Financial instruments can be equity-based, representing ownership, or debt-based, representing a loan. They are used by corporations to raise funds. Money market instruments are short-term investments under 1 year, like treasury bills, commercial paper, and certificates of deposit. Capital market instruments are long-term investments over 1 year, such as treasury notes, bonds, and stocks. Characteristics of different financial instruments include liquidity, maturity, safety, and yield.

1. UNIT 3
Financial Instruments

2.  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 ?

3.  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…

4.  Liquidity
 Maturity
 Safety
 Yield
Characteristics of Financial
Instruments:

5.  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

6.  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

7. Money Market
Instruments
 Treasury Bills
 Commercial Paper
 Repurchase
Agreements (REPO)
 Certificates of Deposit
 Bankers acceptance
Capital Market
Instruments
 Treasury Notes
 Treasury Bonds
 Commercial Bonds
 Equity Shares/
Common Stock
 Preference Shares/
Preffered Stock
Financial Instruments

9. Money Market Instruments
Short term investment Vehicles

10. 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

11. Treasury Bill

12. 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

13. Commercial paper

14. 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

15. Certificates of deposits

16. 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

17. Repurchase agreement

18. 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

20. Banker’s Acceptance

21. Capital Market Instruments
Long term investment Vehicles

22. 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

23. Treasury Notes

24. 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

25. Treasury Bond

26. 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

27. 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

28. Bond

29. 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.
Equity shares/ Common Stock

30. 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.
Equity shares/ Common Stock

31. Equity shares/ Common Stock

32. 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.
PREFERENCE shares/ preferred Stock

33. 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.
PREFERENCE shares/ preferred Stock

34. Preferred stock

35. Derivatives Market:

36. 36
Categories of Derivatives
Futures
Listed, OTC futures
Forward contracts
Options
Calls
Puts
Swaps
Interest rate swap
Foreign currency swap
Derivatives

37. 37
Options
 An option is the right to either buy or sell something
at a set price, within a set period of time
 The right to buy is a call option
 The right to sell is a put option
 You can exercise an option if you wish, but you do
not have to do so

38. 38
Futures Contracts
 Futures contracts involve a promise to exchange a
product for cash by a set delivery date
 The buyer of an option can abandon the option if he or
she wishes
 The buyer of a futures contract cannot abandon the
contract

39.  An agreement between two parties to buy or sell an
asset in future. The price which is paid/received by the
parties is decided at the time of entering into the
contract.
Forward Contract

40. an agreement between parties,
called counterparties, to exchange
streams of cash flows over a period
of time in the future
Swap Contract