Final Project Milestone Four: Draft of Risks and Returns

Final Project Milestone Four: Draft of Risks and Returns

IV. Risk and Returns.

Investment instrument

The New York Security Exchange (NYSEarca) and the London Security Exchange is U.S. markets and one non-U.S. market (LSE). The PIMCO active bond exchange-traded fund (BOND) is a diversified ETF that invests in main US government bonds and investment-grade corporate debt. As of February 4th, 2022, the US PIMCO active bond exchange-traded fund’s net asset value (NAV) is 108.74. The yield on the bond is 2.53 percent. The NYSE SPDR gold shares (GLD) are a class of stock in the SPDR family of exchange-traded funds. The GLD’s NAV is about 169.20, and the YTD daily total return is negative 1.52 percent. The fidelity 500 index fund is one of the mutual funds listed on the Nasdaq market (FXAIX). This is one of the cheapest funds among the top ten best-performing fidelity funds for retirement. Fidelity 500 index fund has the yield if 1.26 percent.

According to the graph, the stock, bond, and GLD investment security have all shown good growth in the last year, with values ranging from $100 to $170. According to the graph, the US market appears to be favorable for security investments. Different securities experienced positive growth, showing that the New York Stock Exchange securities saw good growth. The market appears to be stable, indicating that it is a potential investment market. Like the fidelity 500 index fund (FXAIX), a jointly invested group of portfolios, some assets did better due to lower investment risk.

When compared to other securities, the bond yielded a higher return of 2.3 percent on the previous day. GLD also produced a strong return, despite the available stock prices being recorded this year. Mutual funds offer lower risk since they are diversify investment instruments, minimizing the total risk that can be stated in single investments such as stocks and bonds. The US market is more stable, signifying less risk, whereas the non-US market is very risky due to other factors such as inflation and the economy’s political condition. The firm will evaluate the US market due to market stability and foreign exchange difficulties that may damage the value of the investment if the investor considers markets other than the US.

Interest and Inflation:

Due to inflation’s negative relationship with interest rates, it tends to harm fixed-income investments. As inflation grows, investors’ expected returns increase to keep pace with inflation. When interest rates on debt instruments are set for the instrument’s duration, the price falls as investors sell lower-yielding items in favor of higher-yielding ones (Borağan Aruoba, 2020). As a result, fixed-rate debt investments suffer significant losses in a rising inflation environment. In some situations, inflation-protected securities can modify their yields in response to inflation. Inflation increases the cost of goods and services, reducing the dollar’s purchasing power.

As a result of the increase in inflation, customers may purchase fewer items, and profits decline, resulting in the economy stalling until stability returns. Additionally, inflation increases stock prices without a matching gain in value. Due to the reduction in the purchasing dollar’s value, investors will be able to purchase fewer shares for a higher price. As a result of inflation overstatement, investors may assume the company’s financial condition is positive. Investors should invest in inflation-indexed products such as Treasury bonds and other products that provide a hedge against rising rates during periods of inflation (Borağan Aruoba, 2020).

Market interest rates substantially impact bond portfolios since higher interest rates result in lower bond values, while lower interest rates result in greater bond values. As a result, more fixed-income securities, particularly long-maturity bonds, as central banks adjust interest rates to combat inflation, are impacted. Increased interest rates have a greater impact on longer-maturity bonds than shorter ones. Interest rates affect inflation-protected security, which means that every change in interest rates pushes the price of the bond higher or lower (Alam & Uddin, 2009). On the other hand, a rise in inflation would result in a rise in bond yields as investors seek inflation risk protection and vice versa.

When bond prices fall, investors lose interest, resulting in a decrease in the value of the investment. The non-US market refers to financial markets located outside the United States. Interest and inflation play a significant effect in determining the value of stocks, bonds, and inflation-linked instruments. Increased inflation rates, for example, in the European securities market, will result in increased purchasing power, increased stock prices, and increased interest rates to rein in inflation, all of which will affect the value of stocks and bonds. Investors from the United States will see their investment values fluctuate significantly when the dollar loses value against the pound or euro.

Businesses and investors seeking to invest their free cash flow in securities will choose short-term investments to ensure that inflation does not harm their fixed-income securities. During periods of high inflation, investors will choose to invest in inflation-protected securities or a major portion of their income in the stock market as a hedge against inflation. Having cash is worse than holding an asset during periods of high inflation (Alam & Uddin, 2009). The projected return on the business will influence the investor’s long-term investing strategy; if the expected return is poor, the investor will avoid investing in securities.

Taxation

Governments can makes monetary and fiscal policy changes that greatly impact the taxes charged on capital gain on securities, interest charged on loan and inflation experience in the economy. Investing in the United States market is a better alternative for IPO listing than investing in other non-US markets. Companies listed on the New York Stock Exchange can access a vast pool of cash and grow their prospective investor base depending on securities. Because the Federal Reserve controls the interest rate levied on loans as well as inflation, businesses can obtain loans at lower rates, allowing them to take on less financial risk.

For example, a company listed on the New York stock exchange will be transparent, follow SEC standards, and have its shares and bonds subject to inflation and interest rates set by the Federal Reserve bank. Non-US markets, despite offering securities with lower market capitalization, have a tax regulation that affects tax dividends payables, faces inflation, and interest rates controlled by Bank of England. Tax policies on capital gains will also influence firm decision to invest in the U.S market compared to the Non-U.S market.

References

Borağan Aruoba, S. (2020). Term structures of inflation expectations and real interest rates. Journal of Business & Economic Statistics, 38(3), 542-553.

Alam, M. D., & Uddin, G. (2009). Relationship between interest rate and stock price: empirical evidence from developed and developing countries. International Journal of Business and Management (ISSN 1833-3850), 4(3), 43-51.

Yahoo finance.Com. (n.d).PIMCO Active Bond Exchange-Traded Fund (BOND). Retrieved from https://finance.yahoo.com/quote/BOND?p=BOND

Yahoo finance.Com. (n.d).Fidelity 500 Index Fund (FXAIX). Retrieved from https://finance.yahoo.com/quote/FXAIX/

Yahoo finance.Com. (n.d).SPDR Gold Shares (GLD). Retrieved from https://finance.yahoo.com/quote/GLD?p=GLD