Rate the liquidity and the risk for each of the following items as either low, medium, or high.
(6 marks)
Liquidity Risk
a. Onysha invests $1500 in a 5-year GIC that pays 4% interest
compounded quarterly.
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b. Steven invests $2000 in a silver mine that is starting up near
to his hometown. They are promising investors a 10% return
on their investment in 5 years.
c. Fred has decided to invest in a vintage car that, according to
his research, will increase in value by 4% per year. He hopes
to own the car for 20 years and plans to pay $15 000.00 to
purchase it from someone in the community.
Liquidity Risk:
a. Low liquidity risk - Onysha can easily access her investment as it is in the form of a Guaranteed Investment Certificate (GIC).
b. High liquidity risk - Steven's investment in the silver mine is not easily liquid as it involves a startup company and may take time for him to sell his shares and retrieve his investment.
c. Medium liquidity risk - Fred's investment in a vintage car may require time and effort to find a buyer and sell the car if he needs the money before the 20-year period.
Risk:
a. Low risk - Onysha's investment in a GIC is considered relatively low risk as it is a fixed return investment and guaranteed by the financial institution.
b. High risk - Steven's investment in a silver mine is considered high risk due to the uncertainty of the mine's success and potential fluctuations in the silver market.
c. Medium risk - Fred's investment in a vintage car carries some risk as the value appreciation may not materialize as expected, or there may be maintenance and storage costs associated with owning the car. However, it is not as risky as Steven's investment in the silver mine.
. Two (2) years from now, Thomas will go to community college. He has figured out that college will
cost about $10 000.00. He decides to invest in a GIC that pays 6% interest per year and he
deposits $360.00 per month for the next two years to save enough money.
Liquidity Risk:
Low liquidity risk - Thomas can easily access his investment in the GIC after two years when he needs the money for college expenses.
Risk:
Low risk - Thomas' investment in the GIC is considered relatively low risk as it offers a fixed return of 6% per year and is guaranteed by the financial institution.
. Two (2) years from now, Thomas will go to community college. He has figured out that college will
cost about $10 000.00. He decides to invest in a GIC that pays 6% interest per year and he
deposits $360.00 per month for the next two years to save enough money.
a. determine the amount of
money Thomas will have saved at the end of the
2 years.
b. Does Thomas have enough saved?
a. To determine the amount of money Thomas will have saved at the end of the 2 years, we need to calculate the future value of his monthly deposits into the GIC.
The monthly deposit is $360 and he will make this deposit for 2 years.
Using the formula for the future value of an ordinary annuity:
FV = P * [(1 + r)^n - 1] / r
where FV is the future value, P is the monthly deposit, r is the interest rate per period, and n is the number of periods.
In this case, P = $360, r = 6% or 0.06 (converted to decimal), and n = 2.
FV = 360 * [(1 + 0.06)^2 - 1] / 0.06
= 360 * [(1.06)^2 - 1] / 0.06
= 360 * [1.1236 - 1] / 0.06
= 360 * 0.1236 / 0.06
= $741.60
Therefore, at the end of the 2 years, Thomas will have saved $741.60.
b. No, Thomas does not have enough saved. The cost of college is $10,000, but he will only have saved $741.60. Therefore, he still needs to save additional funds to meet the cost of college.
Liquidity Risk Rating:
a. Onysha investing $1500 in a 5-year GIC that pays 4% interest compounded quarterly - Low liquidity risk. GICs are typically considered to have low liquidity as they have a fixed maturity period and early withdrawal penalties.
b. Steven investing $2000 in a silver mine with a promised 10% return in 5 years - High liquidity risk. Investing in a silver mine involves a higher liquidity risk as the investment is not easily liquidated and may require a longer time horizon to realize returns.
c. Fred investing in a vintage car that is expected to increase in value by 4% per year for 20 years - Medium liquidity risk. Investing in a vintage car can have moderate liquidity risk as it may be challenging to find a buyer at the desired price and time, potentially affecting the liquidity of the investment.
Risk Rating:
a. Onysha investing $1500 in a 5-year GIC that pays 4% interest compounded quarterly - Low risk. GICs are considered low-risk investments as they offer guaranteed returns and are typically insured.
b. Steven investing $2000 in a silver mine with a promised 10% return in 5 years - High risk. Investing in a startup silver mine involves higher risk due to the uncertainty of the mine's success and the potential volatility of the silver market.
c. Fred investing in a vintage car that is expected to increase in value by 4% per year for 20 years - Medium risk. Investing in a vintage car carries moderate risk as the future value appreciation depends on market demand, maintenance costs, and overall condition of the car.
To determine the liquidity and risk for each of the items given, let's go through each of them:
a. Onysha invests $1500 in a 5-year GIC that pays 4% interest compounded quarterly.
- Liquidity: Low liquidity. When Onysha invests in a GIC (Guaranteed Investment Certificate), the funds are locked in for the specified term, in this case, 5 years. Onysha cannot easily access the money before the maturity date without penalty.
- Risk: Low risk. GICs are considered low-risk investments because they provide a guaranteed return and are typically backed by the government or a financial institution.
b. Steven invests $2000 in a silver mine that is starting up near to his hometown, promising a 10% return on investment in 5 years.
- Liquidity: Medium liquidity. Investing in a startup silver mine involves a higher level of risk and may not be easily convertible to cash before the 5-year period. It depends on the terms of the investment and if there is a secondary market for selling shares or exiting the investment.
- Risk: High risk. Investing in a startup carries a considerable amount of risk. Silver mines, particularly those in the early stages, can face uncertainty, operational challenges, and market fluctuations. The promised return of 10% is not guaranteed and may be influenced by various factors.
c. Fred decides to invest in a vintage car that is expected to increase in value by 4% per year. He plans to own the car for 20 years and pays $15,000 to purchase it.
- Liquidity: Low liquidity. Vintage cars are illiquid assets, meaning they cannot be easily converted to cash. Finding a buyer at the desired price may take time, especially if the market conditions change or demand for vintage cars decreases.
- Risk: Medium risk. Investing in vintage cars can be risky because their value depends on factors such as market demand, condition, rarity, and overall appreciation of the asset class. However, the risk may be lower compared to investments with higher volatility, such as stocks or cryptocurrencies.
In summary:
a. Liquidity: Low, Risk: Low
b. Liquidity: Medium, Risk: High
c. Liquidity: Low, Risk: Medium