University Financial Planning Assignment Solution - Part 1 & 2

This document provides a comprehensive solution to a financial planning assignment, addressing key concepts in finance. The assignment begins by defining and explaining Ponzi schemes, including their mechanics and historical context. It then delves into various types of investment risks, such as inflation risk, interest rate risk, business failure risk, market risk, and global investment risk, providing detailed explanations for each. The second part of the assignment explores different types of bonds, including debentures, mortgage bonds, subordinated debentures, convertible bonds, and high-yield bonds. It also discusses the reasons why investors purchase corporate bonds, emphasizing diversification, safety during economic downturns, income growth potential, and the security of their invested capital. The solution is supported by relevant academic references, offering a well-rounded understanding of the financial planning topics covered.

Running head: FINANCIAL PLANNING
FINANCIAL PLANNING
Name of the student
Name of the university
Author’s name

1FINANCIAL PLANNING
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.

2FINANCIAL PLANNING
Mortgage bonds – This a secured bond. Collateral of different assets is being assigned
before selling these mortgage bonds by the companies. In case the company defaults payments,
investors can sell off their assets to recover the dues.
Subordinated debentures – this is an unsecured bond which gives its holders right of
payments such as interest payment or assets secondary to the debenture or bondholders.
Convertible bonds – this is a debt security and enjoys fixed interest payments. However,
there is an option of converting these bonds into equity shares.
High yield bonds – these are the corporate bonds which have a huge default risk and thus
pays higher interest to its holders. These are also known as junk bonds (Bessembinder et al.,
2018).
Answer 2
Investors purchase corporate bonds because they feel that these bonds provide more
diversification to their investment and thus have a lower risk. In addition, they consider these
bonds safer in case of a downturn economy because the stocks traded in the market loses the
market value. In this scenario, diversification and appropriate asset allocation can only reduce
the concentrated risk. Corporate bonds are considered having the potential for income growth
than other bonds. Saving account, money market account and certificate of deposits are some of
the examples which have low risk and provide good returns to the investors. The investors invest
in corporate bonds, specifically for three reasons which are:
 It offers regular interest income
 If the company does well, then there is a possibility of an increase in the value of
the funds and most importantly.
 Investors get their invested amount repaid at the time of maturity means the
capital of the investors are protected (Goldstein, Jiang & Ng, 2017).
References

3FINANCIAL PLANNING
Bessembinder, H., Jacobsen, S., Maxwell, W., & Venkataraman, K. (2018). Capital commitment
and illiquidity in corporate bonds. The Journal of Finance, 73(4), 1615-1661.
Goldstein, I., Jiang, H., & Ng, D. T. (2017). Investor flows and fragility in corporate bond funds.
Journal of Financial Economics, 126(3), 592-613.
Hidajat, T. (2018). Financial Literacy, Ponzi and Pyramid Scheme in Indonesia. Jurnal
Dinamika Manajemen, 9(2), 198-205.
Singh, K., & Sur, D. (2018). Analysing company-specific components of business risk in
selected manufacturing firms in Indian corporate sector. International Journal of Risk
Assessment and Management, 21(4), 359-373.