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Return on Financial Assets

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Effects of Risk Takers 1

Effects of Risk Takers
Introduction to Business
21 November 2009

Effects of Risk Takers 2 In the late 2008, firms suffered immensely from investing in auction rate securities. ARS are bonds that the return rates rely on auctions that take place on every 7th week at a minimum. The company’s financial investor managers were under the impression that buying those types of bonds were the way to go. However, Outfitters decided to play it save and invest conservatively. As Benjamin Franklin quoted "Necessity never made a good bargain". In other words, do not invest funds that are needed prematurely, in hopes of an unrealistic high return. The Outfitter financial managers were patient with their finances. Because the Outfitters had a steady cash flow, they invested cautiously. The Outfitters outcome wasn’t as awful as some other firms. Although corporations are faced with challenges, patience is an asset. Firms like Countrywide Financial, Lehman Brothers, and American International Group all had issues with liquid assets. Because of this, they all invested heavily into ARS which in turn made their investment options unstable. When companies as large as these firms do not have enough cash in the bank or liquid assets, it puts them at an increase disadvantage to withstand a financial crisis. Case in point, when the economy went south in 2008, these companies were not able to inject cash back into their businesses because they had taken on too much debt. The bonds they had were worth less because of the high default ratio. When the market failed the companies were unable to pay their debts and essentially became insolvent. Selecting the appropriate investment options for any firm is an extremely cumbersome ordeal. Most large firms have entire departments devoted to advising them on financial strategic options. So

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