Financial

INSTRUMENTS
FINANCIAL INSTRUMENTS

Financial instruments is either a real or virtual

document representing a legal agreement
involving some sort of monetary value.
TYPES OF INSTRUMENTS

 Money Market Instruments

 Capital Market Instruments
MONEY MARKET INSTRUMENTS

 Callor Notice money

 Treasury bills
 Term money
 Certificate Deposit
 Commercial Papers
CALL/NOTICE MONEY

 Money borrowed or lent for a very short

period.
 When money is borrowed for a day it is
known as call money.
 When money is borrowed for more than a
day and up to 14 days, it is Notice money.
TREASURY BILLS

 Short term (up to 1 year) borrowing

instruments of union government.
 Issued at a discount to face value and on
maturity the face value is paid to holder.
TERM MONEY MARKET

 Inter
bank market for deposits of maturity
beyond 14 days.
CERTIFICATES OF DEPOSITS

 Negotiable money market instruments

 Issued in dematerialized form
 These can be issued by:-
 Scheduled commercial bank excluding
Regional rural banks and local area banks
COMMERCIAL PAPERS

 Unsecured promissory notes privately placed

with investors at a discount rate to face value
determine by market force.
 Notes in evidence of debt obligation of the
issuer
 Freely negotiable by endorsement and
delivery.
CAPITAL MARKET INSTRUMENTS

 DIRECTINSTRUMENTS
 DERIVATIVE INSTRUMENTS
DIRECT or CASH INSTRUMENTS

 Whose value is directly determined by

market. Example:- securities.
 Two types:-

1.Ownership securities:- Equity shares,

preference shares
2.creditorship securities :- Debentures,
innovative debt instruments.
OWNERSHIP SECURITIES

 EQUITY SHARES:-
 Share holders are ultimate owner of the
company.
 They get residual claim on income
 Shares are the permanent source of fund
 Share holders have right to vote
PREFERENCE SHARES

 Share holders have prior claim on income

 They get fixed dividend
 Preference shares are redemable within 10
years
CREDITORSHIP SECURITIES

 DEBENTURES:-
 Holders are entitled to a prespecified interest
 They don’t have voting right
 Payment of interest in legally enforceable
 It can be both convertible or non convertible
into equity shares
TYPES OF
FINANCIAL INSTRUMENTS

CASH INSTRUMENTS

DERIVATIVE INSTRUMENTS
CASH INSTRUMENTS
Instruments whose value is

determined directly by market.

Examples :-Securities
 Types of securities
1. Creditors securities
such as debentures, Innovative debt
instruments.
2.ownership securities
such as equity, preference share
EQUITY/ ORDINARY SHARE
(Cash Instrument)

 Features
 Residual claim to income
 Right to vote
 Permanent source of funds

 Demerits
High cost of funds
Preference shares

 Prior claim on income

 Redeemability (in case of redeemable preference share)
 Fixed dividend
 Convertibility
 Voting rights
 No legal obligation to pay preference dividend and skipping of
dividend without facing legal obligation
 Negligible risk
 Demerits
 High cost
Debentures/Bonds
 Holders are long term creditors of company
 Fixed amount of security
 Debentures carry a fixed rate of interest the payment of which
is legally enforceable
 Maturity:- it indicates the length of time for redemption of per
value
 Lowest cost due to lower risk
Debentures do not carry voting rights
Innovative debt instruments
 It gives holders the right to convert
debentures/bonds into equity share on certain terms.
 They entitled to a fixed income till the conversion
option is exercised and would share the benefits
associated with equity shares after conversion.

 3 types of convertible debentures are :-

1.Complulsorily convertible within 18 months
2.Optionally convertible within 36 months
3.convertible after 36 months
 DerivativeInstruments
Financial Instruments which derive their
value from some other financial
instruments or variables.

They can be divided into

Exchange traded derivatives
Over the counter (OTC) derivative