Why do we invest !!!

We learnt notions of investment

1 Why do we invest ?

Answer is that at the cost of saving some dollars and investing them today, we want to generate more dollars tomorrow, giving more utility tomorrow. If something gives more utility today, we don’t invest.

The investments can be risky or risk less depending on the type of investments. The use of investment is not only to give better utility tomorrow, but also better spending power today.

Interest describes the time value of the money. In short, what Net Asset value I have today and what I will have tomorrow after investing that money will depend on the rate of interest received by me.

There are two participants in the investment system. They are on either on the supply side or on the demand side.

Household investors are on the supply side and companies/ industries are on the demand side.

The government is on the demand side, but technically it can be on the supply side. Since the government can not sell equity, its on supply side.

Equity - refers to total assets minus total liabilities, in which case it is also referred to as shareholder's equity or net worth or book value.

Then we studied the financial asset tree.

Investments can be direct or indirect.

Direct investments can be broken down to money market instruments, capital market instruments, and derivative instruments.

Capital market instruments can be further broken down into Fixed income instruments, or Equity instruments.

1. Money market investments.

1. Treasury bills: These are certificates given by government and they guarantee the payment to the customer, thus they offer lower interests.
2. Certificates of Deposits (CDs) These are given by banks. They might offer higher interest rates though with little extra risk.
3. Commercial paper: Similar to Treasury bills, but offered by private organizations. They mention with a premium over the Treasury bills.
4. Money market funds.
5. Bankers acceptances
6. Euro dollars.

Then we studied how r_BDYBEYExact

2. Fixed income security

An investment that gives returns in the form of fixed periodic payments and eventual return of principal at the maturity.

We saw examples of US treasury bills

Federal agency debt

Mortgage back securities and other pass through securities

Unlike the straight bonds, the MBS don’t decrease when interest rate increases. Thus, the homeowners will always try to return the MBS when interest rates decrease and MBS owners will never want that !!!!

Conversely, when interest rates increase, the homeowners will want to delay payments. And MBS decreases in value.

MBS owners pay the interests to the tranches according to their weight. They can also divide the principal and keep paying that interests are adjusted.

3. Municipal securities : General obligation bond, revenue bonds, .

4. Corporate bonds : These are debts issued by the corporations. These companies receive Bond ratings. Things happen between the companies.

5. Equity security. It defines how much I possess the company in which I have my shares. Ideally, the company must pay me dividends for my shares however it will and can at its own will “if it makes money”.

If I am the company, this security is with me as long as I hold it, and payments are variable.

All these securities are Derivative securities – either of Options of Futures

Its security who’s characteristics whether it is a option or future depends on the underlying security.

Option – right to sell or buy is with the owner.

Futures – The obligation to sell or buy.

We looked at various graphs how common stocks, and other stocks fluctuate in years and how standard deviations fluctuate in years. How can we judge which are risky and which are safe, how does inflation affect the T Bills. Then there are weekend effects, January effects.

Met Prof Bird again

Yes, Its worth writing here.

This time I went to him with a query. He heard patiently to my problem and gave a reasonable solution to it.

When he gave me a solution, he said "I am not sure if this is the correct or the only way to approach this problem, but to me this looks reasonable. " And then he laughed loudly.

Then he said, that day he was looking at old atlases - one was his father's and the other was his grand mother's. He asked me my country and opened the map. He said he could spend hours and hours looking at old Atlas.

Aah! Here is India. I saw that the contour of west coast was little different from the ones I had seen before. I pointed that to him. He said " to their knowledge these were the best ways of measurement and those were their conclusions then*. Then he opened the former atlas. In that, the boundaries looked different but closer to what we see now. He said- they must have devised better measurements. I asked him if he has seen google maps. He said he has seen those and have used it though not extensively.

He asked me the % of Muslims in India and if Muslims create problems in India.
In a moment he realized that he did not know if I was a muslim. He laughed !! and said !! "I am sorry I did not ask you if you are a muslim. "

I told that the % was around 12-15 % and they don't create problems, but the neighboring nation does sometimes by sending militants and causing trouble in Kashmir.

Then he asked me my graduation place. I told him Benaras Hindu University. He said he had heard of that university some time back. Then he asked me the climate of Benaras pre-assuming it should be warm. I told him that I liked the colder climate of Madison better than the warmer of Benaras.

He told me that he likes to meet people in the afternoon and that I should go to him sometimes. I said !! "yes why not!! "

That was the meeting.