of a company in theform of its stocks. The number mentioned on each sharecertificate tells you how many stocks of the company youown.
There are two obvious benefits of raising money this way.Firstly, it lets an entrepreneur to think of starting a business
even if she does not have a. There are two obvious benefitsof raising money this way. Firstly, it lets an entrepreneur to
think of starting a business even if she does not have all themoney required secondly, it allows small investors toparticipate in wealth creation and benefit from an importanteconomic activity.
How can I make money from stocks?
The first, the now-and-thinly source, is through capitalappreciation. A week later if the stock price of the scrip youhold has doubled to Rs 20, by selling it you have earned areturn of Rs 10 as capital appreciation. You have mademoney by a 100% appreciation in the stocks price. Throughthis way your fortunes will perpetually keep fluctuating.
T
henwhatareacom
panysstocks?
Worl
dover,
peoplewhostart
aco
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Thats because it depends on the stocks price, which is always onthe move even if fluctuation are incremental. Chances are:
Dividends can be a good earning, more so because they arenon-taxable in your hands since now only companies have topay tax on the dividend they disburse. Shareholders sometimesprefer to do away with dividends. This is specially so for smalland fast-growing companies. Investors in such companies feelit is better to plough back the earnings for growing thebusiness rather than distribute as dividends.
Types of stocks:
We live in a class-ridden society. Stocks too have their twomajor classes or types: ordinary and preference.
Ordinary stocks, sometimes also called equity stocks orcommon stocks, are really for the general public without anybar. You, me and just anyone can buy them (and proudly saywe have a stake in the company).
Th
eotherwaytom
akemoneythro
ughstocksisdi
vidend.
Thecom
Individual investors can also acquire preference stocks, just thatcompanies in India havent bothered to offer them so far to thegeneral public.
Holding equity (savvy way of saying you own those pricey littleshare certificates) entitles you to a share of the earnings and theassets of a company. What that means is that if a companyrecords profits for a year you are entitledto a share of theprofits. The share of the profits or earnings the company isdecides to give you is called dividend.
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Before we step further, let's clear one thing upfront. By equity wemean stocks, right? And vice versa? We use equity and stocksinterchangeably. Equity refers to ordinary stocks. And thats whatconcerns us here because only ordinary stocks can be purchased
by people like you and traded on the stock exchanges. Stocksagain refer to equity. Unless we mention preferred
How nice! But did you get the catch when we said on `entitledand `decides to give you?
We live in a class-ridden society. Stocks too have their two majorclasses or types: ordinary and preference.
Ordinary stocks, sometimes also called equity stocks or commonstocks, are really for the general public without any bar. You, me
and just anyone can buy them (and proudly say we have a stakein the company).
Before we step further, let's clear one thing upfront. By equity wemean stocks, right? And vice versa? We use equity and stocksinterchangeably. Equity refers to ordinary stocks. And thats whatconcerns us here because only ordinary stocks can be purchasedby people like you and traded on the stock exchanges. Stocksagain refer to equity. Unless we mention preferred stock, stock isalways the other type meant for us. OK?
Individual investors can also acquire preference stocks, just thatcompanies in India havent bothered to offer them so far to thegeneral public.
Holding equity (savvy way of saying you own those pricey littleshare certificates) entitles you to a share of the earnings and theassets of a company. What that means is that if a companyrecords profits for a year you
Are entitled to a share of the profits. The share of the profits or
earnings the company is decides to give you is called dividend.
How nice! But did you get the catch when we said on `entitledand `decides to give you? Because what happens is that ordinaryshareholders will only get the dividend after everyone else, i.e.preference shareholders have settled their share of the earnings.So, if the company chairman says no dividends this year, you
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can't kidnap him till he comes out with your dividend unless ofcourse, you have no other way to earn infamy.
Preference shareholders are privileged guys. They get their shareof the earnings before the ordinary shareholders. In other words,
preference stocks will always have an assured dividend. Whetherthose shareholders actually get paid depends on whether thecompany has enough resources to pay up. If that was not enough,those privileged guys also have the "added" advantage. All theirmissed dividends keep getting added while for ordinaryshareholders dividends once missed are missed forever! Andwhen the company does declare windfall profits, it will first paythe cumulative dividends of the preference shareholders and thenthe ordinary shareholders.
Commodities:
Commodity markets are markets where raw or primary productsare exchanged. These raw commodities are traded on regulatedcommodities exchanges, in which they are bought and sold instandardized contracts.
This article focuses on the history and current debates regardingglobal commodity markets. It covers physical product (food,metals, and electricity) markets but not the ways that services,including those of governments, nor investment, nor debt, can be
seen as a commodity. Articles on reinsurance markets, stockmarkets, bond markets and currency markets cover thoseconcerns separately and in more depth. One focus of this article isthe relationship between simple commodity money and the morecomplex instruments offered in the commodity markets.
http://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Currency_markethttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Currency_markethttp://en.wikipedia.org/wiki/Commodity_money -
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The modern commodity markets have their roots in the trading ofagricultural products. While wheat and corn, cattle and pigs, werewidely traded using standard instruments in the 19th century inthe United States, other basic foodstuffs such as soybeans were
only added quite recently in most markets. For a commoditymarket to be established there must be very broad consensus onthe variations in the product that make it acceptable for onepurpose or another.
The economic impact of the development of commodity marketsis hard to over-estimate. Through the 19th century "theexchanges became effective spokesmen for, and innovators of,improvements in transportation, warehousing, and financing,which paved the way to expanded interstate and international
trade."
Top 10 Commodities are:
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Early
History of commodity markets:
Historically, dating from ancient Sumerian use of sheep or goats,or other peoples using pigs, rare seashells, or other items ascommodity money, people have sought ways to standardize andtrade contracts in the delivery of such items, to render trade itselfmore smooth and predictable.
Commodity money and commodity markets in a crude early form
are believed to have originated in summer where small bakedclay tokens in the shape of sheep or goats were used in trade.Sealed in clay vessels with a certain number of such tokens, withthat number written on the outside, they represented a promiseto deliver that number. This made them a form of commoditymoney - more than an "I.O.U." but less than a guarantee by a
Sr.n
o. Commodity
1 Gold
2 Silver
3 Guar Seed
4 Channa
5 Urad
6 Crude Oil
7 Tur
8 Soya Oil
9 Mentha Oil
10 Guar Gum
11 Others
Total
http://en.wikipedia.org/wiki/Sumerianhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Sumerhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/I.O.U.http://en.wikipedia.org/wiki/Sumerianhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Sumerhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/I.O.U. -
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nation-state or bank. However, they were also known to containpromises of time and date of delivery - this made them like amodern futures contract. Regardless of the details, it was onlypossible to verify the number of tokens inside by shaking the
vessel or by breaking it, at which point the number or termswritten on the outside became subject to doubt. Eventually thetokens disappeared, but the contracts remained on flat tablets.
This represented the first system of commodity accounting.
However, the Commodity status of living things is always subjectto doubt - it was hard to validate the health or existence of sheepor goats. Excuses for non-delivery were not unknown, and thereare recovered Sumerian letters that complain of sickly goats,sheep that had already been fleeced, etc.
If a seller's reputation was good, individual "backers" or "bankers"could decide to take the risk of "clearing" a trade. Theobservation that trust is always required between marketsparticipants later led to credit money. But until relatively moderntimes, communication and credit were primitive.
Classical civilizations built complex global markets trading gold orsilver for spices, cloth, wood and weapons, most of which hadstandards of quality and timeliness. Considering the many
hazards of climate, piracy, theft and abuse of military fiat byrulers of kingdoms along the trade routes, it was a major focus ofthese civilizations to keep markets open and trading in thesescarce commodities. Reputation and clearing became centralconcerns, and the states which could handle them mosteffectively became very powerful empires, trusted by manypeoples to manage and mediate trade and commerce.
Spot trading:
Spot trading is any transaction where delivery either takes placeimmediately, or if there is a minimum lag, due to technicalconstraints, between the trade and delivery. Commoditiesconstitute the only spot markets which have existed nearlythroughout the history of humankind.
Forward contracts
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A forward contract is an agreement between two parties toexchange at some fixed future date a given quantity of acommodity for a price defined today.
Futures contracts:
A futures contract has the same general features as a forwardcontract but is transacted through a futures exchange.
Commodity and Futures contracts are based on whats termed"Forward" Contracts. Early on these "forward" contracts(agreements to buy now, pay and deliver later) were used as away of getting products from producer to the consumer. Thesetypically were only for food and agricultural Products. Forwardcontracts have evolved and have been standardized into what we
know today as futures contracts. Although more complex today,early Forward contracts for example, were used for rice inseventeenth century Japan. Modern "forward", or futuresagreements, began in Chicago in the 1840s, with the appearanceof the railroads. Chicago, being centrally located, emerged as thehub between Midwestern farmers and producers and the eastcoast consumer population centers.
Hedging:
"Hedging", a common (and sometimes mandatory) practice offarming cooperatives insures against a poor harvest bypurchasing futures contracts in the same commodity. If thecooperative has significantly less of its product to sell due toweather or insects, it makes up for that loss with a profit on themarkets, since the overall supply of the crop is short everywherethat suffered the same conditions.
Whole developing nations may be especially vulnerable, and eventheir currency tends to be tied to the price of those particular
commodity items until it manages to be a fully developed nation.For example, one could see the nominally fiat money of Cuba asbeing tied to sugar prices, since a lack of hard currency paying forsugar means less foreign goods per peso in Cuba itself. In effect,Cuba needs a hedge against a drop in sugar prices, if it wishes tomaintain a stable quality of life for its citizens.
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Delivery and condition guarantees:
In addition, delivery day, method of settlement and delivery pointmust all be specified. Typically, trading must end two (or more)
business days prior to the delivery day, so that the routing of theshipment can be finalized via ship or rail, and payment can besettled when the contract arrives at any delivery point.
Regulation of commodity markets:
Cotton, kilowatt-hours of electricity, board feet of wood, longdistance minutes, royalty payments due on artists' works, andother products and services have been traded on markets ofvarying scale, with varying degrees of success. One issue that
presents major difficulty for creators of such instruments is theliability accruing to the purchaser:
Unless the product or service can be guaranteed or insured to befree of liability based on where it came from and how it got tomarket, e.g. kilowatts must come to market free from legitimateclaims for smog death from coal burning plants, wood must befree from claims that it comes from protected forests, royaltypayments must be free of claims of plagiarism or piracy, itbecomes impossible for sellers to guarantee a uniform delivery.
Generally, governments must provide a common regulatory orinsurance standard and some release of liability, or at least abacking of the insurers, before a commodity market can begintrading. This is a major source of controversy in for instance theenergy market, where desirability of different kinds of powergeneration varies drastically. In some markets, e.g. Toronto,Canada, surveys established that customers would pay 10 energythat was not from coal or nuclear, but strictly from renewable
sources such as wind.In the United States, the principal regulator of commodity andfutures markets is the Commodity Futures Trading Commission.
Bonds:
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In finance, a bond is a debt security, in which the authorizedissuer owes the holders a debt and is obliged to repay theprincipal and interest (the coupon) at a later date, termedmaturity. Other stipulations may also be attached to the bond
issue, such as the obligation for the issuer to provide certaininformation to the bond holder, or limitations on the behavior ofthe issuer. Bonds are generally issued for a fixed term longer thanten years. U.S. Treasury securities issue debt with life of ten yearsor more, which is a bond. New debt between one year and tenyears is a "note and new debt less than a year is a "bill".
A bond is simply a loan, but in the form of a security, althoughterminology used is rather different. The issuer is equivalent tothe borrower, the bond holder to the lender, and the coupon to
the interest. Bonds enable the issuer to finance long-terminvestments with external funds. Note that certificates of deposit(CDs) or commercial paper are considered to be money marketinstruments and not bonds.
In some nations, both terms bonds and notes are usedirrespective of the maturity. Market participants normally use theterms bonds for large issues offered to a wide public and notes forsmaller issues originally sold to a limited number of investors.
There are no clear demarcations. There are also "bills" whichusually denote fixed income securities with terms of three yearsor less, from the issue date, to maturity. Bonds have the highestrisk, notes are the second highest risk, and bills have the leastrisk. This is due to a statistical measure called duration, wherelower durations mean less risk and are associated with shorterterm obligations.
Bonds and stocks are both securities, but the major differencebetween the two is that stock-holders are the owners of the
company (i.e., they have an equity stake), whereas bond-holdersare lenders to the issuing company. Another difference is thatbonds usually have a defined term, or maturity, after which thebond is redeemed, whereas stocks may be outstandingindefinitely. An exception is a consol bond, which is a perpetuity(i.e., bond with no maturity).
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Issuing bonds:
Bonds are issued by public authorities, credit institutions,companies and supranational institutions in the primary markets.
The most common process of issuing bonds is through
underwriting. In underwriting, one or more securities firms orbanks, forming a syndicate, buy an entire issue of bonds from anissuer and re-sell them to investors. Government bonds aretypically auctioned.
Types of bonds:
Fixed rate bonds have a coupon that remains constantthroughout the life of the bond.
Floating rate notes (Ferns) have a coupon that is linked to amoney market index, such as LIBOR or Euribor, for example threemonths USD LIBOR + 0.20%. The coupon is then resetperiodically, normally every three months.
High yield bonds are bonds that are rated below investmentgrade by the credit rating agencies. As these bonds are relativelyrisky, investors expect to earn a higher yield. These bonds arealso calledjunk bonds.
Zero coupon bonds do not pay any interest. They trade at a
substantial discount from par value. The bond holder receives thefull principal amount as well as value that have accrued on theredemption date.
Inflation linked bonds, in which the principal amount is indexedto inflation. The interest rate is lower than for fixed rate bondswith a comparable maturity. However, as the principal amountgrows, the payments increase with inflation. The government ofthe United Kingdom was the first to issue inflation linked Gilts inthe 1980s.
Other indexed bonds, for example equity linked notes andbonds indexed on a business indicator (income, added value) oron a country's GDP.
Asset-backed securities are bonds whose interest and principalpayments are backed by underlying cash flows from other assets.Examples of asset-backed securities are mortgage-backed
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securities (MBS's), collateralized mortgage obligations (CMOs) andcollateralized debt obligations (CDOs).
Subordinated bonds are those that have a lower priority thanother bonds of the issuer in case of liquidation. In case of
bankruptcy, there is a hierarchy of creditors. First the liquidator ispaid, then government taxes, etc. The first bond holders in line tobe paid are those holding what is called senior bonds. After theyhave been paid, the subordinated bond holders are paid. As aresult, the risk is higher. Therefore, subordinated bonds usuallyhave a lower credit rating than senior bonds.
Perpetual bonds are also often called perpetuities. They have nomaturity date. The most famous of these are the UK Consoles,which are also known as Treasury Annuities or Undated
Treasuries. Some of these were issued back in 1888 and still tradetoday.
Bearer bond is an official certificate issued without a namedholder. In other words, the person who has the paper certificatecan claim the value of the bond. Often they are registered by anumber to prevent counterfeiting, but may be traded like cash.Bearer bonds are very risky because they can be lost or stolen.
Registered bond is a bond whose ownership (and any
subsequent purchaser) is recorded by the issuer, or by a transferagent. It is the alternative to a Bearer bond. Interest payments,and the principal upon maturity, are sent to the registered owner.
Municipal bond is a bond issued by a state, U.S. Territory, city,local government, or their agencies. Interest income received byholders of municipal bonds is often exempt from the federalincome tax and from the income tax of the state in which they areissued, although municipal bonds issued for certain purposes maynot be tax exempt.
Book-entry bond is a bond that does not have a papercertificate. As physically processing paper bonds and interestcoupons became more expensive, issuers (and banks that used tocollect coupon interest for depositors) have tried to discouragetheir use. Some book-entry bond issues do not offer the option ofa paper certificate, even to investors who prefer them.[3]
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Lottery bond is a bond issued by a state, usually a Europeanstate. Interest is paid like a traditional fixed rate bond, but theissuer will redeem randomly selected individual bonds within theissue according to a schedule. Some of these redemptions will be
for a higher value than the face value of the bond.War bond is a bond issued by a country to fund a war
Investing in bonds:
Bonds are bought and traded mostly by institutions like pensionfunds, insurance companies and banks. Most individuals who wantto own bonds do so through bond funds. Still, in the U.S., nearlyten percent of all bonds outstanding are held directly byhouseholds.
As a rule, bond markets rise (while yields fall) when stock marketsfall. Thus bonds are generally viewed as safer investments thanstocks, but this perception is only partially correct. Bonds dosuffer from less day-to-day volatility than stocks, and bonds'interest payments are higher than dividend payments that thesame company would generally choose to pay to its stockholders.Bonds are liquid it is fairly easy to sell one's bond investments,though not nearly as easy as it is to sell stocks and thecertainty of a fixed interest payment twice per year is attractive.Bondholders also enjoy a measure of legal protection: under thelaw of most countries, if a company goes bankrupt, itsbondholders will often receive some money back (the recoveryamount), whereas the company's stock often ends up valueless.However, bonds can be risky:
Fixed rate bonds are subject to interest rate risk, meaning thattheir market prices will decrease in value when the generallyprevailing interest rates rise. Since the payments are fixed, a
decrease in the market price of the bond means an increase in itsyield price changes in a bond immediately affect mutual fundsthat hold these bonds. Many institutional investors have to "markto market" their trading books at the end of every day. If thevalue of the bonds held in a trading portfolio has fallen over theday, the "mark to market" value of the portfolio may also have
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fallen. This can be damaging for professional investors such asbanks, insurance companies, pension funds and asset managers.
Bond prices can become volatile if one of the credit ratingagencies like Standard & Poor's or Moody's upgrades or
downgrades the credit rating of the issuer. A downgrade cancause the market price of the bond to fall. As with interest raterisk, this risk does not affect the bond's interest payments, butputs at risk the market price, which affects mutual funds holdingthese bonds, and holders of individual bonds who may have tosell them.
A company's bondholders may lose much or all their money if thecompany goes bankrupt. Under the laws of many countries(including the United States and Canada), bondholders are in lineto receive the proceeds of the sale of the assets of a liquidatedcompany ahead of some other creditors. Bank lenders, depositholders (in the case of a deposit taking institution such as a bank)and trade creditors may take precedence.
There is no guarantee of how much money will remain to repaybondholders. As an example, after an accounting scandal and aChapter 11 bankruptcy at the giant telecommunications companyWorldCom, in 2004 its bondholders ended up being paid 35.7
cents on the dollar. In a bankruptcy involving reorganization orrecapitalization, as opposed to liquidation, bondholders may endup having the value of their bonds reduced, often through anexchange for a smaller number of newly issued bonds.
Some bonds are callable, meaning that even though the companyhas agreed to make payments plus interest towards the debt for acertain period of time, the company can choose to pay off thebond early. This creates reinvestment risk, meaning the investoris forced to find a new place for his money, and the investor might
not be able to finas good a deal, especially because this usuallyhappens when interest rates are falling.