identify at least three different kinds of fixed-income securities, and the pros and cons of each from both the firm’s perspective as well as the potential investor’s perspective.

identify at least three different kinds of fixed-income securities, and the pros and cons of each from both the firm’s perspective as well as the potential investor’s perspective.

 

 

answer:

Three different types of fixed income securities are – company bonds, commercial papers and certificate of deposits (CD).

1. Bonds – Firm’s perspective: For the issuing company bonds (unlike stocks) do not lead to dilution of equity or control. In terms of cons the issuing company will have to pay the interest on bonds irrespective of the fact whether the company is earning profits or not.

Bonds – Investor’s perspective: For investors bonds are a fairly safe investment and provide regular payments in the form of interest. In terms of cons the interest income is taxed and also as the risk component is low the return is also low (compared to riskier options like investing in stocks).

2. Commercial papers are short term debt instruments issued by companies. They are unsecured.

Firm’s perspective: The advantage of borrowing through commercial paper is that companies do not have to create any form of collateral for this type of borrowing. In terms of cons firms that do not have high quality debt ratings will not be able to use this form of security to raise money.

Investor’s perspective: As maturities of commercial paper averages around 30 days they are highly liquid. In terms of cons, the commercial papers are unsecured and so investor’s can suffer a setback when the financial health of the issuing company deteriorates substantially.

3. Certificate of deposit (CD) is a time deposit. This is mainly offered by banks, corporations and credit unions.

Firm’s perspective: The advantage of borrowing through CD is that there are restrictions on the holders to withdraw funds on demand. As such the funds are locked in for a specified period. In terms of cons the firm has to pay a relatively higher rate to investors when compared to other instruments. Typically long-term CDs have higher interest rates.

Investor’s perspective: Investor’s can earn more interest from CDs as they are compensated for giving up the opportunity to use the funds for a specific period of time. In terms of cons investors cannot liquidate their investments before the maturity date.

 

 

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