Sample Finance Essay Paper on The Investment Function in Financial-Services Management

The Investment Function in Financial-Services Management

Question 1

The reason why banks and other institutions devote considerable amount of their assets to investment securities is that apart from loans it is one of the revenue earners of the bank in addition to providing a source of bank liquidity to meet the loan or customer demands. Liquidity is to provide money to those who need it and therefore investment securities would ensure that this is possible to capitalize on the market share and beat competition. The other reason for committing assets to invest in securities is to generate a steady stream of income during economic down time when consumer spending reduces (DePamphilis, 2008).  Since the funds are liquid, it is easy to sell the institution holding once the business activities pick up (McNeil et  al, 2005).  It is also meant to provide diversification in other economies and industries so that when one industry fails the other industry prove the required income for banks and other institutions. Investments in security are also done as speculative venture of simply investing the surplus to generate income since the business will not be affected with such investment (Memili, 2012).

Question 2

The principal money market instruments include certificate of deposits, repurchase agreements, commercial paper, federal funds like in the US, euro-dollar deposits agency short-term securities, treasury bills that are short-term debt obligations by the government and short-lived mortgages (Thorp, 2010).   There are several capital market instruments that include stocks those investors and issuers participate in stock markets, bond trades in bond markets involving the buying and selling of securities, debentures that described as unsecured debts determined by creditworthiness and treasury bills offered by national government (Larry, 2003).

Question 3

The two types of investment securities preferred are bonds and equities, the reason is that in investing there is no guarantee and there is always a possibility of loss, this is supported by the fact that banks cannot invest capital that they can lose if things get bad (Straub, 2007).  Bonds and equities are preferred since they are a reliable as they generate a fixed form of income through interests for the banks (Horcher, 2005).

Question 4

It is asserted that forces that trigger and affect how the structure of the financial instruments is overlaid (Cokely et al, 2012), may cause risks.  It is worth noting that such risks are hard to predict and therefore the investors need to pay close attention to risks that may be related to investments in financial instruments (O’Sullivan et al, 2003).  Such risks includes currency risks that have potential financial losses in cases of fluctuations in the exchange rates in the markets, political risks of hostilities restriction or trade embargoes by governments on assets that an institution is trading on may lead to great financial losses, asset price risks due to changes in markets values of the investment, liquidity risk which is the inability to sell the assets quickly by an institution leading to loss of value incurred when ultimately selling them. Credit risk caused by declining value of an asset coupled with poor financial performance of the asset, systematic risks arising from failures in an asset and securities registers, legal risks arising from the applicability of laws or violations on the asset and information risk arising from the inaccessibility of reliable and accurate information concerning the asset to be invested on, information on the price exchange rates and quotations (Wildavsky Aaron and Wildavsky Adam, 2008).

References

Cokely, E. T., Galesic, M., Schulz, E., Ghazal, S., & Garcia-Retamero, R. (2012). Measuring risk

            literacy: The Berlin Numeracy Test. Judgment and Decision Making, 7, 25–47.

DePamphilis, Donald (2008). Mergers, Acquisitions, and Other Restructuring Activities. New

 York: Elsevier, Academic Press. p. 740. ISBN 978-0-12-374012-0.

Horcher, Karen A. (2005). Essentials of financial risk management. John Wiley and Sons.

 pp. 1–3. ISBN 978-0-471-70616-8.

Larry Harris. (2003). Trading & Exchanges: Insider Trading Oxford: Oxford press, Chapter 29 p.

            584.

McNeil, Alexander J.; Frey, Rüdiger; Embrechts, Paul (2005). Quantitative risk management:

concepts, techniques and tools. Princeton University Press. pp. 2–3. ISBN 978-0-691-12255-7.

Memili, Ümit (2012). Baklava Bonds: Sweet Margins in Turkey. Evaluating Turkish Corporate

            Bonds in Local Currency. p. 117.

O’Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in action. Upper Saddle

            River, New Jersey 07458: Pearson Prentice Hall. pp. 197, 507. ISBN 0-13-063085-3.

Straub, Thomas (2007). Reasons for Frequent Failure in Mergers and Acquisitions: A

Comprehensive Analysis. Wiesbaden: Deutscher Universitätsverlag. ISBN 978-3-8350-0844-1.

Thorp, Edward (2010). Kelly Capital Growth Investment Criterion. World Scientific. ISBN

            9789814293495.

Wildavsky, Aaron; Wildavsky, Adam (2008). “Risk and Safety“. In David R. Henderson.

            Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and    Liberty. ISBN 978-0865976658. OCLC 237794267