This order is for 1 original post (300 words) and 2 peer responses (100 words/each). Please read through all deliverables. The book for this course is an Pearson ebook – Financial Management by Raymond Brooks (4th edition). Do you have access to this book?
You are required to use peer reviewed journal articles references and citations in the APA format. The discussion submission should follow the below stated Essay composition and formatting guidelines; and be composed unto a “Word Document.”
Title page with a “Running head:” page number (top right), your name, course, date, and an appropriate title.
Use double space, Times New Roman, and 12pt font.
Provide a short introduction stating your position and argument.
Support your argument.
When all is done, give a brief conclusion.
Upon citing works, add a reference page.
These APA additions are NOT a part of the word count for the discussion.
Your original post should approximate 300 words. Your required peer reviewed journal articles references and citations should be in APA format. Provide a short introduction stating your position. When all is done, give a brief conclusion. Upon citing works, add a reference page. These APA additions are NOT a part of the word count for the discussion.
DELIVERABLES:
Ben has just purchased a long-term government bond and expects to make a 7% return. Donna has just purchased a stock in a new start-up company but expects to make a 20% return. Why is Donna expecting a higher return? Which investment is riskier over time? Which investment is more vulnerable to sudden changes in the economy?
Peer Response 1: Samuel
Because they are different types of investments, Ben’s government bond purchase and Donna’s stock purchase have different expected returns. Brooks (2018) states that differences between interest rates are usually due to the risk of an investment and the investment’s duration. In this case, the level of risk is likely the factor that has the greatest impact on the difference in expected returns. Donna likely expects a higher return because her stock investment has greater risk than Ben’s bond purchase.
Donna’s investment is riskier over time. Brooks (2018) writes, “We must always account for risk when considering return” because risky investments typically have higher returns as compensation for the risk (p. 214). Stocks in general tend to be riskier than bonds, so it is understandable that Donna anticipates a higher return for her investment; there is always a degree of uncertainty as to how stocks will move (Brooks, p. 218). Additionally, Donna’s stock investment has additional uncertainty because the company she is investing in is new. Kubickova et al. (2013) write that the results of investing in a start-up company are difficult to determine beforehand. As many new companies fail, there is a significant risk when choosing to invest in one. Ben’s long-term government bond, however, is much less risky because throughout history, the United States government has always been capable of paying back its debts (Brooks, p. 218). As her investment has more risk, Donna can expect a 20% return on her stock purchase, while Ben’s low-risk investment is expected to make a lower 7% return.
Likewise, Donna’s investment is more vulnerable to sudden changes in the economy than Ben’s. With a low-risk, long-term government bond, Ben’s bond will likely be repaid even with changes in the economy because the government fulfills its promises (Brooks, 2018). Economic changes, however, could have a great impact on a new company and its stock; as economic changes could force a start-up company to discontinue operations, there is a greater risk for Donna’s investment.
References
Brooks, R. M. (2018). Financial management: Core concepts (4th ed.). Pearson.
Kubickova, A., Dohnal, M., & Doubravský, K. (2013). Qualitative decision–making model of investment into start–up companies. International Journal of Technology Intelligence and Planning, 9(3), 165–180. https://doi.org/10.1504/IJTIP.2013.059656
Peer Response 2: Josiah
Donna anticipates that the stock she purchased in a new start-up company will generate a higher return than Ben’s long-term government bond. She likely expects that her investment will produce a higher return because it is involved with greater risks than Ben’s investment. Raymond Brooks (2022) describes how risk and return are positively correlated; high-risk investments have the potential to generate a high return and generally have higher returns than low-risk investments on average, while low-risk investments usually have comparably low returns. Stocks are a risky investment because they are dependent on the uncertain performance of a company (Brooks). The risks related to Donna’s investment are also largely determined by the fact that her stock is in a start-up company. Todeschini et al. (2017) state that start-ups “deal with high levels of uncertainty and dynamicity [and are] exposed to innumerous risks” (p. 40). In contrast to Donna’s investment, governments bonds like Ben’s usually face less risks than stocks; some government bonds are virtually risk-free (Brooks). Further, Ben’s government bond will likely prove to be less risky over time because it is a long-term investment. Long-term investments generally have less risks than short-term investments because they have a smaller range of potential outcomes (Brooks, p. 218).
Sudden changes in the economy can also produce risks for investments. Donna’s investment seems to be more vulnerable to risks caused by economic change. Stocks in startup companies already face a multitude of risks, and these companies may even be unable to survive drastic shifts in the economy (Todeschini et al., 2017). As her investment likely involves greater risks, Donna can expect that her stock will generate a higher return than Ben’s government bond.
References
Brooks, R. M. (2022). Financial management: Core concepts (4th ed.). Pearson Education, Limited.
Todeschini, B. V., Boelter, A. S., Souza, J., & Cortimiglia, M. N. (2017). Risk management from the perspective of startups. European Journal of Applied Business and Management, 3(3), 40-54.
