Introduction

Government bonds are safe investments because investors because they will be guaranteed to at lead receive the principal back. The bonds are low risks investment because treasuries issuing them have a full backing of the government. The only risks associated with them are Interest Rate and Inflation Risks if the bonds are allowed to mature such risks do not matter. Investment clubs should consider Multinationals bonds if the economy’s performance is expected to be bright, but they present high yields regardless of the risks. There is a need for the members of the investment problem to gain knowledge of the best investment options.

Conclusion

Government bonds denotes a loan extended to the government .Irrespective of the nature of bond market in any period , the bonds’ and bond funds’ timeliness utility are constant in terms of diversification , volatility dampening , income and protection of downside risks.  The last aspect is mostly associated with government bonds because they are regarded as a low risk investment (He, Krishnamurthy& Milbradt, 2016, 519).  When the Brexit referendum was held so as Great Britain would lead the European Union, the British pound was devalued and this led to a brief crippling of the stick markets across the globe, but only one investment vehicle remained strong and unaffected – the U.S Government Bonds.  At a time that there was a 4 percent fall in NASDAQ and 8 percent reduction in Nikkei, the prices of bonds issued by the government increased. This indicated that the government bonds and the related debt provide a safe haven for the group and institutional investors especially when the economy is in turmoil (He, Krishnamurthy& Milbradt, 2016, 520). The environment maintains a high demand and low yields for the bond because of the negative relationship between prices and yields.

 Despite the fiscal happenings of the government in a given period, the long-term bonds issued by the Treasury remain to be completely safe as long as the investor holds them to maturity. This is because they will be guaranteed to at lead receive the principal back.  Before the bonds mature, their prices undergo substantial fluctuation. Hence, investors who are conscious about safety so that it is a priority should be certain that will not need a cash-in of the holdings before the date of bond maturation (Ehrhardt & Brigham, 2016, 167).   This is true especially for the US government bonds. They have been considered to be the most effective investment options for investors who need to safely store value for their money.  What is more important in case of a safe investment is not its absolute safety but that while compared to another investment it is relatively safe (Ehrhardt & Brigham, 2016, 167). This can explain why the US government debts are so specially and thus its bonds.

 In addition, the treasuries have a full backing of the government and therefore, there is almost zero risk for any default on the securities which are considered to have fixed-income.  In fact, since the formation of U.S government in 1776 there is no single time that the Treasury has ever failed in its repayment of its lenders. On the other hand, even the safest bond sold by corporation cannot make such a claim.  When investors buy treasury bonds, they can rest assured that there will be no loss for their money since the principal amount will be issued back with its due interest. However, there are some risks that the investment may face which consist of Interest Rate and Inflation Risks. In case of a rise in inflation, the value of the bond may reduce and if the inflation rate is higher than the interest rates.  Basically, the actual value of the funds invested in the bond will reduce (Van Riet, 2017, 14).  If the Treasury bond is held up to maturity date, the risk of interest rate is not considered a factor. However, if the Treasury bond is sold before it matures, one may not receive back the principal amount used in the payment. But there are safer than any corporate bonds. In fact, the government bonds are so safe that they do not need to offer much payment as a way of attracting investors (Van Riet, 2017, 14).

Bonds issued by Multinational firms are high yield bonds because these companies have credit ratings are considered to be below the investment grades. These firms have massive amount of balance sheets cash due to their big and recurring revenues (Butler, 2016, 5). The multinational firms’ credit ratings are high than that of most governments including the U.S government due to limited possibility of them defaulting or failing to make principal and interest payments at the maturation date. Corporate bonds normally provide some advantages to the investors specifically those who are in need of predictable and stable income(Ehrhardt & Brigham, 2016, 173).  The needs of an investment club depend on their risks that its members are willing to take and their cash flow needs especially in future. If the members want to cash flows that are reasonably reliable and ones that are consistent, the corporate bonds issued by multinational would be a good choice.  The bonds issued by multinationals provide term investment that is moderately secure and the cash flow can be predicted.  Normally, a bond makes it possible the realization of a certain investment since it is transferable in nature.  The return offered by the bonds are somewhat secure and there is a chance that they will be higher than having the money deposited in a bank and even more security of capital than is offered while investing in equities (Butler, 2016, 5). Therefore, they may provide enough savings investment for a club since they will be in need of generating income.

However, there are high risks associated with the high yields of these bonds and which may sound inappropriate for the club.  The major risk can be associated with high volatility of these bonds in comparison with other bond market areas.  While the bonds by Multinational firms have shown good performance over time, they can also fall very quickly especially once the market environment becomes sour (Ehrhardt & Brigham, 2016, 173). Such a risk is shown in the 2008 financial crisis that hit the US market, and the high-yield-bonds lost more than 25% of overall value.  The bonds tend to have the best performance when the economy is undergoing expansion and the investment confidence level is quite high. Hence, the Club members should consider investing in multinational firms with the possible benefits and risks in mind. When the prospects for the economy in future are bright the Club should consider investment, otherwise they should invest in government bonds that are more secure and with almost no risks even though returns are lower.

Conclusion

Government bonds pare the safest investment assets for a Club even though their returns are not high. The Multinational bonds face higher risks and hence greater risks of returns which means and the club should invest in them if they are ready to take the risks and hence, the high returns. There also likely losses since the latter fluctuate a lot in terms of value.

References

Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage learning. 167- 117

 

Butler, K.C., 2016. Multinational Finance: Evaluating the Opportunities, Costs, and Risks of Multinational Operations. John Wiley & Sons. 5-13

 

He, Z., Krishnamurthy, A. and Milbradt, K., 2016. What makes US government bonds safe assets?. American Economic Review, 106(5), pp.519-23.

 

Van Riet, A., 2017. Addressing the safety trilemma: a safe sovereign asset for the eurozone (No. 35). European Systemic Risk Board. 13-14