The Share And Bond Market Finance Essay

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When a Company wants to raise funds they look into the Capital Market, they use the 2 major instruments, long term debt which is in the form of bonds, and in the form of equity, where the company offers part this ownership for capital through issuing stocks/shares. There both traded in their specific markets. In we have the bond market where bonds are traded, which included government bonds also known as treasury bills and we have the stock market. In Kenya bonds and stocks are traded in the Nairobi stock exchange, but in two separate markets of bonds and stocks. The NSE starts trading from Monday to Friday from 9am to 3pm, then after that any major company announcements are released.

Share and Bond Market

Stocks/Shares are an "equity instrument", it is what people buy when they want to be a part of the ownership of a corporation and enjoy its gains. The shareholders are paid back depending on the business profits and terms. The shareholder enjoys dividends, rights issues, which allow them to purchase more new shares at a discounted rate. Some company also gives bonus shares, which are free share given to the shareholder per the decided ratio of holding equity in the company. But these benefits are dependent on how well the business is doing hence the shareholder has a risk. The risk is high when investing in a small business where as low in investing in a big business. We have to types of shareholders, preferred shareholders and ordinary shareholders. A bond is a "debt instrument"; here we have either the company or a government issuing bonds to raise capital from the capital market. The owners of the bond have no interest in the business and its gains but they pay attention to the coupon rate, which is the interest they earn per given period. The interest can be fixed or floating. When a person buys the bond he does not own part of the business, but they can be secured with the business assets

Comparison between the Kenyan Share and

Question 2

There are many ways where money can be invested, some people may invest in Shares of companies, the bond market, in the real-estate, others invest in precious stones such as diamonds and gold, some even invest on the fluctuating currency. Investors do this to grow their money and increase their income. But they have risk involved in their investments. To reduce risk, it is advisory to have a balance protfolio Before commuting the Options the following was taken as major consideration, Holding a mixed portfolio can avoid high risk of returns. The vision 2030 of Kenya The upcoming elections of 2013 Life Expectancy in Kenya And bellow are few of the key rates that must be considered during investment.

Central Bank Rate

13.00% 5/9/2012

Interbank Rate

8.80% 9/10/2012

CBK Discount Window

19% 10/9/2012

91 Day T-Bill

8.44% Oct,2012

REPO

9.47% 9/10/2012

Inflation Rate

5.32% Sep,2012

Lending Rate

16.5% July,2012

Savings Rate

1.58% Aug,2012

Deposit Rate

7.85% Aug,2012

Option1

1. Purchase more Land in Namanga

Purchase another ½ acre of land in Namanga and rent it out to an investor. The land will cost around sh.800, 000 same values as his ½ acre. The expected rent for the renting the 2 ½ acre land would around Ksh.60, 000 per month

2. Purchase a Government Bond

He should purchase a 1million shilling bond which will generate semi-annually. This will give him a better return rate than banks and the returns can be used in daily expenses. The bond should be a government bond (Treasury bill) and should be a secured bond. Currently the Central Bank of Kenya with the following details (summary). See attached .pdf for more details Amount of bond (issued) - 15billion Coupon rate - 11% Issue date - 24th September 2012 Term to Maturity - 15yrs The payments of interest- Semiannually

3. Invest in shares

He should invest 1million into the stock market, and purchase securities that generate high dividends by purchasing shares like EABL, BAT and Barclays the investor will enjoy good amount of dividends, if not he could benefit from right issue and also sometimes be able to awarded bonus shares. Further own he can also buy and sell share based on the information attained in the market and gain revenue by selling the shares at higher changes in the prices

4. Remaining money

The remaining amount of Ksh.700,00 can be put in fixed deposit which will earn monthly income. Banks such as Oriental Bank, Chase Bank, ABC Bank, and most local banks currently have an average fixed deposit rate of 8%, above the inflation rate of 6% which is good. The Ksh.28,000 that the wife gets monthly can be used for their daily expense's

Merits of Option 1

The land is not increasing but population is, meaning demand for land of the future will keep increasing. This means if he purchases the land, the value of the land will be increasing as years go on and if he rents the land to investors, he will be able to generate monthly incomes Purchasing Bonds, will give the investor a higher return than banks do when they deposit their money in the bank. This will also mean that their money is growing as per the present value. Having a Fixed Bond, the coupon rate in not affected by inflation rate, hence the Interest gained will be calculated as an annuity. Compared to a floating coupon rate, where the interest paid will be uncertain and varying with time Investing in the stock market with Ksh1million will increase the risk buh will give a higher return from the share, it can help the investor gain through dividends, bonus shares and rights issues which are generated from the profits of the company. Banking sectors has been profitable for the few years and have been giving good returns to its investors. EABL and BAT have also been promising in the stock market Inventing in the stock market will allow the investor to liquidate his money quickly, because trading of the shares occurs every day and it more fasting moving than bonds and real estate The purchase of fixed deposit will allow their money to grow at a fixed rate and can be liquidate for better investment opportunities

Demerits

The Kenya economy is not stable and the upcoming elections could lead to high inflation which happened 5yrs ago, this will drop the prices of real estate's sector and could increase inflation When investing in the stock market, it needs the investor to follow the stock market and its information released by the company's and government, because the stock exchange is very sensitive to information. Bonds are difficult to sell in the bond market compared to the stock market and liquidate your money

Option 2

Sell and Purchase Land

He should sell the farm for ksh.800, 000 and purchase a flat/apartment with worth 5m along athi-river and rent it for Ksh.60, 000 He can pay 4 million upfront and the reaming 1 million he can borrow a home loan from a bank, the Central Bank reduced the lending rate to 16.5%, so we can get a home loan for the amount at 19% including the risk The rent earned can be used to pay the mortgage (interest) on the loan borrowed

Invest in the Stock market

The reaming amount of ksh.300, 000 can be invested in the stock market as Kenya is a developing country. The Ksh.300,000 is not much of a great amount to invest in the share market, but buy purchasing shares like EABL, BAT and Barclays the investor will enjoy good amount of dividends, if not he could benefit from right issue and also sometimes be able to awarded bonus shares.

Merits

There will be a monthly income of rent, which will allow the investor to pay the monthly , and after the loan is repaid, he can earn monthly income from the house. Athi-river area close to the industrial area, which means all necessary utilities such as hospital, roads, water and electricity supply are available and ongoing housing projects such as "Green park", "Graceland" and "Lukenya Hills Park" will help the value of the apartment grow in the near future. If their current rent increases in the near future they will be able to move to the new apartment, so they will have the flexibility to either stay on rent and receive rent or stay in their new apartment. Investing in shares can generate returns and the money put in the share market can be easily liquidated It will be easier to get a home loan as the apartment they purchased with the loan is held as security by the bank, hence the owner will be paying mortgage

Demerits

Borrowing a bank loan is not advisory, since Kenya economy is not stable and the fluctuating interest rates may lead to default in the loan, inflation and the upcoming elections could have a major impact on the interest rates The amount Ksh 300,000 to invest in the shares will not attain higher returns, because the higher the risk, the higher the return, hence investing on Ksh.300,000 will reduce risk and return. The investor will heavily depend on the rent received from the new purchased apartment to pay the loan and could lead to default in the loan.

The Recommended Option

I would recommend the first option, as it is a balanced portfolio of, Shares, Bond, Real estate and Fixed deposit to maximize returns The Land in Namanga will be very useful for multipurpose use. In the real estate by purchasing more land and renting it out will help generate monthly incomes, rather than leaving the farm bare. In the future he will be able to build a house for himself and he would have an option to also rent the house in Namanga. Namangas climate is favorable for farming mainly Horticultural, and the investor can be able to hire a few labors and put in capital for farm machinery. Hence he will have a small business that will be generating revenues. Purchasing a Fixed rate government bond, will help generate semi-annual interests on the bond, the interest will be received for the next 15yrs, which will keep help support to pay the daily expenses they have. With the accumulating interest, the couple can invest in purchasing a new house in the future, or if they are satisfied with the way they are living, then they can enjoy the interests by spending in on Holidays around the world. As the expected life expectancy in Kenya is 58 years as per the 2011 results. Having money in the fixed deposit will help them grow the money, and it will be easy to break the fixed deposit rather than selling the bond, this will allow the investor to pay up any upfront unexpected expenditure such as high-medical bills as they are aging. Having invested in both bond and shares, during the boom of the economy the investor will gain from the share market and during recession he will gain more from the bond purchased Compared to option 2, the investor will not have to borrow a loan from the bank to purchase the new house, which can be purchased in the future in Option1. The 2nd Option heavily depends on the rent of the house purchased as their main income. Where as in option1 we have many sources of income The main aim of increasing income and maximizing the investors' money is by choosing Option 1.
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