CU -BBA Sem VI- investment management

BACHELOR OF BUSINESS ADMINISTRATION SEMESTER IV INVESTMENT MANAGEMENT

First Published in 2022 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 2 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit - 1 Introduction Of Investmen ...........................................................................................4 Unit - 2 Risk Return Relationship............................................................................................15 Unit - 3 Security And Security Maeket....................................................................................37 Unit - 4 Legal Frame Work Of Security Markets ....................................................................53 Unit - 5 Growth Process...........................................................................................................61 Unit - 6 Financial System In India...........................................................................................73 Unit - 7 Mokey Market ............................................................................................................83 Unit - 8 Stock Market ..............................................................................................................95 Unit - 9 Capital Market ..........................................................................................................111 Unit - 10 Players In The Market ............................................................................................123 Unit - 11 Sebi Guidelines.......................................................................................................138 Unit - 12 New Issues Market & Problems .............................................................................157 Unit - 13 Debt Versus Equity.................................................................................................175

UNIT - 1 INTRODUCTION OF INVESTMEN STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 Meaning 1.3 Nature of investment 1.4 Mode of Investment 1.5 Tax Provision 1.6 Characteristics of Investment 1.7 Summary 1.8 Keywords 1.9 Learning Activity 1.10 Unit End Questions 1.11 References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Meaning and nature of Investment  Identify the scope of investment  Understand the Tax provision  Characteristics of investment 1.1 INTRODUCTION Investment is the commitment of a resource to a long-term increase in value. Investment necessitates the loss of a current resource, such as time, money, or effort. In the world of finance, investing is done in order to profit from the asset being put to use. A gain (profit) or loss realised through the sale of a home or investment, unrealized capital gain (or loss), investment income like dividends, interest, or rental income, or a mix of capital gain 4 CU IDOL SELF LEARNING MATERIAL (SLM)

and income may all be included in the return. The return may also include foreign exchange profits or losses as a result of shifting exchange rates. 1.2 MEANING Investments are assets purchased or sums of money invested with the intent of generating revenue in the future. Investments are also made in order to profit from a future increase in an asset's value. An investment is a future-focused purchase of products with the intention of generating income or building wealth in the future. A person might potentially try to profit by selling the asset later on for a bigger sum. Investments can also include funds allocated for starting a new business, growing an existing one, buying stock or shares in a company, or investing an asset in a company. Making your money work for you or allowing your money to grow is the goal of investing. 1.3 NATURE OF INVESTMENT 1. The predicted rate of return on an investment is referred to as the return. The investor's pattern of investment is significantly influenced by this main component. 2. Risk entails: The variability of an investment's rate of return is referred to as the risk of the investment. The risk increases with the degree of unpredictability, dispersion, or boundary of the range of potential outcomes. 3. Marketability: A product or service is highly marketable or liquid if: It is shortly completed. It is inexpensive to transact. Between two purchases that are close in time, the price barely changes. 4. Investment expansion It alludes to In today's investing world, capital growth has taken on significant importance. The relationship between corporate and industry growth is being acknowledged, and it is very 5 CU IDOL SELF LEARNING MATERIAL (SLM)

1.4 MODES OF INVESTEMENT Consider the numerous investing options as instruments that can assist you in achieving your financial objectives. From bank products to stocks and bonds, each broad investment category has its own specific set of characteristics, risk considerations, and application options for investors. Find out more about the various investment Bonds types below. Stocks:- You become a shareholder in a company when you purchase stock. Equity shares, often known as ownership shares, are represented by stocks. Whether you profit or lose money on a stock relies on the performance of the firm, the kind of stock you possess, the state of the market as a whole, and other variables. Frequently, stocks and stock mutual funds can play a significant role in a diversified financial portfolio. Learn more about the various stock types and how to determine whether a certain stock is appropriate for you. ETFs and mutual funds: Investment funds combine the money of numerous participants and make investments using a predetermined plan. There are numerous sorts of funds, each with unique characteristics. The Securities and Exchange Commission (SEC) requires that publicly offered funds, including mutual funds, exchange-traded funds, closed-end funds, and unit investment trusts, be registered as investment companies. Hedge funds and private investment funds are frequently excluded from registration requirements. A wide range of investing methods and styles are available in funds, which can also provide diversification and professional management. Like purchasing any security, investing in a fund entails risk, which includes the potential for financial loss. Furthermore, the past performance of a fund does not guarantee future success. Bank Products: Banks and credit unions can offer a secure and practical way to save money, and some of them even have services that can help you manage your finances. Up to a cap set by Congress, deposits at banks and the majority of credit unions are federally insured. Additionally, transaction (or checking) accounts and deposit accounts provide liquidity, making it simple for you to access your money for any purpose—from daily spending to a down payment or cash for unanticipated situations. Checking accounts allow you to send 6 CU IDOL SELF LEARNING MATERIAL (SLM)

money by cheque or electronic payment to a person or organization that you choose as the payee and are also FDIC-insured. The interest you receive from bank products, like as certificates of deposit (CDs), tends to be lower than prospective returns from other sources, so keep that in mind. Options- Contracts known as options grant the buyer the right, but not the duty, to buy or sell a security, such as a stock or exchange-traded fund, at a fixed price within a given time frame. Options can aid investors in risk management. However, there is risk involved in both purchasing and selling options, and it is possible to lose money. Understanding the various options available, trading methods, and associated risks pays off. Options Spotlight: Investor Insights Options A-Z: The Foundations of Greek Culture The options market can seem to have its own language to those who are not familiar with it, as there are many strange phrases. In order to assist you become familiar with the vocabulary of choices, this article defines several fundamental terminologies. Annuities: In a contract known as an annuity, you and an insurance provider agree that the latter will give you regular payments, either now or in the future. Either a single payment or a series of payments known as premiums are used to purchase an annuity. Retirement savings opportunities are offered by some annuity contracts. Your investments could be used by others to generate a retirement income stream. Others still do both. You have a deferred annuity if you use an annuity as a savings vehicle and the insurance company postpones your payout to the future. You have an immediate annuity if you use the annuity to establish a source of retirement income and your payments begin straight away. Retirement: Retirement planning and income management are two crucial facets of personal financial management. Tax-advantaged options, such a 401(k) or IRA, might be wise decisions when it comes to investing. Your savings have the potential to grow over time in addition to any potential tax advantages. Whether you are just starting out or have already retired, FINRA's Smart 401(k) website offers helpful information about how 401(k) plans operate. The way you manage your income once you retire can make the difference between enjoying a comfortable retirement and running out of money later. There are steps you can do right away to manage your retirement income, regardless of whether you are retired or still saving for it. Investing in education: Savings is the first step in financing education. The good news is that there are numerous wise, tax-advantaged ways to save for education, despite the fact that the 7 CU IDOL SELF LEARNING MATERIAL (SLM)

cost of college and other educational expenses keeps rising. We'll guide you through your choices and offer advice and resources along the way. 1.5 TAX PROVISION Tax compliance refers to policy actions and individual behavior aimed at ensuring that taxpayers are paying the right amount of tax at the right time and securing the correct tax allowances and tax reliefs. A tax is a mandatory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or national) Around 3000–2800 BC, the first recorded taxation was enacted in ancient Egypt. Non-compliance with the law includes failing to pay on time as well as evading or resisting taxation. Taxes can be paid in cash or labour and can be either direct or indirect. Most nations have a tax system in place to finance public, shared, or agreed-upon national necessities as well as governmental duties. While some scale taxes are progressive based on brackets of annual income amounts, most impose a flat percentage rate of taxation on personal annual income. The majority of nations impose taxes on both personal and business income. Wealth taxes, inheritance taxes, estate taxes, gift taxes, property taxes, sales taxes, usage taxes, payroll taxes, fees, and/or tariffs are frequently levied by nations or subunits. In terms of economics, taxation is the transfer of wealth from individuals or companies to the government. Economic growth and economic welfare can be increased or decreased as a result of these consequences. As a result, taxes are a hotly contested subject, with some, like libertarians, characterizing them as theft or extortion. A liability with undetermined date or amount can be a provision. A liability, on the other hand, is a current obligation of the entity resulting from previous occurrences that is anticipated to cause an outflow of resources from the entity that contain economic advantages. A provision should not be viewed as savings, despite the fact that this is how it is frequently perceived. Common provisions include things like income tax obligations, product warranties, environmental rehabilitation, etc. The following conditions must be met in order for a provision to be recognized: A previous event has resulted in an entity having a present obligation; it is likely that an outflow of resources including economic benefits will be needed to settle the obligation; and a trustworthy estimation of the obligation's size can be produced. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

According to a specific current statement, other parties have a right to assume that the entity will uphold its obligations. The entity will accept certain duties. However, no allowance is made for expenses that may need to be incurred in order to continue operating. Additionally, a duty always involves the entity to whom it is owed (even if this party is unknown) When it refers to the income tax charge incurred by a company during an income statement period, the word provision is frequently used as a synonym for \"expense\" in American English. This item would appear as a provision for income tax in income statements. 1.6 CHARACTERISTICS OF INVESTEMENT  Investment characteristics of financial and economic investments can be summed up as follows:  Return - The anticipation of a return is the defining feature of all investments. In actuality, obtaining a return is the main goal of investments. You might get the return in the form of interest plus capital growth. Capital appreciation is the increase in value between the purchase and sale prices. The yield on an investment is the dividend or interest earned. Different investment kinds guarantee various rates of return. The nature of the investment, the maturity term, and a number of other factors all affect the return on an investment.  Risk - Any investment carries some risk. The risk may be related to capital loss, capital payback delays, interest payments that are not made, or return fluctuation. While some investments—such as bank savings and government securities—pose essentially no risk, others do. The following elements affect how risky an investment is. The risk increases as the maturity period lengthens. The risk increases when the borrower's credit worthiness decreases. The risk changes depending on the type of investment. Compared to investments in debt instruments like debentures & bonds, investments in ownership assets like equity shares incur a larger risk.  Safety - The certainty of capital return without monetary or temporal loss is implied by an investment's safety. Another aspect that an investor wants for his investments is safety. Every investor wants to receive their investment back at maturity without suffering any losses or delays.  Liquidity - Liquidity is the ability to easily sell or market an investment without suffering financial loss or losing valuable time. Some assets, including bank deposits, 9 CU IDOL SELF LEARNING MATERIAL (SLM)

P.O. deposits, NSC, NSS, and firm deposits, are not tradable. Even though some investment instruments, such as preference shares and debentures, are tradable, their liquidity is generally quite low. Equity shares of businesses with stock exchange listings can be easily traded on stock exchanges. A typical investor likes investments with liquidity, safety for his money, a good return with low risk, or minimization of risk & maximisation of return. 1.7 SUMMERY  Investment management includes more than just purchasing and selling financial assets and other investments. Creating a short- or long-term strategy for the acquisition and sale of portfolio holdings is a component of management. It may also cover banking, budgeting, and tax-related services and obligations.  The phrase most frequently relates to managing the holdings within a portfolio of investments and trading them to accomplish a certain investment goal. Money management, portfolio management, and wealth management are other terms for investment management.  Generally, investment managers must be registered investment advisers if their assets under management (AUM) are at least $25 million or if they advise investment firms that offer mutual funds (RIA). They must register with the Securities and Exchange Commission (SEC) and state securities administrators in order to work as a registered advisor. They also acknowledge their fiduciary responsibility to their clients. These advisors make a fiduciary oath to operate in the best interests of their clients or risk criminal prosecution. Firms or advisors managing assets under $25 million normally register exclusively in the states in which they conduct business.  Professional investment management strives to accomplish certain investment objectives for the benefit of clients whose money they are tasked with managing. These customers could include retail investors like individuals or institutional investors like pension funds, retirement plans, governments, institutes of higher learning, and insurance organisations. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

1.8 KEYWORDS  Investment management is the term used to describe how experts manage clients' financial assets and other investments.  Individual or institutional investors may be investment managers' clients.  Creating strategies and carrying out deals within a financial portfolio are both aspects of investment management.  Investment management companies that handle assets worth more than $25 million are required to register with the SEC and accept fiduciary duty to their clients.  Managing a company in the investment management sector has its challenges despite the potential for rich profits. 1.9 LEARNING ACTIVITY 1. Define Investment 2. Modes and characteristics of investment 3. Explain Tax Provision 1.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What do you mean by investment? 2. Define Tax provision? 3. Define risk. What are the various sources of risk in an investment? 4. State investment decision process. What factors should an investor consider while making investment decisions? 5. Explain the characteristics of investment? Long Questions 1. What is an investment? Explain the modes of investment? 2. Describe tax Provision? 3. What are the characteristics of investment and how can we apply those on your investment? 11 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Explain Mutual funds. 5. What is a bank product, explain. B. Multiple Choice Questions 1. Investments would score high only if there is a protection to. A) Real estate B) Preferred stock C) Government bonds D) Common stock Investors agree to invest in high- risk investments if only. A) There are any true speculations B) The predicted return is satisfactory for taking a risk C) There are no safe options except for holding cash D) The return is short If there is an increase in interest rates than the fixed interest rate of the corporate bond will. A) Return to the corporation B) Decrease in value C) Remain unchanged D) None of the above In Capital Market Line every investment is. A) Divisible B) Infinitely divisible C) Finitely divisible D) Both b & c 12 CU IDOL SELF LEARNING MATERIAL (SLM)

An investor invests in assets known as a A) Securities B) Block of Assets C) Portfolio D) None of the above Answers 1-c, 2-b, 3-b. 4-d, 5-c 1.10 REFERENCES References books  The Ups and Downs of Biotechnology, by Casey Murphy, Investopedia. retrieved on 12/15/2021.  Washington and Lee Law Review, Spring 1997; Robert H. Hillman, \"Limited Liability in Historical Perspective\"; Benedikt Koehler, \"Islamic Finance as a Progenitor of Venture Capital\" (Economic Affairs, December 2009).  Mr. Edward Thorp (2010). World Scientific, Kelly Capital Growth Investment Criterion, ISBN 9789814293495.  AI-based Drug Discovery Market: Focus on Deep Learning and Machine Learning, 2020-2030,\" Research and Markets, ltd. www.researchandmarkets.com. retrieved on 12/15/2021. Textbook  Graham, Benjamin; Dodd, David (2002-10-31)  Kelly Calculator Investment Tool, Ryan Acquis. On 2012-03-20, the original version was archived. obtained on October 7, 2008.  \"The Hammurabi Code.\" The Avalon Project: Legal, historical, and diplomatic documents Website  https://en.wikipedia.org/wiki/Investment#Investment and risk  https://en.wikipedia.org/wiki/Investment#Investment strategies 13 CU IDOL SELF LEARNING MATERIAL (SLM)

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UNIT - 2 RISK RETURN RELATIONSHIP STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 Tax benefits 2.3 Marketability and liquidity 2.3.1 Market liquidity 2.3.2 Safety 2.3.3 Risk 2.4 Safety vs riskiness 2.5 Types of investments 2.6 Savings & investments 2.7 Summary 2.8 Learning Activity 2.9 Unit End Questions 2.10 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  What are the Tax benefits  What is liquidity  How dose safety work against risk  Various types of investment  The nature of risk as portfolios become large 2.1 INTRODUCTION In general, an investment's risk increases with its possible reward. By taking on more risk, there is no assurance that you will actually earn a bigger return. 15 CU IDOL SELF LEARNING MATERIAL (SLM)

The risk associated with investing in securities is the potential for dividend and capital appreciation to deviate from the projected return owing to both internal and external factors. Unsystematic risk refers to the internal component of a risk that is particular to a company or industry. Systematic risk refers to the portion of risk that is external, impacts all securities, and has a broad impact. Investors are not only concerned with maximizing return but also minimizing risk, as evidenced by the fact that they do not hold a single security that they believe to be the most profitable. By holding a wider variety of securities, the unsystematic risk is eliminated. Systematic risk is also referred to as \"market risk\" and \"non-diversifiable risk\" because it cannot be avoided by adding more securities. Diversification reduces risk, but only to the lowest possible level of market risk. Investors' expectations of returns rise as perceived uncertainty does. Alternative investments have quite different rates of return, and as the necessary return on individual investments changes over time, it is important to take these influences into account. 2.2 TAX BENIFITES Any tax law that lowers your tax liability is referred to as a tax benefit. Benefits include exclusions, tax credits, and deductions, among other things. They cover a variety of topics, such as family programmers, education, employment, and natural calamities. Some tax advantages depend on your capacity to pay taxes. For instance, the earned income tax credit and the child tax credit both take into account the expense of raising a family. Other tax advantages, such as the deductions for charity contributions and mortgage interest, are incentives aimed at advancing social policy objectives. Tax advantage is the term used to describe the economic benefit that is given to some investments or accounts that are, by law, tax-free, tax-deferred, or tax-reduced. Retirement plans, college savings accounts, medical savings accounts, and government bonds are a few examples of tax-advantaged accounts and investments. When it is seen to be in the public interest, governments create tax benefits to encourage private citizens to donate money. 16 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig. 2.1 Tax Benefits People are constantly looking for ways to reduce their income taxes. Nobody likes to pass up opportunities to reduce their tax liability. Different people favour various approaches to doing this. They occasionally just use the techniques they are familiar with, missing out on opportunities to save money on taxes. This post is intended for those who wish to learn more about how to reduce the amount of money they pay in income taxes. If you're wondering how to reduce your income tax in India, keep reading to learn 32 tips for salaried workers and business owners. In India, the tax levied on the majority of fringe benefits—though not all—was known as the fringe benefits tax (FBT). The Finance Act of 2005 of India introduced a new tax on employers with effect for the fiscal year beginning on April 1, 2005. In India's Union budget for 2009, the fringe benefit tax was temporarily banned by Pranab Mukherjee, who was the country's finance minister at the time. The subsequent topics were covered: expenses incurred by the employer for entertainment, travel, employee wellness, and lodging. The scope of what constitutes taxable fringe benefits has been greatly increased. A detailed list of what is taxable is provided by legislation. Employee transportation to work is provided by the employer, or they can receive monetary payments for this. Employer contributions to a retirement plan that has been approved (called a superannuation fund). As of the fiscal year 2007–08, employee stock option plans (ESOPs) are also subject to the fringe benefits tax. 17 CU IDOL SELF LEARNING MATERIAL (SLM)

2.3 MARKETABILITY AND LIQUIDITY In a secondary market, liquidity generally refers to how fast or easily a security can be acquired or sold. When cash is needed, liquid investments can be easily sold without incurring a large cost. The ease with which shares of a stock can be bought or sold without significantly affecting the stock price is referred to as the stock's liquidity. Stocks with low liquidity may be challenging to sell, which could result in you suffering a greater loss if you are unable to do so when you need to. Marketable securities are easily and affordably convertible into cash. They are highly liquid financial products. Marketable securities are liquid since they typically have maturities of less than one year and little impact on prices from the rates at which they can be bought or sold. Market liquidity is a quality of a market in business, economics, or investing that allows a person or company to swiftly buy or sell an asset without significantly changing the product's price. The trade-off between an asset's sale price and its sale time is what is referred to as liquidity. The trade-off is minimal in a liquid market since one can sell right away without having to accept a price that is much lower. An asset must be discounted to sell fast in a generally uniquid market. The ability to rapidly swap money for goods and services at face value makes it the most liquid asset. A liquid asset contains some or all of the characteristics listed below: Anytime during market hours, it can be sold quickly and with no value loss. A liquid market must constantly have willing and able buyers and sellers in order to function. It resembles but differs from market depth, which deals with the trade-off between the amount sold and the price it can get rather than the liquidity trade-off between speed of sale and the price it can fetch. If there are several eager and willing buyers and sellers, a market may be seen as both deep and liquid. Uncertainty regarding its value or the absence of a market where it is frequently exchanged prevent some assets from being easily sold (without a significant price reduction, and occasionally not at any price). Illiquid assets include mortgage-related assets that contributed to the subprime mortgage crisis because, despite being secured by real estate, it was difficult to determine their worth. They had a mediocre amount of liquidity prior to the crisis since it was thought that everyone knew what they were worth. The liquidity of a market or asset is largely influenced by speculators and market makers. Those looking to benefit from projected rises or falls in a certain market price are known as speculators. Market makers look to make money by charging for the speed of execution; this can be done either openly by charging execution commissions or implicitly by earning a bid/ask spread. They offer the capital required to facilitate the liquidity by doing this. Market risk affects entire portfolios as well as individual investments, thus illiquidity risk doesn't just relate to those. \"Contingent\" and \"structural\" liquidity risk is a concern for financial 18 CU IDOL SELF LEARNING MATERIAL (SLM)

institutions and asset managers who manage portfolios. The risk involved with funding asset portfolios in the regular course of business is known as structural liquidity risk, often referred to as funding liquidity risk. The risk of replacing maturing liabilities or locating additional cash in the event of future challenged market conditions is known as contingent liquidity risk. Open market operations refer to the method through which a central bank tries to affect the liquidity (supply) of money. The level of buyer demand and the stock's exchange listing both affect how liquid the market is for that stock. One measure of the liquidity of a stock is the bid/ask spread. For highly liquid equities like Microsoft or GE, the spread is frequently just a few pennies, or significantly less than 1% of the price. The spread can be several percent of the trading price or even more for illiquid equities. Liquidity in banking refers to the capacity to fulfil commitments when they become due without suffering unacceptable losses. In order to maintain sufficient liquidity, managing liquidity is a daily operation that requires bankers to monitor and project cash flows. It's crucial to keep the ratio of short-term assets to short-term obligations in check. Since the bank is required to return all client deposits upon request, client deposits are an individual bank's principal liabilities. On the other hand, reserves and loans are an individual bank's primary assets (in the sense that these loans are owed to the bank, not by the bank). The main source of liquidity comes from the investment portfolio, which accounts for a smaller part of the total assets. Investment securities may be sold to cover withdrawals from accounts and rising loan demand. In addition, banks can sell loans, borrow from other financial institutions, borrow from a central bank like the US Federal Reserve, or raise more capital to provide liquidity. In the worst case, if the bank is unable to create enough cash without suffering significant financial losses, depositors may demand their money. In extreme circumstances, this can lead to a bank run. Most banks are bound by legally required standards meant to prevent a liquidity crisis. Because bank deposits in the majority of modern nations are insured by the government, banks can typically keep as much liquidity as desired. Raising deposit rates and successfully promoting deposit products can solve a liquidity problem. The cost of liquidity is a crucial indicator of a bank's worth and profitability, though. A bank can draw a sizable amount of liquid capital. Stronger earnings, greater stability, and increased confidence among depositors, investors, and regulators result from lower expenses. 19 CU IDOL SELF LEARNING MATERIAL (SLM)

2.4 SAFETY VS RISKINESS Fig. 2.2 Investment Security Safety A security is a financial asset that may be traded. The phrase can be used to refer to any kind of financial instrument, however different jurisdictions have different legal definitions for it. Even if the underlying legal and regulatory framework may not have such a broad definition, the term \"security\" is frequently used to refer to any type of financial instrument in some nations and languages. Financial instruments other than stocks and fixed-income securities are expressly excluded by the term in some countries. In some places, it also contains some items that are comparable to stocks and bonds, like equity warrants. Securities can either be \"non-certificated,\" that is, in electronic (dematerialized) or \"book entry only\" form, or they can be represented by a certificate. Certificates can be registered or bearer, and bearer certificates grant rights to the holder only if they are listed on the issuer's or an intermediary's security register. Registered certificates grant rights only if the holder is listed on the security register. These formal investment vehicles are negotiable and fungible and include shares of corporate stock or mutual funds, bonds issued by businesses or governmental bodies, stock options or other options, limited partnership units, and several other formal investment instruments. Depending on its duration, collateral, and other features, debt securities may also be referred to as debentures, bonds, deposits, notes, or commercial paper. The payment of principle and interest, as well as additional contractual rights under the terms of the issue, such as the right to receive specific information, are normally due to the holder of a debt security. In most cases, debt securities are issued for a set period of time and are redeemed by the issuer at the end of that time. Debt securities may be unsecured or collateral-protected, and if the latter, they may be contractually \"senior\" to other unsecured debt, giving their holders priority in the event of the issuer's bankruptcy. \"Subordinated\" debt is any debt that is not senior. 20 CU IDOL SELF LEARNING MATERIAL (SLM)

Debt owed by businesses or other industrial entities is represented by corporate bonds. Notes have a shorter maturity than debentures, which is normally at least ten years. A straightforward type of debt instrument known as \"commercial paper\" is just a postdated check with a maximum maturity of 270 days. Money market products, such as certificates of deposit, Accelerated Return Notes (ARN), and some bills of exchange, are short-term debt instruments that may resemble deposit accounts. They are frequently referred to as \"near cash\" and are quite liquid. Commercial paper is frequently also very liquid. Securities issued worldwide outside of their native market in a denomination different from the issuer's domicile are known as euro debt securities. Eurobonds and euro notes are two of them. Interest on Eurobonds is often paid in gross amounts and they are typically underwritten but not secured. Either euro-commercial paper (ECP) or euro-certificates of deposit can be considered a type of euro note. A share of equity in an entity, such as the capital stock of a corporation, trust, or partnership, is represented by an equity security. Common stock is the most prevalent type of equity participation, however preferred equity is also a type of capital stock. The owner of equity is a shareholder who has a share or other equity interest in the issuer. Equity securities are not entitled to any payments, in contrast to debt securities, which normally demand periodic payments (interest) to the holder. They only participate in the issuer's remaining stake in bankruptcy cases after all obligations have been fulfilled for creditors. A holder of a majority of the stock, however, is typically allowed to control the issuer because equity typically gives the holder to a pro rata portion of corporate control. In contrast to holders of debt instruments, who only receive interest and return of principal regardless of how well the issuer does financially, equity also has the right to profits and capital gains. Furthermore, outside of bankruptcy, voting rights for debt securities do not exist. In other words, equity owners have a right to the \"upside\" of the company and its management. Equity warrants are options that the company issues that permit the holder to buy a certain number of shares at a certain price within a certain period of time. They are occasionally independent from them and tradeable separately, and they are frequently issued alongside bonds or existing equities. When a warrant holder exercises it, the corporation receives payment straight from him and then issues the holder fresh shares. Warrants increase the number of shares outstanding, just like other convertible securities, and are usually shown in financial reports as fully diluted earnings per share, which makes the assumption that all warrants and convertible securities will be exercised. Riskiness -To minimize, monitor, and control the probability or impact of unfortunate events or to optimize the realization of possibilities, risk management entails the identification, 21 CU IDOL SELF LEARNING MATERIAL (SLM)

evaluation, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives). Instability in global markets, threats from project failures (at any stage of design, development, production, or maintenance of life cycles), legal liabilities, credit risk, accidents, natural causes and disasters, deliberate attack from an adversary, or events with uncertain or unpredictable root causes are just a few examples of the many different types of risks that can arise. There are two different kinds of events; the former are categorized as dangers and the latter as opportunities. Several organizations, including the Project Management Institute, the National Institute of Standards and Technology, actuarial societies, and ISO standards, have created risk management standards. Depending on whether the risk management approach is used in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety, methods, definitions, and goals differ greatly. Some risk management guidelines have come under fire for failing to significantly reduce risk while boosting confidence in predictions and judgments. Avoiding the threat, reducing its negative impact or probability, transferring all or part of the threat to another party, and even holding onto some or all of the potential or actual consequences of a specific threat are common methods for managing threats (uncertainties with negative consequences). To react to opportunities, utilise the reverse of these tactics (uncertain future states with benefits). A Risk Manager's professional responsibilities include \"supervising the organization's comprehensive insurance and risk management programme, assessing and identifying risks that could impede the organization's reputation, safety, security, or financial success,\" and then creating plans to reduce and/or mitigate any unfavourable financial effects. When risk data has been gathered and assessed, risk analysts support the technical side of the organization's risk management strategy by sharing their findings with their managers, who then use those insights to choose between potential solutions. See also internal audit, chief risk officer, and financial risk management. Finance for businesses. After risks have been identified, they must then be evaluated for their likelihood of occurring and potential severity of impact (usually a negative consequence, such as damage or loss). In the instance of a lost building, these quantities can be easily measured, but in the case of an unusual catastrophe, the probability of which is unknown, it is hard to determine with certainty. In order to appropriately prioritise the implementation of the risk management plan, it is crucial to make the best educated selections possible during the assessment phase. Even a temporary increase in good fortune might have detrimental long-term effects. Consider the \"turnpike\" illustration. Widening a road makes room for more traffic. Greater development occurs in the areas close to places with improved traffic capacity. As a result, traffic gradually grows to occupy available space. As a result, turnpikes must be expanded in what seems like infinite cycles. There are numerous such technical examples where growing demand quickly fills up 22 CU IDOL SELF LEARNING MATERIAL (SLM)

available capacity (to perform any function). Without forecasting and management, the growth that results from expansion, which entails costs, could not be able to continue. Since statistical data on all types of prior accidents is not readily available and is especially scarce in the case of catastrophic events due to their rarity, estimating the rate of occurrence is the fundamental challenge in risk assessment. Additionally, it might be challenging to assess the seriousness of the effects (impact) for intangible assets. Another issue that needs to be addressed is asset value. The most knowledgeable perspectives and readily available facts are therefore the main information sources. However, risk assessment should provide top executives with information that makes it simple to grasp the key risks and allows them to prioritise risk management actions in line with overall business objectives. As a result, several theories and attempts to quantify dangers have been made. There are many other risk formulas, but the one that is most frequently used is probably this one: \"Rate (or likelihood) of occurrence multiplied by the impact of the event equals risk magnitude. 2.5 TYPES OF INVESTMENT Fig. 2.2 Investment Strategies 1: Passive and Active Techniques To reduce increased transaction costs, the passive technique entails purchasing and keeping stocks rather than trading in them regularly. Passive techniques tend to be less risky because they are believed to be incapable of outperforming the market due to its volatility. Active tactics, on the other hand, require regular buying and selling. They think they can do better than the market and generate greater returns than the typical investor. The buy and hold strategy describes an investor's investment approach in which they purchase securities and hold them for an extended period of time without planning to sell them soon 23 CU IDOL SELF LEARNING MATERIAL (SLM)

after. Instead, it refers to holding onto an investment over a lengthy period of time while generally ignoring short-term price fluctuations in the market. Investors use this buying approach and base their decisions on the fundamental study of the firm in which they intend to invest. Fundamental analysis takes into account elements like the company's historical performance, its long-term growth strategy, the types and calibre of the items it supplies, the management of the company, etc. This approach avoids and does not take into account short-term market swings, inflation, business cycles, etc. 2: Investment in growth (Short-Term and Long-Term Investments) Based on the value they intend to add to their portfolios, investors choose the holding time. Investors will invest in firms to increase their corpus value if they think the company will expand over the next few years and the intrinsic value of the stock will increase. Investing in growth is another name for this. On the other side, investors will choose short-term holding if they think a company would produce good value in a year or two. Additionally, the holding time is determined by investor preferences. For instance, how soon they need the money, say to buy a house, send their children to school, or for retirement plans, etc. Stocks with the potential to offer investors large returns are included in growth investing. The possibility for stock price movement is closely tied to the company's expansion of profitability. The return increases with increased growth. The risk to reward ratio and return on investment (ROI) remain high due to the high return. One of the main components of growth investment is capital appreciation. In contrast to other investment strategies, the return from this specific area is the highest. Defensive stocks are not the major focus, but rather blue-chip, growth, stalwart, or market leader categories. 3: Value Investing Due to the undervaluation of these companies by the stock market, value investing technique involves investing in them based on their intrinsic value. The rationale behind investing in these businesses is that when the market has a correction, it will adjust the value for these undervalued firms, causing the price to soar and providing investors with substantial returns upon sale. The renowned Warren Buffet employs this tactic. The market correction, which is typically defined as a drop of 10% or more from its most recent high, is a common occurrence in the stock market and occurs when prices of commodities, 24 CU IDOL SELF LEARNING MATERIAL (SLM)

stocks, indexes, and other securities listed on the market are corrected for a variety of reasons, including declining macroeconomic factors, widespread economic pessimism, securities- specific factors, overinflation in the markets, and so on. When prices begin to decline, a market correction takes on a fear-based atmosphere, and suddenly there is active selling. Depending on the size of the correction, the market sell-offs last for a time until coming to an end when buying resumes. Nearly all corrections share a few characteristics, including excessive buying, an upbeat mood with a strong bullish trend, a quick drop in prices, a market gripped by dread, a pattern of new lower lows, unfavourable news about the economy or the relevant organisations, etc. Timing the market and determining the precise point of the correction is very challenging. But there are clear signs that a slump is on the horizon. Market participants can predict when market corrections will occur in a number of ways, including by using charting. The charting method uses observation and analysis of prices to identify market trends. Additionally, there are additional signs that could cause the market to crash, including unfavourable government policy decisions, bad economic conditions, and damaging news relating to a stock. The exhilaration or intense purchasing sessions in the market may be one of the most obvious causes. The scenario also calls for a correction to maintain prices in balance or give a true picture. 4: Investments in income Instead of buying companies that just enhance the value of your portfolio, this sort of strategy focuses on producing cash flow from stocks. An investor can generate two different types of cash income: (1) dividends, and (2) fixed interest from bonds. Such a technique is chosen by investors who are looking for consistent returns on their assets. The part of firm profits given to shareholders as a thank you for their equity investments is referred to as a dividend. The company's board of directors decides whether to issue them as extra shares or in cash. Since they are an expense for the company and reduce retained earnings, not all companies offer them. For a business to grow, retained earnings must be reinvested. Investors like dividend- bearing stocks because they offer a relatively consistent income in addition to the profits that may be realised by trading shares. 5: Investing in dividend growth The investor uses this type of investment approach to search for businesses that consistently pay a dividend each year. Companies with a history of routinely paying dividends are more 25 CU IDOL SELF LEARNING MATERIAL (SLM)

stable and less volatile than other businesses, and they strive to improve their dividend payout each year. Such dividends are reinvested by the investors, who gain over time by compounding. Dividends are compensations given to a company's shareholders, usually from financial profits. Common stockholders who have voting rights typically have a lower priority to receive them than preferred stockholders who do not. The yield is calculated by dividing each stock's annual dividend by its share price. The profitability of shareholder earnings is defined in part by yield. The problem can manifest itself in a variety of ways, including as currency, stocks, real estate, and scrip, among others. It is taxable income for the shareholders, and the firm withholds the appropriate tax amount at the time of distribution, or \"at source.\" Dividends, which are a source of cash, are a reflection of a company's earning potential. Typically, they are paid from the company's profits or accumulated earnings to keep the shareholders buying stock. However, because it is an expense, it lowers retained earnings, which some businesses may not be able to pay. Additionally, businesses cannot issue them in a loss. As a result, these equities draw investors since they provide a relatively consistent income in addition to the profits that may be made from their sales. A one-time lump sum payout is another option used by certain businesses to reward shareholders. The board of directors makes choices about profit distribution after consulting with the company's key stakeholders. 6 : Contrarian Investing When the market is down, investors might purchase stocks of companies using this type of method. This tactic emphasises buying at a discount and selling at a premium. The stock market typically experiences downturns at times of recession, war, natural disaster, etc. Investors shouldn't, however, simply purchase any company's stock during a slump. They ought to keep an eye out for businesses with the potential to grow in value and a brand that bars competitors from doing business with them. 7: Indexing This kind of investment approach enables investors to place a small number of stocks in an index of the market. These could be exchange-traded funds, mutual funds, or the S&P 500. Benefits of Investment Techniques The following are some benefits of investment strategies: 26 CU IDOL SELF LEARNING MATERIAL (SLM)

By investing in various asset classes and industries according to time and anticipated returns, investment methods provide risk diversification in the portfolio. To meet the tastes and needs of the investors, a portfolio may consist of a single strategy or a combination of methods. A strategic approach to investing enables investors to maximise their returns. Investment techniques assist in lowering transaction costs and tax obligations. Investing Strategies' Limitations The following list includes some of the drawbacks of investment strategies: It is challenging for average investors to outperform the market. They may need years to get an average return on their investments, when a professional investor would do so in a matter of weeks or months. Prior to investing, extensive study, analysis, and historical data are taken into account; however, the majority of judgments are made on a predictive basis. Sometimes, performance and returns may not match expectations, which can prevent investors from accomplishing their objectives on time. An investment strategy is crucial to have. It will improve your chances of success and assist you in eliminating bad portfolios. Ask yourself some fundamental questions, such as: How much am I willing to invest? How much money must I get back? How much can I risk taking? What time frame will I be investing over? I had no need to invest, why? Etc. Your investing decision will be better if your objectives are more clearly defined. Keep an eye out for good possibilities and avoid making investments all at once. Building a portfolio is like to building a house, money at a time. 2.6 SAVINGS AND INVESTMENTS Savings- Saving is the act of setting money aside in bank accounts for a future expense or necessity. Saving money is very low-risk and highly liquid, and it is there when you need it for purchases or emergencies quite quickly. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

A Savings are distinct from savings. In contrast to the latter, which refers to either several chances to cut expenditures or one's assets in the form of cash, the former relates to the act of not using one's assets. Savings refers to anything that exists at any given time, a stock variable, whereas saving refers to an action occurring over time, a flow variable. This difference is frequently misinterpreted, and even seasoned economists and financial experts will sometimes refer to \"saving\" as \"savings.\" What constitutes saving can vary slightly depending on the situation. For instance, although though individuals don't necessarily consider paying off a loan as saving, the portion of a person's income used to pay down a home loan principle is not used for immediate consumption and is, therefore, saving in accordance with the aforementioned definition. Personal interest payments are not considered \"saving\" until the institutions and individuals who receive them do so in the National Income and Product Accounts, which is how the United States measures the figures that go into its gross domestic product. Saving and physical investment are closely associated because the former serves as a source of funding for the latter. It is possible for resources to be invested by being used to develop fixed capital, such as factories and machinery, rather than being utilised to purchase consumer products and services. Therefore, saving can be essential to raising the amount of available fixed capital, which supports economic expansion. However, increasing investment does not always follow increased saving. Savings have no possibility of being recycled as company investment if they are not placed into a financial intermediary like a bank. The result could be a shortfall in demand (a buildup of inventories, a reduction in production, employment, and income, and ultimately a recession) rather than an increase in economic growth as a result of increased saving without an equal rise in investment. A short-term increase in aggregate demand and an economic boom may result if saving falls short of investment. If saving falls short of investment over time, investment eventually declines and future growth is hampered. By reducing current consumption and increasing investment, future growth is made possible. Savings that are not placed with a financial intermediary, however, are actually a (no-interest) loan to the government or central bank, which can thereafter be repaid. Savings in a prehistoric agricultural economy can take the form of reserving the best corn crop as seed corn for the following planting season. The economy would transition to hunting and gathering the following season if the entire crop were consumed. 28 CU IDOL SELF LEARNING MATERIAL (SLM)

Money used to buy stocks, put in an investment fund, or used to acquire any asset where there is an element of capital risk is considered an investment in the context of personal finance. This distinction is crucial because, unlike cash savings, investment risk can result in a capital loss when an investment is realised (s). Cash savings accounts are thought to carry a low level of risk. All banks in the US must have deposit insurance, which is normally provided by the Federal Deposit Insurance Corporation, or FDIC. A bank failure can, in rare circumstances, result in the loss of deposits, as it did at the beginning of the Great Depression. Since then, the FDIC has stopped that from happening. The terms investing and saving are sometimes used synonymously. For instance, banks frequently advertise their deposit accounts as investing accounts. Generally speaking, savings are when money is \"invested\" in cash. An investment is when money is used to buy an asset with the expectation that its worth will rise over time, even though the asset's market value may change. A savings account gives you quick access to your funds. Since you must notify the bank in advance of any cash withdrawals, a notice deposit shields your funds from unforeseen withdrawals. A fixed deposit, on the other hand, is a form of savings account that enables you to pick the time period for investment, offers a fixed interest rate for the duration of the investment term, and furthermore safeguards you against making unforeseen withdrawals. Due to their stability and lack of market sensitivity, these savings accounts carry a low risk. You can predict how much interest you will receive on your balance in savings accounts. Investment A purchase made with the intention of creating income or capital growth is known as an investment. An asset's value increasing over time is referred to as appreciation. When a person invests in a good, they do not intend to use it as a source of immediate consumption, but rather as a tool for future wealth creation. An investment always entails the expenditure of some capital—time, effort, money, or an asset—today with the expectation of a future return higher than the initial investment. The purpose of investing is to provide income and build wealth over time. Any method for producing potential future revenue might be referred to as an investment. Buying bonds, equities, or real estate property are a few examples of this. A property that can be utilised to create things can also be bought and regarded as an investment. There is always some risk involved with an investment because it is focused on the possibility for future growth or income. An investment might not produce any revenue or might even depreciate over time. You might invest in a business that goes out of business or a project that never gets off the ground, for instance. Savings and investing can be distinguished from one another primarily 29 CU IDOL SELF LEARNING MATERIAL (SLM)

by the fact that saving involves building up funds for future use with no risk involved while investing involves leveraging funds for a potential future gain with some risk. Financial Investments, investments have an impact on economic growth inside a nation or country. Economic growth often arises from businesses and other organizations making wise investment decisions. For instance, if a company is involved in the production of goods, it might create or purchase new machinery that enables it to produce more things in less time. This would increase the company's overall output of items. This boost in production could raise the country's gross domestic product (GDP) when combined with the actions of numerous other entities. Investment banking can also refer to a particular branch of banking that deals with raising money for other businesses, governments, and other organizations. Investment banks deal with the selling of securities, mergers and acquisitions, reorganizations, and broker trades for both institutions and individual investors. They also underwrite new debt and equity securities for all kinds of firms. Companies that are considering issuing shares publicly for the first time, such as through an IPO, may also receive advice from investment banks (IPO). Objectives Of Investments It's important to comprehend the rationale and the purpose of investing before choosing to put your money into one of the many investment programmes offered in India. Even though each investor may have different personal investment goals, the following reasons are generally why people invest money: 1. To safeguard money One of the main goals of investing for people is to preserve their capital. Some investments aid in preventing the gradual erosion of hard-earned money. You can prevent outliving your savings by placing your money in these instruments or plans. Your money can be kept safe with the help of fixed deposits, government bonds, and even a regular savings account. The goal of capital preservation is easily achieved even though the return on investment can be smaller in this case. 2. To Encourage Money Growth A further typical goal of investing money is to make sure that it accumulates a sizeable corpus over time. A long-term objective that aids people in securing their financial future is capital appreciation. You should think about investment goals and strategies that provide a sizable return on the initial amount invested if you want to turn the money you earn into riches. The best assets for growth include stocks, commodities, mutual funds, real estate, and mutual funds. These options may carry a high level of risk, but they also frequently offer a sizable return. 30 CU IDOL SELF LEARNING MATERIAL (SLM)

3. To provide a consistent flow of income Investing can also assist you in generating a reliable supplementary (or primary) source of income. Such investments include ones in fixed deposits that accrue interest on a regular basis or in stocks of businesses that continuously distribute dividends to shareholders. After you retire, income-producing investments can assist you in covering your regular needs. They can also serve as great sources of additional income during your working years by giving you extra cash to cover things like tuition costs or EMIs. 4. To reduce the tax burden Investors have other strong reasons for making investments besides capital growth or preservation. The Income Tax Act of 1961's tax advantages serve as this motivation. Your total income may be reduced if you invest in things like Unit Linked Insurance Plans (ULIPs), Public Provident Funds (PPF), and Equity Linked Savings Schemes (ELSS). Your taxable income will be decreased as a result, lowering your tax obligation. 5. To Put Money Toward Retirement Retirement savings are essential. You might not be able to work forever, so it's crucial to have a retirement fund you can rely on in your golden years. You can allow your savings to develop sufficiently to support you after retirement by investing the money you make during your working years in the appropriate investment options. 6. To reach your financial objectives Additionally, investing can assist you in easily achieving both your short- and long- term financial objectives. For instance, some investment options have high liquidity and brief lock-in periods. If you want to set aside money for short-term goals like paying for home upgrades or setting up an emergency fund, these investments are the perfect vehicles to do so. For long-term aims, longer lock-in periods offered by other investing options are ideal. Categories Of Investments 1. Investments in ownership As the name implies, ownership investments consist of assets that the investor has bought and acquired. Stocks, real estate investments, and bullion are a few examples 31 CU IDOL SELF LEARNING MATERIAL (SLM)

of this type of investment. An ownership investment might also take the form of financing a firm. 2. Investments in Lending You effectively act like a bank when you invest in lending securities. Examples of lending investments include savings accounts, corporate bonds, and government bonds. Your deposit in a savings account is essentially a loan to the bank. The bank uses this cash to finance the loans it extends to its clients. 3. Cash Alternatives These are very liquid investments that are simple to turn into cash. Excellent instances of cash equivalents include money market instruments. Cash equivalents often have low returns, but fortunately, they also have very little risk. 2.8 KEYWORDS  An investment idea known as the risk-return tradeoff suggests that the potential benefit increases with risk.  Investors must take into account a variety of aspects, including as their general risk tolerance, their ability to replenish lost cash, and more, to determine the right risk- return trade.  When deciding which investments to make, investors weigh the risk-return trade-off for each investment and for the entire portfolio.  When comparing an investment product's predicted return to its level of risk, the SML can be used to aid make this determination.  The securities market line (SML) is a line drawn on a graph that represents the capital asset pricing model graphically. 32 CU IDOL SELF LEARNING MATERIAL (SLM)

2.9 SUMMERY  Investors consider the risk-return trade-off on individual investments and across portfolios when making investment decisions.  The trading principle that connects high risk with high reward is known as the risk- return trade-off. The right risk-return trade-off depends on a number of variables, including as the investor's risk tolerance, the number of years till retirement, and the possibility of recovering lost cash.  The risk-return trade-off is one of the crucial factors that investors consider when making investment decisions and when evaluating their portfolios as a whole.  The risk-return trade-off at the portfolio level can take into account evaluations of the concentration or diversity of assets as well as whether the mix poses an excessive amount of risk or a lower-than-desired potential for returns.  Having said that, there is a risk-return trade-off at the portfolio level as well. An all- equity portfolio, for instance, has both higher risk and larger potential profits.  Concentrating investments in particular industries or taking on single positions that make up a significant portion of assets can raise the risk and reward in an all-equity portfolio.  2.10 LEARNING ACTIVITY 1. Define Savings 2. Objectives of Investments ___________________________________________________________________________ ___________________________________________________________________________ 2.11 RISK RETURN RELATIONSHIP END QUESTIONS A. Descriptive Questions Short Questions 1. Define Tax benefits? 2. What are the risks in investments? 3. Name the types of investments? 4. What is liquidity? 5. What is Marketability and liquidity? Long Questions 33 CU IDOL SELF LEARNING MATERIAL (SLM)

1. What are tax benefits? Explain the various types of benefits? 2. Explain Passive and Active Techniques? 3. Describe Market liquidity? 4. Explain Investment strategies? 5. Explain savings and investments? B. Multiple Choice Questions 1. Two securities' risks that have various projected returns can be contrasted with: Computer Reservation system a. Coefficient of variation b. Standard deviation of securities c. Variance of Securities d. None of the above 2. The degree correlation between risk and return over a longer period of time is generally believed to be as a. Highly negative b. Negative c. Highly positive d. No correlation 3. The minimum expected rate of return that is needed to persuade an investor to purchase the security at given risk is which of the following? a. Risk premium b. Risk free rate of return c. Required rate of return 34 CU IDOL SELF LEARNING MATERIAL (SLM)

d. Inflation premium 4. The variability in return on security due to changes in the level of interest rate in market is called as: a. Call Risk Hosted tour b. Interest Risk c. Liquidity Risk d. Financial Risk Answers 1-a, 2-c, 3-C, 4-B, 2.12 REFERENCE References books  John Y. Campbell and Luis Viceira. The risk-return tradeoff's term structure.  The risk return tradeoff in the long run: 1836–2003, by Christian Lundblad, Journal of Financial Economics 85.1 (2007): 123–150  Lettau, Sydney Ludvigson, and Martin. measuring and simulating the risk-return tradeoff's fluctuation. Financial Econometrics Handbook  Pedro Santa-Clara, Rossen Valkanov, and Eric Ghysels. \"After all, there is a risk- return trade-off.\" Financial Economics Journal 76.3 Textbooks  When All Else Fails by historian David A. Moss outlines the US government's historical function as the last-resort risk manager.  Christopher Rescher (1983). Introduction to the Theory of Risk Evaluation and Measurement from a Philosophical Perspective.  D. Hillson (2007). Project risk management in practise using the Atom Methodology. Management Ideas.  Holden, Kim (2005). Risk management in the Project Manager's Light Jossey-Bass. Website 35 CU IDOL SELF LEARNING MATERIAL (SLM)

 https://en.wikipedia.org/wiki/Risk  https://en.wikipedia.org/wiki/Investment  https://cebma.org/faq/evidence-based-management 36 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 3 SECURITY AND SECURITY MAEKET STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2 Definition 3.2 Characteristics of Securities 3.3.1 Promissory note 3.3.2 Professional participants 3.3.3 Motives of security 3.4 Summary 3.5 Keywords 3.6 Learning Activity 3.7 Unit End Questions 3.8 References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Financial market system  Borrowers and equity funders  Common stocks outperform practically  Securitization financial practise  Credit enhancement and trenching 3.1 INTRODUCTION What Is a Security? The term \"security\" refers to a fungible, negotiable financial instrument that holds some type of monetary value. A security can represent ownership in a corporation in the form of stock, a 37 CU IDOL SELF LEARNING MATERIAL (SLM)

creditor relationship with a governmental body or a corporation represented by owning that entity's bond; or rights to ownership as represented by an option. KEY  Securities are fungible and tradable financial instruments used to raise capital in public and private markets.  There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and equity.  Public sales of securities are regulated by the SEC.  Self-regulatory organizations such as NASD, NFA, and FINRA also play an important role in regulating derivative securities. 3.2 DEFINATION A securities market is a network of connections between all participants (both professionals and laypeople), which offers ideal conditions for attracting new capital through the issuance of new securities (debt securitization), which allows the conversion of real assets into financial assets. 3.3 CHARACTERISTICSC OF SECURITIES The financial market system's efficient transfer of capital (equity and debt) from investors to businesses is made possible by the securities markets. The primary purpose of the securities markets is to provide a platform for the investing of savings. The securities market is a location where buyers and sellers come together just like any other market; the main distinction is that in addition to offering liquidity and price discovery, the securities market also contributes to capital formation. Due to the strength of the securities markets, savings from individuals, corporations, and the government can be used to finance a business enterprise's capital needs. Key Characteristics of Securities 1. The terms of the exchange of money between two parties—in this case, the buyer and the seller—are represented by securities. 2. Borrowers and equity funders can issue securities to raise funds at a fair price and grant investors ownership of the securities. 38 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Businesses use a regulated contract and a controlled and supervised method to issue securities to investors with excess capital to raise money. 4. Investors have a right to the rights represented by the securities, even though the terms of the capital raise are determined by the security's issuer. 5. Securities can be broadly divided into two categories: debt and equity (risk participation) (claim on cash flows). 6. Equity securities are issued forever, whereas debt securities are issued for a specified time period. Equity pays dividends whereas debt securities pay interest, but debt is not equity. The security market is a segment of the larger financial market where securities can be purchased and sold between economic entities based on supply and demand. Stock, bond, and derivatives markets are all examples of security markets where prices can be established and players, both professional and non-professional, can interact. Primary markets, where new securities are issued, and secondary markets, where existing assets can be purchased and sold, are the two tiers of the securities markets. Secondary markets can be further divided into over-the-counter and organized exchanges like stock exchanges, where different parties come together and transact directly in securities. The ability of businesses to issue securities is increased when investors are aware that there is a secondary market where their securities may be sold and converted into cash. This boosts investors' desire to hold stocks and bonds. Brokerages, broker-dealers, market makers, investment managers, speculators, as well as those that provide the infrastructure, like clearing houses and securities depositories, are just a few of the professional participants in a securities market. A securities market helps an economy by attracting fresh capital, converting real assets into financial assets, setting prices that balance supply and demand, and offering short- and long- term investment opportunities. Promissory Note A promissory note, also known as a note payable in accounting or simply a \"note,\" is a written promise made by one party (the maker or issuer) to pay another party (the payee) a certain amount of money on demand or at a specified future time under certain conditions. In contrast to IOUs, they contain a particular pledge to pay as opposed to just admitting the existence of a debt. Certificate of deposit 39 CU IDOL SELF LEARNING MATERIAL (SLM)

A time deposit, also known as a certificate of deposit (CD), is a financial product that is frequently provided to customers by banks, thrift establishments, and credit unions. In that they are insured and essentially risk-free, CDs are comparable to savings accounts in that they are \"money in the bank\" (CDs are insured by the FDIC for banks or by the NCUA for credit unions). In contrast to savings accounts, certificates of deposit (CDs) often have a fixed interest rate and a specific duration (commonly three months, six months, or one to five years). It is intended that the CD be held until it matures, after which time both the principal and interest may be removed. Common Shares Ownership in a corporation and a claim (dividends) on a portion of profits are represented by common shares. The board members, who oversee the key decisions made by management, are chosen by shareholders with one vote per share. Common stocks outperform practically all other investments in terms of long-term returns thanks to capital growth. Due to the greater risk associated with common stocks, this larger return comes at a price. The common shareholders won't get paid until the creditors and preferred shareholders are compensated if a company declares bankruptcy and liquidates. Professional Participants Legal entities, including credit organisations, as well as individuals who are registered as business people and engage in the following forms of activities are considered professional players in the securities markets. Brokerage - Brokerage is defined as the execution of civil law transactions involving securities as an agent or commission agent acting pursuant to an agency or commission contract, as well as pursuant to a power of attorney for the performance of such transactions in the absence of a provision in the contract indicating the agent's or commission agent's authority. Dealer - Dealer activity is defined as the execution of transactions in the purchase and sale of securities in one's own name and for one's own account through the public announcement of the prices of purchase and/or sale of certain securities, with an obligation of the person pursuing such activity to purchase and/or sell these securities at the prices announced. Clearing - When calculating mutual responsibilities (collecting, compiling, and correcting information on security trades and creating bookkeeping records thereon) and offsetting these liabilities in securities deliveries, clearing activity shall be judged to have taken place. 40 CU IDOL SELF LEARNING MATERIAL (SLM)

Depositary - The provision of services for the safeguarding of securities certificates and/or the recording and transfer of securities rights shall constitute the conduct of a depositary. Securitization Securitization is the financial practise of grouping various forms of contractual debt, such as home mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets that generate receivables), and selling their associated cash flows as securities, which may be referred to as bonds, pass-through securities, or collateralized debt obligations, to third party investors (CDOs). Through the capital structure of the new financing, investors are reimbursed from the principle and interest cash flows obtained from the underlying debt. Mortgage-backed securities (MBS) are securities backed by mortgage receivables, whilst asset- backed securities are those backed by other types of receivables (ABS). The credit risk of certain borrowers can be reduced by the level of detail in pools of securitized assets. Securitized debt's credit quality is non-stationary, in contrast to regular corporate debt, because of volatility variations that rely on time and structure. The credit risk of all tranches of structured debt is reduced if the deal is properly designed and the pool performs as anticipated; nevertheless, if badly structured, the impacted tranches may suffer significant credit losses and degradation. Securitization has developed since its inception in the late 18th century, and as of the second quarter of 2008, it was expected to have an outstanding of $10.24 trillion in the United States and $2.25 trillion in Europe. ABS were issued for a total of $3.455 trillion in the US and $652 billion in Europe in 2007. In the 1990s, WBS (Whole Business Securitization) arrangements originally developed in the United Kingdom and quickly spread to other Commonwealth legal systems, giving senior creditors of insolvent businesses the legal authority to effectively take control of the business. Structure The assets involved in the trade are initially owned by the originator. This often refers to a corporation that needs to raise cash, restructure debt, or otherwise make financial adjustments. However, it can also refer to companies created especially to produce marketable debt (whether it be consumer or otherwise) for later securitization. Such a corporation would have three alternatives to generate additional money under conventional corporate finance theories: a loan, bond issue, or issuing of stock. However, stock offers diminish the company's ownership and control, and loan or bond financing is frequently prohibitively expensive because of the company's credit rating and the consequent increase in interest rates. 41 CU IDOL SELF LEARNING MATERIAL (SLM)

A company's regularly profitable division may have a substantially better credit rating than the business as a whole. For instance, a leasing company may have offered leases with a nominal value of $10 million, and over the next five years, these leases will provide cash flow for the company. It is unable to request early lease payback and hence, if necessary, cannot receive its money back early. It could convert that revenue stream into a lump sum immediately away if it could transfer the rights to the cash flows from the leases to another party (in effect, receiving today the present value of a future cash flow). The structure is typically more complicated when the originator is a bank or another institution that is required to meet capital adequacy criteria. A \"special purpose vehicle\" or \"SPV\" (the issuer), a tax-exempt business or trust set up with the express aim of supporting the assets, receives a suitably sizable portfolio of assets after being \"pooled\" and transferred to it. Normally, the originator has no further recourse once the assets have been given to the issuer. The issuer is \"bankruptcy remote,\" which means that its assets won't be transferred to the originator's creditors if the latter declares bankruptcy. The issuer's governing papers limit its operations to those required to complete the issuing of securities in order to accomplish this. Typically, many issuers are \"orphaned.\" A trust in behalf of the SPV may be established as an alternative to the customary transfer by assignment in the case of certain assets, such as credit card debt, where the portfolio is made up of a pool of receivables that is continually changing (see the outline of the master trust structure below). When a transfer falls within the category of a sale, financing, partial sale, or sale and financing, accounting criteria apply. [4] In a real sale, the originator may take the transferred assets off of its balance sheet; nevertheless, in a financing, the assets are regarded as the originator's property. [5] In accordance with US accounting requirements, the issuer is referred to as a \"qualified special purpose entity\" or \"qSPE\" when the originator completes a sale while maintaining an arm's length relationship with the issuer. Due to these structural problems, the originator often need assistance from an investment bank (the arranger) to set up the transaction's structure. Issuance The issuer SPV issues tradable securities to fund the acquisition of the assets from the originator. The securities are bought by investors either on the open market or through a private offering that targets institutional investors. The performance of the assets and the securities are so closely related. To give investors a more objective view of the liabilities being generated and to aid in their decision-making, credit rating agencies grade the securities that are offered. 42 CU IDOL SELF LEARNING MATERIAL (SLM)

A depositor will put together the underlying collateral in transactions involving static assets, assist in structuring the securities, and work with the financial markets to sell the securities to investors. Regulation AB has increased the importance of the depositor. The depositor, who is normally the parent or a wholly owned subsidiary of the parent that starts the transaction, typically owns 100% of the beneficial interest in the issuing corporation. Asset managers put together the underlying collateral for transactions involving managed (traded) assets, assist in structuring the securities, and engage with the financial markets to sell the securities to investors. The securities can be issued with either a fixed interest rate or a fluctuating rate under currency pegging regime. Fixed rate ABS set the \"coupon\" (rate) at the time of issuance, in a form similar to corporate bonds and T-Bills. In the floating market, floating rate instruments may be backed by both amortizing and non-amortizing assets. The rates on \"floaters,\" in contrast to fixed rate instruments, will fluctuate based on a specified index, such as the U.S. Treasury rate or, more frequently, the London Interbank Offered Rate (LIBOR). Typically, the variable rate reflects changes in the index along with an additional fixed margin to account for the increased risk. Credit enhancement and trenching Securities generated through a securitization are \"credit enhanced,\" which means their credit quality is raised above that of the originator's unsecured debt or underlying asset pool, in contrast to typical corporate bonds, which are unsecured. As a result, the securities are able to have a higher credit rating than the originator and increase the possibility that the investors will receive the cash flows to which they are entitled. In some securitizations, external credit enhancement from third parties is used, such as surety bonds and parental guarantees (although this may introduce a conflict of interest). The issued securities are frequently divided into tranches or grouped according to different subordination levels. There is often a senior (\"A\") class of securities and one or more junior subordinated (\"B,\" \"C,\" etc.) classes that serve as protective layers for the \"A\" class. Each tranche has a different level of credit protection or risk exposure. The more junior classes only begin receiving reimbursement once the more senior classes have been paid back, and the senior classes have first claim to the funds that the SPV receives. This design is frequently referred to as a cash flow waterfall due to the cascading effect between classes. The loss is initially absorbed by the subordinated tranches, and the upper-level tranches 43 CU IDOL SELF LEARNING MATERIAL (SLM)

are left untouched until the losses exceed the full amount of the subordinated tranches. This can happen if the underlying asset pool is no longer sufficient to cover payments on the securities (for instance, when loans within a portfolio of loan claims default). The senior securities may have ratings of AAA or AA, indicating a lesser risk, while the subordinated classes with inferior credit quality are given a lower credit rating, indicating a higher risk. Payment risk is most prevalent in the youngest class, which is frequently referred to as the equity class. This unique kind of instrument is sometimes kept by the originator as a possible earnings stream. In some circumstances, the equity class only receives the remaining cash flow (if any) after all the other classes have been paid, not the coupon (fixed or floating). Additionally, there can be a unique class in the underlying assets that takes early repayments into account. When mortgages serve as the underlying assets, this is frequently the case because the mortgages are essentially repaid anytime the homes are sold. This class receives a share of any early repayments, which gives the other investors a more stable cash flow. When mortgages or loans serve as the underlying assets, there are typically two distinct \"waterfalls\" since principle and interest payments are simple to allocate and match. But it is more difficult to separate the revenue into income and principle payments if the assets are income-based transactions, such as rental agreements. In this instance, all of the revenue is used to cover the bond cash flows when they fall due. Credit improvements change credit risk by offering more or less protection for a security's expected cash flows. Increased protection can assist a security receive a higher rating, while decreased protection can help generate new securities with different desired risks, which can increase the appeal of the securities. Servicing The assets that form the basis of the structured financial agreement are monitored and payments are collected by a servicer. Because the servicer requires knowledge very similar to that of the originator and wants to guarantee that loan repayments are made to the Special Purpose Vehicle, the servicer is frequently the originator. Due to its control over the collection policy, which affects the amounts collected, the charge- offs, and the recoveries on the loans, the servicer has a considerable impact on the cash flows to investors. Any money left over after bills and expenditures are paid is often saved in a reserve or spread account, and any extra money is given back to the seller. Asset-backed securities are rated by bond rating agencies based on the performance of the collateral pool, credit enhancements, and default risk. 44 CU IDOL SELF LEARNING MATERIAL (SLM)

The trustee, who acts as the issuer's gatekeeper of the assets, is crucial to the transaction when the issuer is set up as a trust. Despite being a member of the SPV, which is often owned entirely by the Originator, the trustee has a fiduciary duty to safeguard the assets and the people who hold them, usually the investors. Repayment Structures Contrary to corporate bonds, the majority of securitizations are amortised, which means that the principal borrowed is repaid gradually throughout the loan's set duration rather than all at once when it matures. Fully amortising assets including auto loans, student loans, and home equity loans are typically used as collateral for fully amortising securitizations. With fully amortising ABS, prepayment uncertainty is a major worry. Numerous prepayment models have been developed in an effort to describe common prepayment activities because the rate of prepayment is highly variable depending on the type of underlying asset pool. One prominent illustration is the prepaid PSA model. Even while the underlying assets may not amortise, a managed amortisation structure might give investors a more predictable repayment timeline. These securitizations aim to return principal to investors through a series of set periodic payments, often made over the course of a year, following a predetermined \"revolving period\" during which only interest payments are provided. The possibility of early debt retirement is referred to as an early amortisation event. However, bullet or slug structures pay investors their principle back in a single payment. The most typical bullet structure, known as a \"soft bullet,\" does not ensure that the last bullet payment will be made on the specified maturity date, yet most of these securitizations are settled on time. The hard bullet, which ensures that the principal will be paid on the planned maturity date, is the second type of bullet construction. Investors are more at ease with soft bullet structures, and they are hesitant to accept the lower yields of hard bullet securities in exchange for a guarantee, which makes hard bullet structures less popular. Securitizations are frequently set up as sequential pay bonds that are paid off in order of maturity. Accordingly, the first tranche, which may have an average life of one year, will receive all principal payments up until it retires, at which point the second tranche will start to receive principal, and so on. Pro rata bond arrangements distribute the principal over the course of the security in proportional portions to each tranche. In their eagerness to earn money from the fees connected with origination and securitization, certain originators (such as those of mortgages) have prioritised loan volume over credit quality, ignoring the long-term risk of the assets they have produced. Other loan originators have paid more attention to credit quality since they are aware of the reputational damage and 45 CU IDOL SELF LEARNING MATERIAL (SLM)

additional costs if hazardous loans are the subject of buyback requests or incorrectly generated loans result in litigation. Special types of Securitizations Master trust A master trust, a sort of SPV with the flexibility to handle various securities at various times, is particularly well-suited to manage revolving credit card obligations. An originator of credit card receivables transfers a pool of those receivables to the trust in a conventional master trust transaction, and the trust subsequently issues securities backed by those receivables. Frequently, the trust would issue a number of tranched securities based on a single set of receivables. Normally, the originator would go on servicing the receivables—in this case, the credit cards—after this transaction. Particularly with master trusts, there are a variety of hazards. One risk is that the promised timing of the cash flows to investors may differ from the scheduled timing of the payments on the receivables. Credit card-backed securities, for instance, have maturities of up to 10 years, although receivables backed by credit cards typically settle considerably more swiftly. These securities often have a revolving term, an accumulation period, and an amortisation period to address this problem. The historical experience of the receivables served as the foundation for all three of these times. Principal payments made on the credit card balances throughout the revolving period are utilised to buy more receivables. These payments are accumulated in a different account during the accumulation period. The investors receive fresh payments during the amortisation period. The seller (originator) owns the accounts, but a second concern is that the entire investor interests and the seller's interest are restricted to the credit card receivables. This may lead to problems with how the seller manages the account terms and conditions. This problem is typically solved by including wording in the securitization that safeguards investors and prospective receivables. Thirdly, payments on the receivables may cause the pool balance to drop and the total investor interest to be under-collateralized. A minimum seller's interest is frequently necessary to prevent this, and if it were to decline, an early amortisation event would take place. Grantor Typically, REMICs and automobile-backed securities use grantor trusts (Real Estate Mortgage Investment Conduits). The pass-through trusts that were popular in the early days of securitization are remarkably similar to grantor trusts. Loans are gathered by an originator and 46 CU IDOL SELF LEARNING MATERIAL (SLM)

sold to a grantor trust, which uses them to support various kinds of securities. After deducting costs, the principal and interest earned on the loans are proratedly distributed to the holders of the securities. Owner Trust Allocating received principle and interest to various classes of issued securities is easier under an owner trust. In an owner trust, senior securities may be repaid with interest and principal owed on subordinate securities. Owner trusts can thereby customise the maturity, risk, and return characteristics of issued securities to suit the interests of investors. Typically, any money left over after costs is maintained in a reserve account up to a certain point, at which point all money is given back to the seller. Owner trusts enable credit risk mitigation through over- collateralization by prepaying securities before principal with extra reserves and finance revenue, leaving greater collateral for the other classes. Motives for Securitization Reduces funding costs - Through securitization, a company with a BB rating but AAA-worthy cash flow may be able to obtain credit at rates as low as AAA. This has a significant impact on borrowing costs and is the main justification for securitizing a cash flow. There may be several hundred basis points between debt rated BB and AAA. Because of the strength of the underlying collateral and other credit enhancements, senior automotive backed securities issued by Ford Motor Credit in January 2002 and April 2002, despite Moody's downgrading Ford Motor Credit's rating in January 2002, continue to be rated AAA. Reduce asset liability mismatch - By removing financial vulnerability in terms of duration and price basis, securitization can provide perfectly matched finance depending on the structure selected. Essentially, the liability book or funding is from borrowings in the majority of banks and finance organizations. This frequently has a high price. Such banks and financial institutions can develop a self-funded asset book through securitization. Lower capital requirements - Some businesses have a cap or range on the amount of leverage they can use owing to legal, regulatory, or other considerations. These businesses will be able to remove assets from their balance sheets while keeping the \"earning power\" of the assets by securitizing portion of their assets, which counts as a sale for accounting reasons. Locking in profits - The entire revenues for a specific business block are still unknown because they have not yet materialized. Once the block has been securitized, the company's profit level has been fixed, therefore the risk of no profit or the advantage of super-profits has been transferred. 47 CU IDOL SELF LEARNING MATERIAL (SLM)

Transfer risk - Through securitization, risks can be transferred from an entity that doesn't want to take them to one that would. Catastrophe bonds and entertainment securitizations are two examples of this. Similar to this, the corporation has effectively freed up its balance to go out and write more profitable business by securitizing a block of business (thereby locking in a certain amount of profits). Admissibility - Future cashflows may not always receive full credit in a company's financial statements (for example, life insurance companies' regulatory balance sheets may not always fully reflect future surpluses). A securitization effectively converts a permissible future surplus flow into a permissible immediate cash asset. 3.4 SUMMARY  A financial instrument known as a security can be exchanged openly between parties. Debt, equity, derivative, and hybrid securities are the four different categories of security. By selling stocks, owners of equity securities, such as shares, can profit from capital gains.  Security markets, such as the LIFFE or Forex Market, are locations where traders congregate to trade securities. Trading is a process of searching for a counter-party by buyers or sellers. Factors including price, quantity, and time to trade are important. Dealers and brokers facilitate trading. On demand, dealers will take the other side of a trade. They provide a bid price (buy), an offer price (sell), and they make money off the spread. Dealers acquire the positions of their clients and then attempt to trade for them profitably. Brokers are intermediaries who assist traders in finding counterparties and make money through commissions. Security markets are made to lower the cost of counterparty search. The following are essential components of markets: Information between the informed and uninformed is asymmetrical.  The three main categories of securities are: equity, which gives holders ownership rights; debt, which is effectively a loan returned with recurring payments; and hybrids, which include features of both debt and equity.  The regulation of derivative securities also involves self-regulatory bodies like NASD, NFA, and FINRA. In both public and private markets, securities are fungible, tradeable financial instruments used to raise capital. 48 CU IDOL SELF LEARNING MATERIAL (SLM)

3.5 KEYWORDS  In both public and private markets, securities are fungible, tradeable financial instruments used to raise capital.  The three main categories of securities are: equity, which gives holders ownership rights; debt, which is effectively a loan returned with recurring payments; and hybrids, which include features of both debt and equity.  The SEC oversees the regulation of public securities sales.  The regulation of derivative securities also involves self-regulatory bodies like NASD, NFA, and FINRA.  Any anticipated returns or profits are a result of a third party's or promoter's activity. 3.6 LEARNING ACTIVITY 49 1. Define Securities 2. State the characterises of securities 3.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Securities. 2. Explain the key characterises of securities? 3. What is a Brokerage? 4. What are the functions of security? 5. What are the five types of security? Long Questions 1. How many sectors are there to invest in stock market? 2. Explain the structure if security market. 3. What is the role of underwriters in security market? 4. Name the types of security market 5. Explain the concept of risk and return CU IDOL SELF LEARNING MATERIAL (SLM)

B. Multiple Choice Questions 1. In capital markets, businesses are typically run by? a. Public access to government treasury departments is occasionally permitted. b. Financial industry private parties c. International organisations and companies d. Not the aforementioned 2. What are the best-known capital markets? a. The stock market b. The bond markets c. A depository account with any of the depositories in India d. Both (a) & (b) 3. What of the following is not a component of the stock market? a. KPO b. IPO c. NSE d. NAV 4. Which of the following is referred to as the world stock market index? a. Sensex b. FTSE100 c. OTCEI index d. Nifty 50 CU IDOL SELF LEARNING MATERIAL (SLM)