Financial instruments are legal agreements that require one party to pay money or

something else of value or to promise to pay under stipulated conditions to a counterparty in

exchange for the payment of interest, for the acquisition of rights, for premiums, or for
indemnification against risk.

A financial instrument can be an actual document, such as a stock certificate or a loan

contract.

Common financial instrument used:

 Exchanges of money for future interest payments and repayment of principal.

o Loans and Bonds. A lender gives money to a borrower in exchange for
regular payments of interest and principal.
o Asset-Backed Securities. Lenders pool their loans together and sell them to
investors. The lenders receive an immediate lump-sum payment and the
investors receive the payments of interest and principal from the underlying
loan pool.
 Exchanges of money for possible capital gains or interest.
o Stocks. A company sells ownership interests in the form of stock to buyers of
the stock.
o Funds. Includes mutual funds, exchange-traded funds, REITs, hedge funds,
and many other funds. The fund buys other securities earning interest and
capital gains which increases the share price of the fund. Investors of the fund
may also receive interest payments.
 Exchanges of money for possible capital gains or to offset risk.

Options and Futures. Options and futures are bought and sold either for
capital gains or to limit risk.

Currency. Currency trading, likewise, is done for capital gains or to offset

risk. It can also be used to earn interest, as is done in the carry trade.

 Exchanges of money for protection against risk.

o Insurance. Insurance contracts promise to pay for a loss event in exchange for
a premium..

FINANCIAL INSTRUMENTS USED IN RWPL 2:

FINANCIAL INSTRUMENTS (Rs.IN MILLION)

Equity Capital 3375.00
Rupee term Loans from FIs/ banks 10125.00
Total 13500.00
 VALUATION OF FINANCIAL INSTRUMENTS:

The value of any financial instrument depends on how much it is expected to pay, the
likelihood of payment, and the present value of the payment. The greater the expected
return of the instrument, the greater its value.

Overall cost of capital = cost of debts + cost of equity

Cost of equity (kd) = (D1/P0) + g

= (2/112) + 20

Interest amount=

Cost of debts = I (1 – t)/FV