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Investment Alternatives Essay

1955 words - 8 pages

INVESTMENT ALTERNATIVES: AN UPDATEContents2Investment Categories 2Real Assets 2Financial Assets 2Direct Investments 2Indirect Investments 2Money Market Instruments 2Treasury Bills 3Short-term Municipals 3Commercial Paper 3Bankers' Acceptances 4Repurchase Agreements 4Capital Market Financial Instruments 4Long-term Bonds 4Treasury Notes and Bonds 5Agency Securities 5Municipal Bonds 5Corporate Bonds 5Preferred Stock 6Common Stock 6Foreign Stocks 6Indirect Investments 6Mutual Funds 6Closed-end Funds 7Exchange Traded Funds 7Hedge Funds 7Derivatives 7Convertible Securities 7Warrants 8Options 8Futures 8Bank Deposits 8Fixed Deposits 8Recurring Deposits Investment CategoriesAll the investment alternatives can be categorized into 2 categories -Real AssetsThese are the physical or identifiable assets such as land, equipments, patents, gold etc. These tend to be most desirable during the periods of high inflation.Financial AssetsThese are the indirect claims to the real assets. Eg. Stocks, bonds, bank deposits etc.These can further be sub-divided into 2 categories -Direct InvestmentsThese are investments where you take actual direct ownership of the assets.Indirect InvestmentsThese are investments where you have indirect ownership, such as mutual funds, ETFs, and REITsMoney Market InstrumentsThe money market is comprised of high quality, short-term, large denomination debt instruments. Following are the types of money market instruments -Treasury BillsTreasury bills are used to provide short-term liquidity for the U.S. government.These are backed by the "full faith and credit" of the U.S. government.They are issued with original maturities of 4 weeks, 13 weeks, 26 weeks and 52-weeks.They do not pay interest, instead they are sold at a discount to face value and are redeemed at maturity for their full face value.The face value of T-bills is $1,000 and multiples thereof.Short-term MunicipalsCities, counties, and states all frequently have a need for short-term funds to provide for liquidity needs.They can issue securities that are similar to T-bills called anticipation notes (in anticipation of some revenue, usually taxes).The advantage of these securities is that the income they provide is free of federal taxation.The disadvantage is that they are backed only by the taxing authority of the district that issues them.For this reason, they are not as safe as T-bills.Commercial PaperCommercial paper (CP) is very high-quality, unsecured, short-term corporate debt.CP with maturities less than 9 months are exempt from SEC registration. Most of the CPs mature in 30 days or less.CP is not very liquid as it tends to be held to maturity by purchasers, though it can be traded in the secondary market if necessary.CP is issued by firms in one of two ways:Direct - CP is sold directly to investors. This method is usually used by financial firms with frequent, large needs for short-term cash.Indirect - CP is sold to a dealer at a discount (higher interest rate), and is then...

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