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Portfolio means collection or bunch of various investment tools which are available in the market like shares, bonds, stocks, mutual funds and other assets such as real estate and it all depends on investor’s budget, his income and time frame and the risk which he want to take.
And the meaning of the term portfolio management refers to manage the investment of an individual they may be in the form of shares, bonds, mutual funds so that the investor could earn maximum profit within the time which is available to him. Portfolio management means manage the investment money of an individual .The portfolio managers presents a best investment plan to the individuals according to their budget, income, time and the risk they want to take. In portfolio management the managers understands the needs of their client and suggest the best investment to them which involve minimum risk.
Portfolio management does not mean that an owner does not perform risky projects it means that an owner should be aware of overall risk level and he can adjust the risk on his project accordingly (Management study guide, 2016).
Interest bearing securities means those securities that generate a stream of cash flow whether it is equal or unequal over a span of time. Example - different types of bond and debentures. The intrinsic value of these securities is affected by the rate that is prevailing in the market. These securities have a long term maturity period. These securities have important role for designing a portfolio management of any investor. What is meant by portfolio it is a bunch of securities we take from different asset classes and groups. When we construct a portfolio we can take these securities in a proportion so that we can change the structure of portfolio as per choice of the investors. (Woelfel, 2015)
In Interest bearing securities the money is invested to a company who pays interest on that amount for a period of time. (Somerset smith Partners investment advisers, 1934)
Interest bearing securities are those securities which carry a fixed interest rate with them we can include bonds, certificate of deposit, Debentures, mortgages, notes, and the securities having carrying interest with them such as equity Shares, Common stocks, Preferred stocks. The terms interest and dividend differ in their meaning or we can say that the strength of claim in both the terms are different, interest is a fixed charge if interest is not paid the creditors are eligible to take legal action and dividend are not fixed charges dividend is dependent on funds available to the company and it depends on management decision whether they want to distribute dividend or not. If dividend is not paid the equity owners does not have right to enforce any claim for them (Shekel, 2015).
In these securities the rate of return is fixed, say 10%, 12% .The returns on these due on specific dates, 30th June or 31st Dec. Example- Government Bonds and Securities (Swayamjit, 2015).
In these securities the return is not fixed, i.e., variable. These are applicable in case of shares because dividend is not fixed on shares it fluctuates. In 1st year return may be 10% and in the 2nd year, it may be around 15%. We purchase shares from brokers and they are charging a specific rate of commission on the purchase and sale of them (Swayamjit, 2015).
The money market is that place where the instruments which have high liquidity and short term maturity are traded up to a period of 13months. These are used by the participants for lending and borrowing in short term and they have a maturity period from an overnight to just under a year.
Capital market, are those markets where we can buy and sell for long-term debt and equity instruments. These are the markets channel where the money of saver is invested to long-term productive use, such as companies/ governments making long-term investments. In these markets money is invested for a period more than a year. These markets can protect the investors against fraud, among other duties (Investopedia, 2016).
In Australia, government bonds are considered as safest investment. The bonds can be purchased from state government or from federal. Face value payments and interest payments are guaranteed to be paid on maturity by the government if the bonds are sold before maturity period than the capital gain or loss may be possible to be occurred. The price of the bonds will change when there is a change in interest change. The price of the bonds falls when the interest rate rises and will fall when interest rate is higher (Australian investors association, 2012).
Types of bonds
The federal government bonds are of 2 types:
The Queensland Treasury Corporation (QTC) of Australia offers these bonds to the retail investors these bonds with have a minimum of$ 5000 (thereafter multiples of $100) which have different interest rates and different maturities. The payment of interest can be made on basis of either quarterly or it may be made half-yearly. We can sell them on Link Market Services.
Corporate Investments
In Australia corporate investments are traded on over the counter. That means we can buy corporate investments through a specialist broker such as FIIG Securities. Investments are offered to the retail investors directly by the company and some other are listed on the ASX.
When we are looking for investment it is essential that few points are considered for interest bearing securities each product has a different rate.
When we lend money a risk is always there that we will not received the interest that is promised and we not get the capital when it is due. When money is provided by investor he wants that interest rate should be higher and it becomes easy when we have a charge on the security of the borrower in case money is not paid on time the asset is sold and the payment can be repaid. So before investing are search can be made we have to look the general creditworthiness of the issuer.
FIIG Securities Limited has produced a diagram we can call it risk versus reward diagram and this diagram is very fruitful to the investors (Australian investors association, 2012).
After 1 July, 2011 in Australia if any one issues debentures they have some security to be offered to be issued on the tangible property of the issuer and the security must be fixed.
When we buy a listed security and we don’t want to hold it till maturity, there may be some risks that the price of the security will fall below what we have paid .if the interest rate changes then the security it may trade above or it may be below than the face value. It is the general rule that higher will be the interest rate the product is more risky (Australian investors association, 2012).
Some of the interest bearing securities like floating rate notes and fixed rate bonds has a different matter because these bonds are dispersed among the holders and they are held by them in a small amounts and it’s a challenge to collect the periodic interest payment from the holders directly.
One of the securities commercial paper does not faces the problems when the interest rates are negative .mostly the investors pays less for those securities which are promised to pay at maturity and pay more for the securities at purchase. In the life of an instrument the reduction in the nominal value reflects the negative yield on the instrument.
The term Negative interest rates are a topic of modest academic interest to a practical reality. It is suggested that issuing interest-bearing securities at negative rate have some problems like difficult in design. (Garbade and McAndrews, 2015)
Asset allocation is a technique and its main aim is to balance the risk and create diversification when we divide the assets in the following categories like Bonds, cash, stocks, real estate, and derivatives. The entire asset has a different risk and a different return and they all have a different behavior over a time (Bank of Queensland, 2012).
It may be possible that one asset at a particular time increase in value and other may decrease or the other may not decrease but not increase as much or it can be said that that assets allocation is like making of wine. when we make wine we add different variety of grapes to give the wine a flavor just like that is asset allocation we combine different assets to a achieve a portfolio risk and return should be that which meets our needs. (AMP Capital Investors Limited, 2014)
There is no particular formula by which we can say that asset allocation is right for each Individual there are 4 points which are important in asset allocation.
Valuation
Asset valuation is the process by which we can assess the company’s value. Any item which have some worth like real property or we can say that any assets that produce cash flows it is performed when we are buy or sell a asset (Queensland Government, 2016).
We expressed Duration as number of years. When the interest rate is higher, bonds prices will fall and when interest rate is declining the bond prices will rise.
For example, an investor wants to select those bonds that suit her portfolio criteria. She thought that interest will increase in the next 3 years and she desires to sell the bonds prior to maturity. So while investing she need to take into account the duration while investing and invest to those bonds which have short duration (James, 2016).
Convexity
Convexity shows the relationship between prices of bonds and bond yields . And it also tells that when the interest rate changes the bonds duration also changes. It is a risk-management tool, that helps to identify the market risk by which the portfolio of bonds is exposed (James, 2016).
Immunization
We can call Immunization that it is a dedicated-portfolio strategy and it can be used to manage a portfolio with the aim of making it worth a specific amount at a certain point, usually to fund a future liability.
In short we can say that Interest bearing securities have an important role in portfolio management. We can take them as a part of constituting the portfolio. The meaning of the word portfolio means it is group of securities taken from different asset classes and groups. To construct a portfolio these securities can be taken in a certain proportion so that we can change the portfolio structure according to investors' needs. When we take these securities in our portfolio it seems defensive.
Management study guide (2016), Portfolio Management - Meaning and Important Concepts Accessed on 16 August 2016 from http://www.managementstudyguide.com/shares-and-stock-market.htm
Shekel .A, (2015) transtutors, Interest-bearing Securities and their role in Portfolio Management accessed on 16 August 2016 from http://www.transtutors.com/questions/-interest-bearing-securities-and-their-role-in-portfolio-management-582395.htm
Woelfel .C.J, (2015) eagle traders, Interest-Bearing Securities (9h Edition) accessed on 16 August 2016 from http://www.eagletraders.com/advice/securities/interest_bearing_securities.php
Somerset smith Partners investment advisers, since 1934 NZX firm, Interest Bearing Securities
Accessed on 16 August 2016 from http://somersetsmith.co.nz/interest-bearing-securities
Swayamjit, (2015), Fixed and Variable Interest Bearing Securities, accessed on 16 August 2016 from http://www.yourarticlelibrary.com/accounting/investment-accounts/fixed-and-variable-interest-bearing-securities/59437/
Garbade.K and McAndrews .J, (2015) Liberty Street Economics, Interest-Bearing Securities When Interest Rates are Below Zero from http://libertystreeteconomics.newyorkfed.org/2015/05/interest-bearing-securities-when-interest-rates-are-below-zero.html#.V7CF4U2F7IV
Australian investors association, (2012) Interest Rate Securities, online source, accessed on 16 August from http://www.investors.asn.au/education/fixed-interest/interest-rate-securities/
Bank of Queensland, (2012), Asset allocation, accessed on 16 August 2016 from http://www.boq.com.au/smsf/asset-allocation.htm.
James.(2016), Duration and Convexity, accessed on 16 August 2016 fromhttp://www.raymondjames.com/fixed_income_duration.htm
The Little Book of Valuation, Asset Measurement and Valuation, Accessed on 16 August 2016 from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/littlebook/assetvalue.htm
Queensland Government, (2016) Business and industry portal, How to value business assets, Accessed on 16 August 2016 from https://www.business.qld.gov.au/business/exiting-business/valuing-a-business/how-to-value-business-assets
AMP Capital Investors Limited, (2014) the critical role of asset allocation for investors
http://www.ampcapital.com.au/article-detail?alias=/olivers-insights/march-2014/the-critical-role-of-asset-allocation-for-investor
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