Valuation of Securities Essay Example | Topics and Well Written Essays - 2250 words

Valuation of Securities - Essay Example 500,000, then I have to look at the options available to me and perform a detailed analysis of each. This would allow me to determine which is best considering the risk and return profile of each option. I have made the decision to assess a life insurance investment option and a fund which I will manage on my own. Other investments which could be considered include bonds, shares and mutual funds. Life Insurance Investment Investing the amount of ?500,000 saved with a life insurance company may allow me to receive a stable income on an annual basis with an adjustment for inflation. The insurance policy that my insurance agent recommends is one that will pay me an annual sum that allows for an inflation adjustment and allows for the balance to be paid to my estate when I die. This information is presented in Table 1. Year Initial Investment/ Balance (?) Interest rate Inflation rate Capital Growth (?) Withdrawal (?) Balance (?) 0 500,000.00 0.04 0.03 0.00 0.00 500,000.00 1 500,000.00 0. 04 0.03 520000.00 15000.00 505000.00 2 505,000.00 0.04 0.03 525200.00 15450.00 509750.00 3 509,750.00 0.04 0.03 530140.00 15913.50 514226.50 4 514,226.50 0.04 0.03 534795.56 16390.91 518404.66 5 518,404.66 0.04 0.03 539140.84 16882.63 522258.21 6 522,258.21 0.04 0.03 543148.54 17389.11 525759.43 7 525,759.43 0.04 0.03 546789.80 17910.78 528879.02 8 528,879.02 0.04 0.03 550034.18 18448.11 531586.07 9 531,586.07 0.04 0.03 552849.51 19001.55 533847.96 10 533,847.96 0.04 0.03 555201.88 19571.60 535630.28 11 535,630.28 0.04 0.03 557055.50 20158.75 536896.75 12 536,896.75 0.04 0.03 558372.62 20763.51 537609.11 13 537,609.11 0.04 0.03 559113.48 21386.41 537727.06 14 537,727.06 0.04 0.03 559236.15 22028.01 537208.14 15 537,208.14 0.04 0.03 558696.47 22688.85 536007.62 16 536,007.62 0.04 0.03 557447.92 23369.51 534078.41 17 534,078.41 0.04 0.03 555441.55 24070.60 531370.95 18 531,370.95 0.04 0.03 552625.79 24792.71 527833.08 19 527,833.08 0.04 0.03 548946.40 25536.50 523409.90 20 523,409.90 0.04 0.03 544346.30 26302.59 518043.71 403055.62 Table 1:- Investment in Life Insurance Policy The information in Table 1 indicates that the policy will run for 20 years. It is assumed that the interest rate for the period would be 4% and the inflation rate - 3%. An amount of ?15,000 will be paid in the first year after allowing for inflation. If I die at the end of the first year my estate will receive a total of ?505,000. If not the annual payments will increase year after year to an annual payment of ?26,203.59 in the 20th year. At that time the balance on the account would be ?518,043 which would be paid to me or my estate if I die. The information in Table 1 also indicates that the balance on the policy would increase up to the 13th year but would start declining thereafter. My total receipts from this policy from year 1 to year 20 would be ?403,055.62 leaving a balance of ?518,043.71. This suggests that after 20 years I would have received a total of ?921,099.33 (?403,055.62 + ?518043.71). Therefore, I would gain a total of ?421,099.33 on my investment. Manage Funds Personally In the event that I choose to personally manage my funds I would want to diversify the risks involved by investing in a mix of government bonds and shares. Government bonds are basically risk free while investment in shares is considered to be risky. I would want to consider a 50:50 mix since I am hoping to get high returns that would be able to