MEGHA MALANI ROLL NO.

07 FYBBI

FINANCIAL

INSTRUMENTS

AN INTRODUCTION:
A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument.

Cash instruments are financial instruments whose value is determined directly by the markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.

Although there is a wide variety of financial instruments , most share the same elements . let us look for the financial instruments available to our investors:
-A loan a borrower to buy a car or some other asset. -A bond issued by Australian Treasury department. -A bond issued by a private company , such as FORD or SONY.

-A bond issued by National and Local government authorities.

-Shares in a local (as in national) government. -Shares in common stock from a private company.

DEFINATION OF FINANCIAL INSTRUMENT

A REAL OR VIRTUAL DOCUMENT REPRESENTING A LEGAL AGREEMENT INVILVING SOME SORT PF MONETAR VALUE.
In todays financial marketplace , financial instruments can be classified generally as equity based , representing ownership of the asset, or debts based , representing a loan made by a investor to the owner of the asset. Foreign exchange instruments comprise a third , unique type of instrument . Different subcategories of each instrument type exist , such as preferred share.

FEATURES OF FINANCIAL INSTRUMENT

These are highly liquid and safe instruments giving attractive yield . Approved asset SLR purposes and DFHI in the market maker in these instruments and provide (daily) two way quotes to-assure liquidity. RBI sells treasury bills on auction basis every fortnight by calling bids from banks , state Govt. and other specified bodies.

Some of the most important features are:

TRANSFERABILITY. MARKETABILITY. TRANSACTION COST. MATURITY. TAX EXEMTION.

TYPES OF FINANCIAL INSTRUMENTS

EQUITIES. MUTUAL FUNDS. BONDS. CASH EQUIVALENTS. SHARES AND BONDS. DEBENTURES. BANK DEPOSITS. TREASURY BILLS.

EQUITIES
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists. In an accounting context, Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock.

MUTUAL FUNDS
A mutual fund is a type of professionally-managed collective investment scheme that pools money from many investors to purchase securities. While there is no legal definition of mutual fund, the term is most commonly applied only to those collective investment schemes that are regulated, available to the general public and open-ended in nature. Hedge funds are not considered a type of mutual fund. The term mutual fund is less widely used outside of the United States. For collective investment schemes outside of the United States, see articles on specific types of funds including open-ended investment companies, SICAVs, unitized insurance funds, unit trusts and Undertakings for Collective Investment in Transferable Securities.

BONDS
Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e., they are owners), whereas bondholders have a creditor stake in the company (i.e., they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is perpetuity (i.e., bond with no maturity).

CASH EQUVALENTS
Cash and cash equivalents are the most liquid assets found within the asset portion of a company's balance sheet. Cash equivalents are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities and commercial paper. Cash equivalents are distinguished from other investments through their short-term existence; they mature within 3 months whereas short-term investments are 12 months or less, and long-term investments are any investments that mature in excess of 12 months. Another important condition a cash equivalent needs to satisfy is that the investment should have insignificant risk of change in value; thus, common stock cannot be considered a cash equivalent, but preferred stock acquired shortly before its redemption date can be.

SHARES AND BONDS

A share is a single unit of ownership in a corporation, mutual fund, or any other organization. A joint stock company divides its capital into shares, which are offered for sale to raise capital, termed as issuing shares. Thus, a share is an indivisible unit of capital, expressing the proprietary relationship between the company and the shareholder. The denominated value of a share is its face value: the total capital of a company is divided into number of shares.

DEBENTURES
A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital. Senior debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories.

BANK DEPOSIT
Money placed into a banking institution for safekeeping. Bank deposits are made to deposit accounts at a banking institution, such as savings accounts, checking accounts and money market accounts. The account holder has the right to withdraw any deposited funds, as set forth in the terms and conditions of the account. The "deposit" itself is a liability owed by the bank to the depositor (the person or entity that made the deposit), and refers to this liability rather than to the actual funds that are deposited.

TREASURY BILLS:
A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.

MAIN OBJECTIVE OF FINANCIAL INSTRUMENTS

After studying this module , students should be able to:
Use and apply the terms in corporate finance and investments management. Discuss the key principle of corporate finance. Evaluate the different capital structure option available to a business. Critically discuss the characteristics of the main financial instruments in use by companies and describe the methods through which they can be issued. Define and calculate the cost of capital for a business and explain its revillance to a businesss investment decision. Discuss the key issue to be considered by a company when deciding on dividend policy.

Conclusion
FINANCIAL INSTRUMENTS ARE THE PART OF FINANCIAL SYSTEM.

WE STUDY THE TYPE AND FEATURES AND THE MAIN OBJECTIVES OF FINANCIAL INSTRUMENTS.
ALL TYPES OF FINANCIAL INSTRUMENTS ARE USED IN FINANCIAL MARKESTS OF INDIA.