The investment of choice will be in the financial market through non-equity securities, especially bonds, due to the limited capital. Under the recession, the output was reduced significantly. This resulted in business and individual preferences to save on their money, as Keynes stipulated. This implies that savings were more than the investment resulting in saving/ investment imbalance. With the current condition, the financial market will be vibrant.
Measures that have been introduced are meant to spur economic growth through lowering interest rates. The demand for money increases with a decrease in the interest rates. This results in investors holding the money until the interest rates increase again. The increase will drive the bond price downwards, thus keeping it in line with the interest rates. The current state shows that the interest rates are declining. This means one should hold money up to a certain favourable interest rate that will favour investment. Investing when the interest rates are low means that the income from the bonds will increase to match the increased interest rates. This investment will be best placed when investing in a floating rate bond.
Interest rates do not drop drastically within a day. This means that one may lose revenue by holding idle money, waiting for the interest rates to fall. The investor may choose to invest in the fixed-rate bond, which is riskier. The current trend in the macroeconomic environment shows a general trend where interest rates are declining. This means that the fixed rates will be favoured by the condition since one will earn more revenues as the bond approach maturity.
As a risk-averse investor, Treasury bond is a reliable investment plan. This is because they are risk-free. These bonds usually have lower interest rates compared with other bonds of similar maturity periods. The bond is not favourable for an investor seeking a high yield. An investor should prefer to invest in such a bond in the short run when evaluating the other bonds to invest in. Perpetual bonds are reliable for high yielding bonds because they have no maturity period. This bond entitles the investor to lifetime returns but will never receive the principal amount. The investor will only invest in such a bond if he is certain that the current and future amount is sufficient to facilitate smooth bond trading. Such an investment will be better in the younger lifetime.
Zero-coupon bonds will be encouraged if the discount rates match the current interest rate. This is because if the discount rate is lower, the investor will make a relative loss due to alternative investments. An investor should prefer this bond only in the short run. There exist other types of bonds. The bonds discussed are well understood and used commonly. The option to trade using non-equity securities is preferable because they are more rewarding and relatively stable as compared to equity bonds. Bondholders enjoy legal protection once the issuer of the bond goes bankrupt because they are entitled to reimbursement of their money. One can sell off the bond before the maturity period for its liquid nature.
Real effect argues that when the real prices fall, real wealth increases resulting in increased consumer demand. This effect, by extension, means that businesses would seek to expand and match the increased demand for their product. The expansion would need capital, thus favouring business in the securities market. IS curve consists of investment points equal to the savings in case the output is known. This allows the allocation of appropriate time for the investment of the preferred bonds. Assume that the owner of the retirement capital invests in a bond that has an interest rate of 12%. This is a hypothetical situation to illustrate how retirement capital should choose to invest in a bond.
The value of the bond – VD – after five years will be as follows.
Where:
- VD is the value of the bond
- R is the annual interest
- K is the interest rate of return
The value of the investment has grown from 40000 to 45557 over the five years. This means that the bonds offer a smart investment scheme for retirees.