1. Financial Assets (Instruments)
Chapter 2

2. Financial Instruments
A real or virtual document representing a legal agreement involving some sort of monetary value.
In today's financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of instrument

3. Assets
Tangible asset
A physically observable, or touchable item such as inventory, building…etc
Financial asset
An asset that represents a promise to distribute cash flows some time in the future such as common stocks, bonds….etc

4. Major Financial Instruments
Treasury notes/bonds
Municipal bonds
Term loans
Mortgages
Corporate bonds
Preferred stock
Common stock
Treasury bills
Repurchase agreements
Federal funds
Bankers’ acceptances
Commercial paper
Negotiable CDs
Eurodollars
Money market funds

6. Lisa Inc.
Dividends
75.25 65
Retained Earnings

7. Financial Instruments and the Firm’s Balance Sheet
Firm issues financial instruments so it can purchase the tangible assets necessary to produce income.
The purpose of issuing financial instruments is to raise capital.

8. Balance Sheet - Equity Common equity
stockholder’s total investment in the firm
Par value
nominal or face value of a stock or bond
Retained earnings
earnings the firm has not paid out as dividends throughout its history
Additional paid-in capital
difference between the value of newly issued stock and its par value

9. Debt A loan to an individual, company, or government Debt features
Principal value
Face value
Maturity value
Par value
Interest payments or discounted securities
Maturity date
Priority to assets and earnings

10. Short-Term Debt
Treasury Bills (T-bills): A short-term obligation of the U.S. Treasury having a maturity period of one year or less and sold at a discount from face value.

11. Short-Term Debt
Repurchase Agreement (Repo): An agreement with a commitment by the seller ( dealer ) to buy a security back from the purchaser.

12. Short-Term Debt
Federal Funds: overnight borrowings between banks and other entities to maintain their bank reserves at the Federal Reserve.
Banker’s Acceptance: A short-term credit investment which is created by a non-financial firm and whose payment is guaranteed by a bank.
Commercial Paper: written instrument or document such as a check or draft or promissory of short-term notes issued primarily by corporations.

13. Short-Term Debt
Certificate of Deposit: is a promissory note issued by a bank.

14. Short-Term Debt
Eurodollar Deposit: U.S. dollar on deposit with a bank abroad, especially in Europe.
Money Market Mutual Funds: is a type of fixed income mutual fund that invests in debt securities that are characterized by their short maturities and minimal credit risk

15. Long-Term Debt
Loans: is a debt evidenced by a note which specifies, among other things, the principal amount, interest rate, and date of repayment
Bonds: is a fixed interest financial asset issued by governments, companies, banks, public utilities and other large entities.
Government bonds
Treasury bonds
Municipal bonds
Revenue bonds
General obligation bonds
Corporate bonds
Mortgage bonds

16. Bond Ratings
Represents the credit worthiness of corporate or government bonds.
Moody’s Investors Service (Moody’s)
Standard & Poor’s Corporation (S&P)
Investment grade bonds
triple B or better
Criteria for rating bonds
Importance of bond ratings
Changes in ratings

18. Stock (Equity)
Preferred stock : is an investment in a company from which fixed interest payments are paid .
Common stock: a claim to a part of the corporation's assets and earnings.
Represents ownership in a corporation
Common stockholders vote for members of the board of directors

19. Short-term U.S Treasury Bills
Risk and return
Common stocks
Risk
Preferred stock
Bonds
Short-term U.S Treasury Bills
Return

20. Derivatives
Is a financial contract which derives its value from the performance of another entity such as an asset, index, or interest rate, called the "underlying”
Futures contracts, forward contracts, options and swaps are the most common types.

21. Which financial instrument is best?
It depends on the risk/return tradeoff
It depends on the issuance rating
It depends on the financial markets structure
It depends on the availability of the financial reports
In general: many people prefer to invest in portfolios rather than individual security.