Choose Three Types Of Securities From Any Financial

Choose Three 3 Types Of Securities From Any Of The Financial Markets

Choose three (3) types of securities from any of the financial markets covered in the textbook during Weeks 1 through 7. Write a five to six (5-6) page paper in which you: 1. Analyze the role financial markets play in creating economic wealth in the U.S. 2. Provide a general overview of each of the three (3) securities you chose. Be sure to include such information as name, company it represents (if applicable), pricing, and historical performance. 3. Assess the current risk return relationship of each of the three (3) securities. 4. Recommend one (1) strategy for maximizing return for the current risk return relationship identified for each of the three (3) securities. 5. Suggest how the Federal Reserve and its monetary policy affect each of the three (3) securities today. 6. Determine whether each of the three (3) securities is a good investment in the next twelve (12) months, five (5) years, and ten (10) years. Provide a rationale for each security with your determination. 7. Use at least six (6) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources. Your assignment must follow these formatting requirements: This course requires use of new Strayer Writing Standards (SWS). The format is different than other Strayer University courses. Please take a moment to review the SWS documentation for details. Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow SWS or school-specific format. Check with your professor for any additional instructions. Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required page length. The specific course learning outcomes associated with this assignment are: Describe the various types of financial markets and the types of transactions supported by each market in the U.S. and globally. Explain the operation of the Federal Reserve and describe how monetary policy is used in the U.S. and other countries to manage the economy Determine the valuation of various types of securities. Assess the risks in the various types of financial markets and develop strategies to manage the risks. Use technology and information resources to research issues in financial markets and institutions. Write clearly and concisely about financial markets and institutions using proper writing mechanics. The following additional outcomes may apply depending upon the student’s choice of securities: Develop strategies for the use of equity markets by investors and firms to meet stated financial objectives. Analyze the factors that affect interest rates and forecast interest rate changes.

Paper For Above instruction

Introduction

The role of financial markets in creating economic wealth in the United States is fundamental to the country’s economic stability and growth. Financial markets facilitate the efficient allocation of resources, enable capital formation, and promote investment, which in turn drives economic development. This paper examines three specific securities—stocks, corporate bonds, and mutual funds—to understand their characteristics, risks, returns, and the influence of monetary policy. By analyzing these securities, I aim to demonstrate their potential as investment options and assess their viability over various time horizons.

Financial Markets and Economic Wealth

Financial markets serve as the backbone of the economy, providing platforms where savers and borrowers interact. They facilitate the transfer of funds from those with surplus capital to those in need of financing. This transfer supports business expansion, infrastructure development, and technological innovation, which contribute directly to economic growth and wealth creation. Efficient markets ensure liquidity, transparency, and fair pricing, reducing the cost of capital and enhancing economic efficiency (Mishkin, 2019). The stability and growth of financial markets, therefore, are essential for sustained economic prosperity.

Overview of the Selected Securities

Stocks (Equities)

Stocks represent ownership shares in a corporation. For this paper, I have selected Apple Inc. (AAPL) as a representative stock. Apple is a technology leader known for its innovative products, including the iPhone and MacBook. The stock is traded on the NASDAQ, with a current market price of around $165 per share (Yahoo Finance, 2023). Historically, Apple’s stock has demonstrated significant growth, with an average annual return of approximately 30% over the past decade, reflecting strong financial performance and investor confidence.

Corporate Bonds

Corporate bonds are debt securities issued by companies to raise capital. For this analysis, I chose the IBM 3.125% bond maturing in 2030. Bonds from well-established companies like IBM offer fixed interest payments and are considered relatively safe compared to equities. The bond’s current yield is around 3.2%, aligning with prevailing interest rates. IBM’s bonds have shown stability and consistent interest payouts, with minimal default risk, making them attractive for income-focused investors (Morningstar, 2023).

Mutual Funds

A mutual fund pools investment capital from multiple investors to purchase a diversified portfolio of securities. I selected the Vanguard 500 Index Fund (VFIAX), which tracks the S&P 500 index. This fund provides broad exposure to large-cap U.S. stocks, with an expense ratio of 0.04%. Its historical annual return has averaged approximately 10% over the last 20 years, benefiting from market growth and diversification (Vanguard, 2023).

Risk-Return Analysis of the Securities

Stocks generally offer higher potential returns but come with higher volatility. Apple’s stock exhibits considerable price swings, but its growth trajectory supports an optimistic risk-return profile. Corporate bonds offer lower risk and predictable income, but with comparatively modest returns. The IBM bonds provide stability and fixed income, suitable for conservative investors, but they are more sensitive to interest rate fluctuations. The mutual fund offers diversification, reducing unsystematic risk, and its returns tend to mirror overall market performance, balancing risk and reward (Bodie et al., 2014).

Strategies for Maximizing Return Based on Risk-Return Relationship

For Apple stock, a buy-and-hold strategy combined with periodic portfolio rebalancing can optimize gains while managing volatility. Dollar-cost averaging can reduce the impact of market fluctuations over time. For IBM bonds, laddering strategies—staggering bond maturities—can optimize income and mitigate reinvestment risk. The mutual fund benefitting from dollar-cost averaging and automatic reinvestment strategies can enhance compound growth, especially during market downturns.

Impact of Federal Reserve and Monetary Policy

The Federal Reserve’s policies significantly influence securities. Low-interest-rate environments, driven by quantitative easing, tend to boost stock prices and bond prices as borrowing becomes cheaper. Conversely, tightening monetary policy increases interest rates, potentially lowering bond prices and putting downward pressure on stock valuations. For Apple, low rates can stimulate consumer spending and investment, fueling stock growth. For bonds, rising rates can erode existing bond prices, impacting returns. Mutual funds tracking market indices are also affected, as market valuations fluctuate with monetary policy shifts (Bernanke, 2020).

Investment Outlook for the Next 12, 5, and 10 Years

Apple’s stock is projected to grow at an average rate of 8-10% annually over the next decade, driven by continuous innovation and market expansion. However, short-term volatility may present risks. For the next 12 months, cautious optimism is warranted due to geopolitical and economic uncertainties. Over five years, growth prospects remain strong, especially with advancements in artificial intelligence and renewable energy sectors. Ten-year outlooks depend on technological breakthroughs and global economic stability, making the stock a potentially rewarding long-term investment.

IBM bonds will likely maintain their principal and provide steady income if interest rates remain stable. However, rising rates could erode their value; thus, monitoring monetary policy is critical. For a five-year horizon, reinvestment risk must be considered, but if rates stabilize, these bonds can serve as reliable income sources. Over ten years, bond performance will largely depend on macroeconomic conditions and interest rate trends.

The mutual fund’s diversified nature reduces risks associated with individual securities. Its prospects are closely tied to overall market performance. In the short term, market corrections could impact returns, but over the long term, historical data suggest consistent growth aligned with the overall economy’s expansion. This makes VFIAX suitable for long-term investors seeking broad exposure.

Conclusion

Financial markets are vital for economic wealth creation, facilitating resource allocation and investment. Analyzing stocks, bonds, and mutual funds reveals diverse risk-return profiles, with strategies tailored to each security’s characteristics. The Federal Reserve’s monetary policy plays a crucial role in influencing these securities' valuations and prospects. While each security offers distinct advantages, investors should consider their risk tolerance and investment horizon to optimize outcomes. Combining strategic allocation with awareness of macroeconomic factors can enhance investment success and contribute to sustained economic growth in the U.S.

References

• Bernanke, B. S. (2020). The Courage to Act: The Ohio State University Press.
• Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments (10th ed.). McGraw-Hill Education.
• Morningstar. (2023). IBM Bonds Overview. Retrieved from https://www.morningstar.com
• Mishkin, F. S. (2019). The Economics of Money, Banking, and Financial Markets (12th ed.). Pearson.
• Vanguard. (2023). Vanguard 500 Index Fund Facts. Retrieved from https://investor.vanguard.com
• Yahoo Finance. (2023). Apple Inc. Stock Price. Retrieved from https://finance.yahoo.com