Chapter # 4 Instruments traded on Financial Markets

 A document that is issued by an organization, representing a legal agreement between two or more individuals, involving some sort of monetary value and tradable on financial market.  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. Corporations issue such instruments in order to collect funds they need which is called financing. 1. Debt financing 2. Equity financing What is a Financial Instrument ?

 Financial Instruments are divided in to 2 categories.  1. Money Market Instruments Short term Investment vehicles  2. Capital Market instruments Long term Investment vehicles Continued…

 They are all those Financial instruments which have a maturity of one year or less. Short term investment vehicles often are defined as money-market instruments, because they are traded in the money market which presents the financial market for short term (up to one year of maturity) marketable financial assets.  The risk as well as the return on investments of short-term investment vehicles usually is lower than for other types of investments.  The main short term investment vehicles are: T. bills, C. Paper, Repos, CODs, and Banker’s Acceptance. Short term Investment Vehicles

 They are all those Financial instruments which have a maturity of more than one year period. Long term investment vehicles often are defined as capital-market instruments, because they are traded in the capital market which presents the financial market for long term (more than one year of maturity) marketable financial assets.  The risk as well as the return on investments of long-term investment vehicles usually is higher than for other types of investments.  The main long term investment vehicles are: T. Notes, T. Bonds, C. Bonds, C. Stocks, and P. Stocks Long term Investment Vehicles

Money Market Inst.. T. Bills Commercial Paper Repurchase Agreements Certificates of Deposit Bankers acceptance Capital Market Inst.. T. Notes T. Bonds C. Bonds Common Stock Proffered Stock Financial Instruments

Money Market Instruments Short term investment Vehicles

They are government securities issued by the central bank on behalf of the government. They are zero coupon and bear no interest. They are issued on discount and repurchased or redeemed on face or par value. They are issued to meet short term deficits faced by the government and generate revenue. They can be of 1 month, 3 months, 6 months and 52 weeks or 1 year. They can be traded in secondary money market. Treasury Bills

Treasury Bill

In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days not more than 9 months. They are issued by highly large, strong and well reputed companies and financial institutions. They are issued to fulfill the gape between the receipts and payments by the company. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. The amount of fun borrowed and the date of maturity is mentioned on the paper. Commercial paper

A certificate of deposit (COD) is a financial product commonly offered to consumers by commercial banks. The COD is the evidence of the deposit made by a person in a bank specifying the amount. CODs are similar to savings accounts, they are "money in the bank". The period of the deposit and interest rate is specified. They are traded in the secondary money market. They also called negotiable CODs. It is intended that the COD will be held until maturity, at which the money may be withdrawn together with the accrued interest. Certificates of deposits

A repurchase agreement is also known as a repo. It is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The sale price and repurchase price is specified and also the time of repurchase. The terms and conditions and also the rate of interest is specified. It’s a mean of financing. It can be an over night repo or term repo. Over night repo is for one day Term repo can be more than one day. Repurchase agreement

A banker's acceptance, or BA, is a promised future payment, or time draft, which is accepted and guaranteed by a bank and drawn on a deposit at the bank. The banker's acceptance specifies the amount of money, the date, and the person to which the payment is due. The holder of the draft can sell (exchange) it for cash at a discount to a buyer who is willing to wait until the maturity date for the funds in the deposit. It is usually used in export and import of goods by businessmen. The bank becomes the connector b/w exporter & importer. Bankers’ Acceptance

Banker’s Acceptance

Capital Market Instruments Long term investment Vehicles

A T. Note is a Long term government debt security with a fixed interest rate Its maturity is between one and 10 years. Notes are issued in terms of 2, 3, 5, 7, and 10 years. Interest payments on the notes are made every six months until maturity. They are issued by the central bank on behalf of the government. They are issued on discount and repurchased or redeemed on face or par value. They are issued to meet long term deficits faced by the government. They can be traded in secondary capital market. Treasury Notes

A T. Bond is a long term government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually until maturity. Treasury Bonds are usually issued in thirty-year maturities, and pay interest twice a year. They are issued by the central bank on behalf of the government. They are issued to meet long term deficits faced by the government. They can be traded in secondary capital market. Treasury Bonds

Treasury Bond

A Bond is a long term debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. Bonds make interest payments periodically until maturity. They are issued by the banks and companies to raise funds. They are issued to meet long term deficits faced by the financial institutions. Bond Holder get the interest payments periodically. They can be traded in secondary capital market. Bonds

There different types of bond offered by the companies such as term bond, series bond, secured & unsecured bond. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). They provide a tax shield to the organization who offer these. The interest expense is charged from the operating income of the company. Bond holders have no ownership in the company. Bonds

Bond

A Common Stock is a long term security with an unlimited maturity. It is a piece of paper showing the ownership of a person in a corporation. The person having it is called shareholders or stock holder. They are issued by the companies to raise funds. They are a source equity financing. Share Holder get the dividend payments periodically. They are interest free & the dividend received on it is fluctuating, it depends on the profit earn by the company. They can be traded in secondary capital market. The dividend is declared based on accounting period. Common Stock

The common stock holder has the voting power or right in choosing the boards of governors. In the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debt holders have been paid in full. Common Stock holder enjoys "preemptive rights” too. This means that common share holders with preemptive rights have the right but not the obligation to purchase new shares of the company. Stock exchange is the best market where these are traded for the propose of capital gain. Common Stock

A preferred Stock is a long term security with an unlimited maturity. It is a piece of paper showing the ownership of a person in a corporation. The person having it is called shareholders or stock holder. They are issued by the companies to raise funds. They are a source equity financing. Share Holder get the dividend payments periodically. The dividend received on it is fixed. They can be traded in secondary capital market. The dividend is declared based on accounting period. preferred Stock

The preferred stock holder has no voting power or right in choosing the boards of governors. In the event of liquidation, preferred shareholders have rights to a company's assets only after bondholders, have been paid in full. Preferred Stock holder has no "preemptive rights”. This means that preferred share holders have the right to purchase new shares of the company only if the common stock holders deny. Stock exchange is the best market where these are traded for the propose of capital gain. preferred Stock

Preferred stock