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Financial instruments are legal documents that represent monetary value. There are a number of
different types of documents that are properly identified as a financial instrument. Under the
broad heading of a financial instrument, some would be classified as cash
instruments or derivative instruments. Financial instrument is simply those documents that are
recognized as cash that can be utilized for various transactions. Currency is the most easily
identified of all cash instruments, although such documents as checks or funds transfers from
bank accounts would also be understood to be a financial instrument. Derivative instruments are
another example of the financial instrument. This classification would include
such instruments as futures, options, and swaps.

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1.c Government securities bonds: A bond is a debt investment in which an investor loans a
certain amount of money, for a certain amount of time, with a certain interest rate, to a
company. A government bond is a bond issued by a national government denominated in
the country's own currency. Government bonds are usually referred to as risk-free bonds,
because the government can raise taxes to redeem the bond at maturity. Government
Securities are securities issued by the Government for raising a public loan. They consist
of Government Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger
Account. They may be in the form of Treasury Bills or Dated Government Securities.
Government Securities are mostly interest bearing dated securities issued by RBI on
behalf of the Government of India. These securities are generally fixed maturity and
fixed coupon securities carrying semi-annual coupon. Since the date of maturity is
specified in the securities, these are known as dated Government Securities.
Features of government securities are:

c Issued at face value.

c No default risk as the securities carry sovereign guarantee.
c Ample liquidity as the investor can sell the security in the secondary market.
c Interest payment on a half yearly basis on face value.
c No tax deducted at source.
c Can be held in D-mat form.
c Rate of interest and tenor of the security is fixed at the time of issuance and is not subject
to change (unless intrinsic to the security like FRBs).
c Redeemed at face value on maturity.
c ›aturity ranges from of 2-30 years.
c Securities qualify as SLR investments (unless otherwise stated).

2.c Treasury bills: 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.
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c Investors are guaranteed a rate of return for their investment
c The rate of returned is competitive to the market
 c The federal taxes due on treasury direct bond do not need to be paid until the bond is
redeemed
c If the value of a redeemed bond is used to pay for qualifying educational expenses,
federal taxes can be waived.
c Treasury direct bonds are a federal investment; they are not subject to state or local tax
penalties.
c Treasury direct bonds are easy to buy.

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c To reap the full reward of the investment may take up to thirty years of waiting for the bond to
mature.
c There are restrictions and penalties associated with redeeming treasure bonds too early.
c Depending on the type of bond you purchase, the rate of return may not exceed the average
annual inflation rate of 3% thus mitigating the interest gains.
c The maximum annual purchase for individuals is capped at EE bonds is $15,000 and $30,000
for I series bonds.
c To qualify for the educational tax break when redeeming treasury direct bonds, your income
must be below a certain level.

3.c Commercial paper: commercial paper is an unsecured promissory note with a

fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by
large banks and corporations to get money to meet short term debt obligations , and is
only backed by an issuing bank or corporation's promise to pay the face amount on the
maturity date specified on the note. Since it is not backed by collateral, only firms with
excellent credit ratings from a recognized rating agency will be able to sell their
commercial paper at a reasonable price. Commercial paper is usually sold at
a discount from face value, and carries higher interest repayment rates than bonds.
Typically, the longer the maturity on a note, the higher the interest rate the issuing
institution must pay. The rate of return had raised to 8.33% in October. Interest c

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Advantage of commercial paper:

c *igh credit ratings fetch a lower cost of capital.

c Aide range of maturity provides more flexibility.
c It does not create any lien on asset of the company.
c Tradability of Commercial Paper provides investors with exit options.
Disadvantages of commercial paper:

c Its usage is limited to only blue chip companies.

c Issuances of Commercial Paper bring down the bank credit limits.
c A high degree of control is exercised on issue of Commercial Paper.
c Stand-by credit may become necessary.

4.c Preference share: Capital stock which provides a specific dividend that is paid before any
dividends are paid to common stockholders, and which takes precedence over common
 stock in the event of liquidation. Like common stock, preference shares represent partial
ownership in a company, although preferred stock share holders do not enjoy any of the
voting rights of common stock holders. Also unlike common stock, preference shares pay
a fixed dividend that does not fluctuate, although the company does not have to pay this
dividend if it lacks the financial ability to do so. The main benefit to owning preference
shares are that the investor has a greater claim on the company's assets than common
stockholders. Preferred shareholders always receive their dividends first and, in the event
the company goes bankrupt, preferred shareholders are paid off before common
stockholders. In general, there are four different types of preferred stock :cumulative
preferred, non-cumulative, participating, and convertible also calledcpreferred stock

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c *elpful in raising long term capital for a company.
c There is no need to mortgage property on these shares.
c Redeemable preference shares have the added advantages of repayment of capital
whenever there is surplus in the company
c Rate of return is guaranteed.

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c Permanent burden on the company to pay a fixed rate of dividend before paying anything
on the other shares.
c Not advantageous to investors from the point of view of control and management as
preferences shares do not carry voting rights.
c Compared to other fixed interest bearing securities such as debentures, usually the cost of
raising the preference share capital is higher.

5.c Equity shares: Equity shares are the equally divided capital of a company. Total capital
contribution for a company comprises of investments through equity share holdings by
small and big investors. The investors who have a stake in a company are referred to as
shareholders. The equity shares are therefore documents issued by a company and floated
in the open market for purchase by shareholders which entitle them to be one of the
owners of the company.

The profits of equity shareholders depend on the profit making capability of the company
that they have invested in. In a situation where the company has made huge profits the
benefits are passed over to the equity share holders by way of dividends. The equity
shareholders also enjoy voting rights in the company.
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c The funding is committed to your business and your intended projects. Investors only realize
their investment if the business is doing well.
c The right business angels and venture capitalists can bring valuable skills, contacts and
experience to your business. They can also assist with strategy and key decision making.
c In common with you, investors have a vested interest in the business' success, i.e. its growth,
profitability and increase in value.
c Investors are often prepared to provide follow-up funding as the business grows.
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c Raising equity finance is demanding, costly and time consuming. Depending on the investor,
you will lose a certain amount of your power to make management decisions.
c At first you will have a smaller share in the business - both as a percentage and in absolute
monetary terms. *owever, reduced share may become worth a lot more in absolute monetary
terms if the investment leads to your business becoming more successful.
c There can be legal and regulatory issues to comply with when raising finance.

6.c Certificate of deposit: A deposit account is a current account, savings account, or other
type of bank account, at a banking institution that allows money to be deposited and
withdrawn by the account holder. These transactions are recorded on the bank's books,
and the resulting balance is recorded as a liability for the bank, and represent the amount
owed by the bank to the customer. Some banks charge a fee for this service, while others
may pay the customer interest on the funds deposited.

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c CDs typically offer a higher rate of interest than Treasury bills and savings account due
to the higher risk associated with them.
c As the rate of interest is fixed, your return on investment is ensured despite the rate
fluctuations in the market.
c CDs are insured by Federal Deposit Insurance Corporation and hence are a good
investment option for single income households and retired folks. CDs are a risk-free
investment.
c The return on CDs is assured and helps in financial planning.
c It¶s very easy to set up a CD. One needs to just walk to their local bank and request for
purchase of CD. ›oney from the existing savings account will be ear-marked against the
CD that has been purchased. The only thing to be made sure that the bank is FDIC
ensured.
c CDs can be purchased and sold through a brokerage firm. This way you can en cash the
CD before the maturity term without paying the penalty.

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c ›oney is tied down for long durations of time. Though the investor can withdraw money,
he has to generally incur penalty in terms of some amount of loss of interest on the
deposit amount. You can get a waiver on the penalty in case of special circumstances like
disability, death or retirement.
c As the rate of interest is fixed, it is difficult to change or to take advantage of the market
situation when the market rates are favorable. You will not be able to get an interest rate
that favors inflation.
c Though the return rate is higher on CDs than savings account, it is much lower than other
money market instruments where you can make possible investments.
 7.c ›utual fund: A mutual fund is a professionally managed type of collective investment
scheme that pools money from many investors and invests typically in
investment securities (stocks, bonds, short-term money market instruments, other mutual
funds, other securities, and/or commodities such as precious metals). The mutual fund
will have a fund manager that trades (buys and sells) the fund's investments in
accordance with the fund's investment objective. c
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c Risk: Pooling smaller investments into a greater whole allows a fund manager to invest
with greater diversification. An individual managing a portfolio may not have enough
cash to do this. Getting a broader spread can help reduce risk.
c Investment cost and access: Individuals can invest relatively low amounts in mutual
funds. This, again, allows them to benefit from diversification at a lower cost than with
other investments. They can also opt to take their money out of a fund if they wish.
c Specialist fund management: *aving a fund manager to take control of investments may
make it easier for people to invest in the first place. An individual needs no knowledge of
where, how and when to buy and sell as this is managed for them.
c Choice: Aith so many different types of fund to choose from, the individual can tailor
their investment according to financial needs and preferences. Those that are risk-averse
can opt for safer funds; those that are prepared to take greater risks have their own
options. It may also be easy to switch between different types of funds over time to take
account of market conditions or changes in individual circumstance.
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c Investment returns: There are no guarantees of returns and profits/losses depend on
variables such as stock market performance and fund management capabilities.
c Investor choice: Some investors do not choose the right fund for their needs. Investing in
long-term growth funds, for example, may not be cost-effective for those with short-term
needs. A high-risk product may not suit those that need more security of return.
c Fund management: A good fund manager may get effective returns but a mediocre or bad
one may not. There are also no guarantees that original management will stay in place for
the life of an investment or that a high-performing specialist will always perform well.
c Fees and costs: Buying into a mutual fund will cost money. Some funds will charge
loading fees at the investment and/or withdrawal stages which can reduce invested cash
or returns. All will charge annual operating fees.

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