Basic knowledge about investment setting

1. P R E S E N T E D B Y
G R O U P 8 ( M B F 3 R D B A T C H )
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The Investment Setting
Chapter-1

2. Contents
1. What is an Investments?
2. Meaning of Investment from different Perspectives
3. Defining Types of Investments
4. Types of Investors ~ Investments
5. How will you invest your excess income?
6. Why do individual invest?
7. Why give up savings/investing?
8. Pure Rate of Interest & Pure Time Value of Money
9. Investment Risk ~Risk Premium
10. Conclusion

3.  Investment is the commitment of money or capital to purchase
financial instruments or other assets in order to gain profitable returns
in the form of interest, income, or appreciation of the value of the
instrument.
 In order to drive future payment:
- The time the funds are committed
- The expected rate of inflation during this time period.
- The uncertainty of the future payments.
What is an Investment?

4. What is an Investment?
Investment
 Income – Consumption  Excess/Deficit Saving/Borrowing
 Income>Consumption  Excess Income  Saving
 Income<Consumption  Higher Consumption  Borrowing
 Income = Consume  ?
 Excess Income  ?
 Expand Business  ?
 Increase Skills  ?
 Profitability  ?
 Cost Minimization  ?
 Profit Maximization  ?

5. Meaning of Investment from different Perspectives
Investment Definition in terms of Economics :
Investment is defined as the per unit production of goods .
(Which have not been consumed , but will be used for the purpose of future production)
Investment Definition in terms of Business Management:
Investment refers to tangible assets and intangible assets.
(The decision for investment is also known as capital budgeting decision)
Investment Definition in terms of Finance:
Investment refers to the purchasing of securities or other financial assets from the capital
market. It also means buying money market or real properties with high market liquidity.
Example : Gold, silver, real properties, and precious items.

6. Investment Definition in terms of Personal Finance:
An investment is the implementation of money for buying shares , mutual funds or assets
with capital risk.
Investment Definition in terms of Real Estate:
Investment is referred to as money utilized for buying property for the purpose of
ownership or leasing. This also involves capital risk.
Example : Commercial Real Estate : Renting
Residential Real Estate: Buying properties
Meaning of Investment from different Perspectives

7. Defining Types of Investments
 Ownership Investments
High risk-High return investments : Stocks , Real Estate, Precious objects
 Lending Investments
Low risk-Low return investments : Savings , Bonds
 Cash Equivalents
Easy to convert back into cash : Money market funds
 Close, but Not Quite
Education
 Not Investments
Consumer purchases

8. Types of Investors & Investments

9. How will you invest your excess income?
 Ownership Investments
 Lending Investments
 Cash Equivalents
 INVESTOR’S PREFERENCE
 Highest Return
 Lowest Risk
 Liquid Assets
Investors are trading a known dollar amount today for some expected future stream of
payments that will be greater than the current dollar amount today.

10. Why do individual invest?
 One Possibility
Income< Consumption  Higher Consumption  Borrowing
Income>Consumption  Excess Income  Saving
 Another possibility
Future Return = Future Consumption  Give up Saving.
 Trade-off
Present consumption > future consumption the reason for saving

11. Why do individual invest?
Individual Motives
 Payment for Future Children’s Education
 Major Willingness of Purchases
 Saving for Retirement
Investment Motives
 Profitability
 Liquidity
 Safety

12. Why give up savings/ investing?
 Expect to receive in future > They gave up
 Willing to pay back in future > They borrowed
 Current Consumption > Current Income Give up
 Future Return = Future Consumption  Give up Saving
Future Current
Consumption – Consumption= Pure rate of interest
Rate Rate

13. Pure Rate of Interest & Pure Time Value of Money
Pure Rate of Interest
Economics concept of the theoretical interest rate that emerges in market of
loadable funds where conditions of perfect competition and certainty (Zero
Risk) prevail.
Pure time value of money
Pure time value of money is the interest rate demanded by an investor for
postponing his consumption and making available capital to a borrower.

14. Investment Risk ~Risk Premium
Future payment on investment is not certain, Investor’s preference :
 Demand on IR > Nominal Risk free IR Investment Risk
 Additional Return + Nominal Risk Free Interest Rate
 Expected Return– (Risk Free Interest Rate )  Risk Premium
 Risk Premium = Required Return - Risk-Free Rate
 Risk Free interest Rate=Real Rate of return + Expected Inflation Premium
+ Risk Premium
 Real Rate of Return = Nominal Rate of Return – Inflation Rate
 Expected Return = Real Rate of Return + Expected Inflation Premium +
Risk Premium
 Total Return = Current Income + Capital Gains - Capital Losses
 Rate of Return =(Current Income + Capital Gains - Capital Losses)
Amount Invested

15. Conclusion
 Q-Why do individuals invest ?
 Q- What is an investment?
 Q-What do they want from their investment?
 Q-How do investors select investments?
 How to measure the expected rate of return on an
investment?
 How to quantify the uncertainty risk of expected
returns?

16. References
 http://www.businessdictionary.com/definition/investment
 daily@investorguide.com
 www.investopedia.com
 Lecture Notes
 www.investorwords.com
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