Financial Planning Answers | Assignment

Running head: FINANCIAL PLANNING
FINANCIAL PLANNING
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FINANCIAL PLANNING1
Part 1
Answer 1
Ponzi scheme is an investment fund which is designed by fraudsters. The fact about these
schemes is they promise higher returns to the investors at low or no risk. This promise helps to
attract new investors into the business, and the amount collected is used to pay the older
investors. The cycle of this fraud investment continues until it fails to generate new investors into
the scheme. The scheme was named after Charles Ponzi, and he developed a company that is
Securities exchange company and made false promise of giving 50% interest in 45 days only. He
collected huge funds by his promises and distributed the funds to the older investors to show that
his company has earned huge profits. The person was arrested, but these type of companies
collapse when they stop attracting new investors (Hidajat, 2018).
Answer 2
Inflation risk – This means the risk of fluctuation in the inflation rate resulting in the
fluctuation in the estimated financial return from an investment.
Interest rate risk – The risk of fluctuation of the interest rate of government or corporate
bond is known as interest rate risk. There is a negative correlation between the value of bonds
and the interest rate in the market.
Business failure risk – The risk of bad management, unsuccessful products, competition
in the market or any other factor which result in a company, loss or low profit is known as
business failure risk.
Market risk- the market value of the stock faces two different types of risk. One is
systematic, and the other is unsystematic. Systematic risk means the overall risk of the market
like the risk of economic crisis. Unsystematic risk means the risk exists particular to a specific
industry.
Global investment risk – The risk associated with the investments made in foreign
companies but these investments also be evaluated before investment for diversifying the
portfolio (Singh & Sur, 2018).
Part 2
Answer 1
Debentures – This is an unsecured bond and backed by the company’s reputation and
goodwill. In case of bankruptcy of the company, they can claim their dues from any asset like
other creditors.