Finance for Business: Comparison of Financial Products, Principles of Finance, Bond Market Analysis

FINANCE FOR BUSINESS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
1.1 Comparison of three key financial products common stocks, bonds and preferred stocks
from the perspective of an investor..............................................................................................1
1.2 Analysis of five basic principles of finance...........................................................................4
PART 2 ...........................................................................................................................................6
2.1 Fact finding of the Australian Bond Market..........................................................................6
2.2 Fact Finding of Australian Share Market ..............................................................................8
PART 3 .........................................................................................................................................10
3.1 Sensitivity Analysis. ...........................................................................................................10
3.2 NPV Break even analysis when unit price decrease by 10%...............................................17
CONCLUSION..............................................................................................................................17
MAIN BODY.................................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
Finance industry is vast as it contains multiple products where investor can make
investment and earn profit. These investment avenues have some risk and return profile which
for some financial instruments keeps on change like equity and for some financial instruments it
remains same like debt and bond. Main purpose of the research study is to identify difference
between varied financial instruments like common stock, bond and preferred stocks on varied
parameters and identify their risk profile. Further research is carried out and in-depth analysis of
bond and equity is done in the section 2 and 3. In section 2 focus is on AU Government and
corporate bond. Apart from this, relationship between coupon rate and YTM is also explored.
Interest rate risk is defined and its impact on bond price is also explored in the research study. In
last section of the report, Index 3-year historical data is analysed reasons behind trend are
identified. On analysis it is identified that equity is riskier then bond and give rights to the
investors then debt instrument. There are very important 5 principles like time value of money
and profitability as well as liquidity which must be followed to make safe investment on right
time. Interest rate and bond are closely related to each other. If interest rate increase bond value
decline. From 2016 ASX is consistently rising to upper level. However, decline for few months
was observed in 2020. Entire report is divided into two parts. In the first part difference between
financial instruments and five principles of finance are explained. In middle part of the report,
detail discussion is carried on bond and equity and in third section sensitivity analysis is done
along with breakeven analysis.
PART 1
1.1 Comparison of three key financial products common stocks, bonds and preferred stocks from
the perspective of an investor
Common stock Bonds Preferred stock
Ownership status Common stock refers
to the equity stock
under which one by
making investment in
the company obtained
ownership into it. One
can also sale
Bond are basically a
debt instrument and
under this company
by issuing bond take
debt from the general
public and financial
institution. In return
Preference shares are
those where priority is
given to the specific
holders who own
preference shares in
terms of receipt of
dividend over equity
1

ownership to any
other individual if
want to exit from the
company (Chuen,
2015). Equity
shareholder are
considered as real
owner of the company
and entitled to receive
dividend from the
profit earned by the
company.
firm pay interest of
specific rate to the
bond holders. In this
mode of investment
holders do not have
ownership status in
the firm because they
are creditors of the
company.
shareholders. In case
of winding up of
company preference
shareholders first
receive amount then
equity shareholders.
Nature of funding It is capital or equity
funding under which
investors make an
investment in the
company by
purchasing shares
from the stock
exchange.
It is debt funding and
under this firm take
debt from public and
mutual fund houses.
Same of common
stock.
Risks Risk on equity is high
as with change in
market conditions and
improvement or
decline in the
company performance
price of shares
fluctuate. Many time
investor loss entire
value of investment.
Thus, it can be said
Risk on debt is low
because interest rate
remains fixed and it is
basically rate of return
on the investment.
Irrespective of market
fluctuations interest
remain same (Foster,
Ker and Characklis,
2015).
If dividend is issued
then in that case
preference
shareholders receive
dividend before equity
shareholders. Thus,
risk of not receiving
dividend is less in
case of preference
shares then equity
shares.
2