Innovative financial instruments

1. INNOVATIVE FINANCIAL INSTRUMENTS
In order to keep in tune with the changing
times and changing customer needs a number of
innovative financial instruments have come in to
the financial markets in recent years. They are:
1. Commercial Paper
- short term money market instrument
- with a fixed maturity of 3 to 6 months
- issued by banking and non-banking
companies
- sold at discount and redeemed at face value
- high denomination, suitable for institutional
investors and companies

2. INNOVATIVE FINANCIALINSTRUMENTS
2. Treasury Bill
- a money market instrument issued
by central government
- issued at discount and redeemed at
par
- Govt. has issued short term
Treasury Bills of 182 days and 364
days

3. INNOVATIVE FINANCIALINSTRUMENTS
3. Certificates of deposits
- a money market instrument issued by
scheduled commercial banks only
- unlike a deposit receipt it is a
negotiable (transferable) instrument and
has a secondary market.
- high denomination, suitable for
institutional investors and companies

4. INNOVATIVE FINANCIALINSTRUMENTS
4. Inter-Bank Participations (IBPs)
- this scheme is confined to scheduled
banks only for a period from 91days to 180
days.
- this money market instrument is not popular.
5. Zero-Interest Convertible Bonds / Debentures
- no interest payable
- convertible into equity after a specified
period

5. INNOVATIVE FINANCIALINSTRUMENTS
6. Deep Discount Bonds
- no interest payable
- issued at a deep discount and redeemed at face value
-IDBI in February’96 issued bonds with a face value
of Rs.2,00,000 at a discounted price of Rs.5,300 with a
maturity period of 25 years.
- can be gifted to any person
7. Index-linked Guilt Bonds
- inflation free money market instruments
- maturity value is linked to the index prevailing as on
the date of maturity

6. INNOVATIVE FINANCIALINSTRUMENTS
8. Option Bonds
- option available to the investor to get the
interest as cumulated or non-cumulated.
- if cumulated, the interest will be given at the
maturity, if not half yearly.
9. Secured Premium Notes
- interest will be paid only after 3 years
- companies with high capital intensive can
opt this.

7. INNOVATIVE FINANCIALINSTRUMENTS
10. Medium term Debentures
- having medium term maturity period
- very popular in Germany
11. Variable Rate Debentures
- debt instruments having compound rate of
interest.
- interest rate varies from time to time as in the
case of Dearness Allowance calculation

8. INNOVATIVE FINANCIALINSTRUMENTS
12. Equity with 100% Safety Net
- some companies make 100% safety net offer to
the public
- they give a guarantee to the issue price even if
the market price falls below the face value.
Example : Nominal/Face value of an equity share
Rs.100
Issue Price Rs.400
Market Price Rs.300
In the above situation, the company is ready to
get the equity back for Rs.400

9. INNOVATIVE FINANCIALINSTRUMENTS
13. Cumulative Convertible Preference Shares
- dividend is cumulated with capital and converted
into equity shares.
14. Convertible Bonds
- converted into equity (fully or partly) after specific
period
15. Debentures with call and put option
- a debt instrument issued by a company
- under call option, the issuing company will redeem the
debentures before maturity at a specified price.
- under put option, the debenture holder has the right to
seek redemption before the maturity at a predetermined
price.

10. INNOVATIVE FINANCIALINSTRUMENTS
16. Easy Exit Bond
- enables the investors to encash the bond at any time after
18 months.
17. Retirement Bond
- enables the investor to get an assured monthly
income for a fixed period after the expiry of the ‘wait
period’
- longer the wait period, higher the monthly income
- investor will also get a lump sum on maturity
- can be gifted to others.
18. Regular Income Bond
- offers an attractive interest rate payable half
yearly, redeemable earlier
- IDBI Regular Income Bond’96 offered 16%
income

11. INNOVATIVE FINANCIALINSTRUMENTS
19. Infrastructure Bond
- a kind of debt instrument which gives tax
benefit to investors u/s 88, 54EA, and
54EB of Income Tax Act.
- HUDCO issued such bonds and they are listed
in important stock exchanges.
20. Dual Currency Bonds
- interest is paid in one currency and redeemable in
another currency
Others
Bonds raised in USA is known as Yankee Bonds
Bonds raised in Japan is known as Samurai Bonds