There is a high risk of investing in stocks compared to bonds this is because the return from bonds can come either from dividends which depends on the performance of a company such that if the a company reports negative profits it will translate to zero dividends. The second form of income in regards to stocks is capital gain from the sale of stocks which means that you can only sale stock when price go up in order to earn a capital gain the unfortunate bit is that this price of stock is determined by market forces of demand and supply which is subject to fluctuations hence it is not certain hence risky on the other hand a bond holder will receive fixed interest payments periodically irrespective of the market dynamics and also a lump sum amount at the end of the maturity period hence they are certain with less risks involved in addition there are numerous advantages of investing in bonds compared to stocks and they include; the fact that debt financing allows an owner of a business to have control of his own business fully which is not the case with equity financed business also if a business invest in bond financing interest paid is tax allowable.
The idea is wise these is because the interest rate charged on the borrowed amount is low in addition there are several advantages which comes along with debt financing for a given company and they include; debt financing allows the owner of a business to have full control of a business in regards to the management and decision making in regards to investments and other key functions within a business unit, the interest which a business pay in regards to the loan repayment is tax allowable for purposes of tax computation meaning that the business will end up paying a lower tax figure. Good loan repayments record will guarantee business low interest rates for future borrowings from financial institutions as well flexible repayment structure.
Effective rate is computed as, expected return multiply by probability hence;
Project 1, Expected return= (12%*0.35) =4.2%
Project 2, Expected return= (9%*0.65) =5.85%
Project3, Expected return= (4%*0.80) = 3.20%
I will choose the project with a return of 9& and a probability of 65% as it leads to the greatest expected effective return of 5.85% which is a higher rate than for the two other projects.
It is indeed very true that organisation do finance their operations with short term borrowing which in most cases are charged high interest rates these organisations do recover this high interest rate through the pricing scheme adopted for their products and services such that the products and services prices will be inclusive of this interest rates paid hence these burden of interest rate will finally be paid by the consumer so this means the price will be inflated to cover up for the high rates they paid to financial institutions for the borrowings.
The best form of finance in regards to this scenario where large amounts of funds is required for a short duration of time will be a form of finance which will in overall lead to low interest rate paid after the period.in this scenario I will recommend loan from development finance institution since they provide finances for private sectors for developmental purposes its main purpose is to provide investments in area where the market as failed to provide, it comes along with a low interest rate of 9%.Estimated cost will be as follows;
Loan amount=150M, duration=3Years, Interest rate=9% per annum
Cost of funds=150m*9/100=13.50million and for 3Years the cost of funds=(13.5*3)=40,500,000
Hence the total cost= (150m+40.5m) =190.5M.
Asset based financing is whereby working capital loans and term loans are secured by accounts receivable and inventory this means that the short term loan granted is on the basis of this assets as a form of collateral and it is indeed true that its preferable to short term credit line from bank as its easily available in the sense that for a start-up business its normally very difficult to obtain a bank loan due to the stringent regulations from banks such as the banks statements for a given duration of time, security and the fact that you must be operating an account for a given timeline. All these conditions makes it extremely hard for such kind of business to obtain bank loan unlike the asset based lending where you only have to have inventories or account receivables other examples of asset based lending includes purchase order financing in general the formalities before one obtains a bank loan are so many such that daily operations can come to an halt for a particular business hence asset based financing is convenient (John 19)
The statement is very true, this because it means that 80% of the exports by the United States of America is other regions apart from Euro zone this means that Eurozone forms a very small fraction in terms of market for United States products for exports therefore whether Euro zone economy is stable or not the United states will not bother that much since there large market share is somewhere else that’s why they are constantly monitoring economic stability of African and Asian countries since it is their key target market for export. All that said and done it doesn’t mean that they are not concerned with euro zone Stability it is only that their interest is low over there.
Bank Lending. Singapore: John Wiley & Sons Singapore Pte, 2012. Internet resource.