FINANCIAL INSTRUMENTS

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Tatwamasi Mohapatra
 TYPES:

• CAPITAL MARKET INSTRUMENTS

• MONEY MARKET INSTRUMENTS

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 CAPITAL MARKET INSTRUMENTS

EQUITY SHARES:

• EQUITY SHAREHOLDERS HAVE TO SHARE REWARD AND RISK

ASSOCIATED WITH OWNERSHIP OF COMPANY.
• EQUITY SHAREHOLDERS ARE THE OWNERS OF THE COMPANY WHO
HAVE CONTROL OVER WORKING OF THE COMPANY.
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 FEATURES :

• PERMANENT CAPITAL: AN EQUITY SOURCE IS THE MAIN LONG TERM SOURCE OF

FINANCE. THEY CAN BE REDEEMED OR REFUNDED AT THE TIME OF LIQUIDATION FROM
THE RESIDUE LEFT AFTER MEETING ALL THE OBLIGATIONS.
• VOTING RIGHTS: EQUITY SHAREHOLDERS AS THE REAL OWNER OF THE COMPANY ,
THEY HAVE VOTING RIGHTS IN APPOINTING DIRECTORS AND AUDITORS OF THE COMPANY
, PARTICIPATE AND VOTE IN AGM.

• PRE-EMPTIVE RIGHT: EQUITY SHAREHOLDERS HAVE PRE-EMPTIVE RIGHT, WHICH

MEANS THEY HAVE LEGAL RIGHT TO BUY NEW ISSUES, BEFORE OFFERING TO THE PUBLIC.
PRE-EMPTIVE RIGHT IS THE OPTION GIVEN TO THE SHAREHOLDERS TO BUY A SPECIFIED
NUMBER OF SHARES AT A GIVEN PRICE.
• LIMITED LIABILITY: EQUITY SHAREHOLDERS ARE THE OWNERS OF THE COMPANY,
THEIR LIABILITY IS LIMITED TO THE EXTENT OF THE INVESTMENT IN THE SHARE. 4
 PREFERENCE SHARES
PREFERENCE SHARE CAPITAL GIVES CERTAIN PRIVILEGES TO ITS HOLDERS:
• A PREFERENTIAL PRIVILEGE IN PAYMENT OF FIXED DIVIDED.
• PREFERENTIAL RIGHT AS TO REPAYMENT OF CAPITAL IN CASE OF LIQUIDATION
OR WINDING UP OF THE COMPANY.
• PREFERENCE SHARE CAPITAL IS A HYBRID FORM OF LONG TERM FINANCE.

PREFERENCE SHARE HAS THE FEATURES OF EQUITY AND DEBENTURES:

• PREFERENCE DIVIDENDS ARE PAYABLE ONLY AFTER TAX PROFITS(PAT).
• PAYMENT OF PREFERENCE DIVIDEND DEPENDS ON THE DISCRETION OF BOD’S.
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• IRREDEEMABLE PREFERENCE SHARES ARE LONG TERM IN NATURE.
 FEATURES:

• REDEEMABLE: PREFERENCE SHARE HAS LIMITED MATURITY PERIOD.

• FIXED RATE OF DIVIDEND: ISSUE OF PREFERENCE SHARES ARE AT A FIXED
RATE OF DIVIDEND.
• CONVERTIBLE: CONVERTIBLE PREFERENCE SHARES HAS THE FEATURE OF
CONVERSION OF PREFERENCE SHAREHOLDERS INVESTMENT INTO FULLY OR
PARTLY PAID EQUITY SHARES AT A PREDETERMINED RATIO WITHIN A GIVEN
PERIOD.
• VOTING RIGHTS: PREFERENCE SHARE HOLDERS DO NOT HAVE VOTING
RIGHTS.
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 CLASSIFICATION OF PREFERENCE SHARES:
• CONVERTIBLE AND NON CONVERTIBLE PREFERENCE SHARES:

• CONVERTIBLE PREFERENCE SHARES CAN BE CONVERTED INTO AN ORDINARY EQUITY SHARE AT SOME
AGREED TERMS AND CONDITIONS.

• NON CONVERTIBLE SIMPLY DO NOT HAVE THIS OPTION BUT HAS ALL OTHER NORMAL CHARACTERISTIC
OF A PREFERENCE SHARE.

• REDEEMABLE AND IRREDEEMABLE PREFERENCE SHARES:

• REDEEMABLE PREFERENCE SHARES CAN BE REDEEMED OR REPAID AFTER THE EXPIRY OF A FIXED
PERIOD OR AFTER GIVING THE PRESCRIBED NOTICE AS DESIRED BY THE COMPANY.

• IRREDEEMABLE PREFERENCE SHARES CAN NOT BE REDEEMED DURING THE LIFE TIME OF THE COMPANY

• PARTICIPATING AND NON PARTICIPATING PREFERENCE SHARES:

• PARTICIPATING PREFERENCE SHARES HAVE THE RIGHT TO PARTICIPATE IN PROFITS OF THE COMPANY 7

APART FROM THE FIXED DIVIDEND.

• CUMULATIVE AND NON CUMULATIVE PREFERENCE SHARES:
DIVIDEND OF CUMULATIVE PREFERENCE SHARES WILL HAVE TO
BE PAID AS LONG AS THE COMPANY EARNS PROFIT IN ANY YEAR.
WHEREAS, FOR NON CUMULATIVE PREFERENCE SHARES, A COMPANY
CAN SKIP THE DIVIDEND IN THE YEAR, THE COMPANY HAS
INCURRED LOSSES.

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 DEBENTURES

• A DEBENTURE IS AN INSTRUMENT ISSUED BY A COMPANY UNDER ITS

COMMON SEAL ACKNOWLEDGING A DEBT AND SETTING FORTH THE
TERMS UNDER WHICH THEY ARE ISSUED AND ARE TO BE PAID.
• A PERSON WHO BUYS DEBENTURES IS DEBENTURE HOLDER AND
CREDITOR OF THE COMPANY.
• DEBENTURE CAN BE PRICED AS SAME MANNER AS SHARE.
• A DEBENTURE IS SECURED ONLY BY THE ISSUER’S PROMISE TO PAY THE
INTEREST AND LOAN PRINCIPAL.
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 TYPES
SECURITY:
• SECURED/MORTGAGE DEBENTURES: DEBENTURES SECURED AGAINST ASSETS OF THE
COMPANY .I.E. IF THE COMPANY IS WINDING UP, ASSETS WILL BE SOLD AND DEBENTURE
HOLDERS WILL BE PAID BACK.

• MORTGAGE DEED: INCLUDES NATURE/VALUE OF THE SECURITY, DATE OF INTEREST

PAYMENT, AND RATE OF INTEREST, REPAYMENT TERMS, AND RIGHTS OF THE DEBENTURE
HOLDERS IF THE COMPANY DEFAULTS. IN THE EVENT OF DEFAULT OF COMPANY TO PAY
INTEREST OR PRINCIPAL INSTALLMENT, THEY CAN RECOVER THEIR MONEY VIA THE
ASSETS MORTGAGED.
• UNSECURED/NAKED DEBENTURES: DEBENTURES NOT SECURED AGAINST ASSETS OF THE
COMPANY .I.E. IF THE COMPANY IS WINDING UP, ASSETS WILL BE NOT BE SOLD IN ORDER
TO PAY THE DEBENTURE HOLDERS.

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TENURE:
• REDEEMABLE DEBENTURES: DEBENTURES WHICH HAVE TO BE REPAID WITHIN A
CERTAIN SPECIFIED PERIOD.
• IRREDEEMABLE/PERPETUAL DEBENTURES: THESE CAN BE PAID BACK AT ANY
TIME DURING THE LIFE OF THE COMPANY .I.E. THERE IS NO SPECIFIED PERIOD FOR
REDEMPTION. THEY ARE ALSO CALLED PERPETUAL DEBENTURES.
REGISTRATION:
• REGISTERED DEBENTURES: THESE ARE DEBENTURES THAT ARE REGISTERED
WITH THE COMPANY. IT RECORDS ALL DETAILS OF DEBENTURE HOLDINGS SUCH
AS NAME, ADDRESS, PARTICULARS OF HOLDING ETC.
• BEARER DEBENTURE: THESE ARE THE DEBENTURES WHICH ARE NOT RECORDED
IN A REGISTER OF THE COMPANY. SUCH DEBENTURES ARE TRANSFERABLE
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MERELY BY DELIVERY.
 BOND

• A DEBT INSTRUMENT ISSUED FOR A PERIOD OF MORE THAN ONE YEAR WITH THE
PURPOSE OF RAISING CAPITAL BY BORROWING.
• GENERALLY, A BOND IS A PROMISE TO REPAY THE PRINCIPAL ALONG WITH
INTEREST (COUPONS) ON A SPECIFIED DATE (MATURITY). SOME BONDS DO NOT
PAY INTEREST, BUT ALL BONDS REQUIRE A REPAYMENT OF PRINCIPAL.

• A BOND IS TYPICALLY A LOAN THAT IS SECURED BY A SPECIFIC PHYSICAL ASSET.

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 TYPES:
ZERO COUPON BONDS:
• DOES NOT HAVE A SPECIFIED INTEREST RATE, THEREBY TO COMPENSATE, THEY ARE ISSUED
AT A SUBSTANTIAL DISCOUNT.

SPECIFIC COUPON RATE BONDS:

• DEBENTURES ARE NORMALLY ISSUED WITH AN INTEREST RATE WHICH IS NOTHING BUT
THE COUPON RATE. IT CAN BE FIXED OR FLOATING. FLOATING IS ASSOCIATED WITH THE
BANK RATES.
CALLABLE BONDS:
• CALLABLE BONDS ARE THOSE BONDS THAT CAN BE CALLED IN AND PURCHASED AT A
PRICE. COMPANIES GENERALLY CALL BACK BONDS ONLY WHEN THE INTEREST RATES FALL
IN MARKET LESS THAN BOND INTEREST RATE.
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 DERIVATIVE INSTRUMENTS

• FUTURE: A FUTURE CONTRACT IS A STANDARDIZED CONTRACT, TRADED ON A

FUTURES EXCHANGE, TO BUY OR SELL A CERTAIN UNDERLYING INSTRUMENT AT A
CERTAIN DATE IN FUTURE, AND AT A SPECIFIC PRICE.
• FORWARD: A FORWARD CONTRACT IS A AN AGREEMENT BETWEEN TWO PARTIES TO
BUY OR SELL AN ASSET AT A SPECIFIED POINT OF TIME IN THE FUTURE.
• OPTION: AN OPTION IS A CONTRACT THAT GIVES ONE PARTY THE RIGHT, BUT NOT
THE OBLIGATION TO PERFORM A SPECIFIED TRANSACTION WITH ANOTHER PARTY.
• SWAP: SWAP REFERS TO AN EXCHANGE OF ONE FINANCIAL INSTRUMENT FOR
ANOTHER BETWEEN THE PARTIES CONCERNED. THIS EXCHANGE TAKES PLACE AT A
PREDETERMINED TIME, AS SPECIFIED IN THE CONTRACT.
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 MONEY MARKET INSTRUMENTS

TREASURY BILLS:
• TREASURY BILLS ARE SHORT TERM MATURITY PROMISSORY NOTE ISSUED BY
GOVERNMENT.
• THEY ARE ISSUED WITH THREE-MONTH, SIX-MONTH AND ONE-YEAR
MATURITIES.
• THEY ARE PURCHASED FOR A PRICE THAT IS LESS THAN THEIR PAR (FACE)
VALUE; WHEN THEY MATURE, THE GOVERNMENT PAYS THE HOLDER THE
FULL PAR VALUE.
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CERTIFICATES OF DEPOSITS:

• A CD IS A TIME DEPOSIT WITH A BANK.

• CD’S HAVE SPECIFIC MATURITY DATE, INTEREST RATE AND IT CAN BE ISSUED IN ANY
DENOMINATION.

COMMERCIAL PAPERS:
• IT IS A NEGOTIABLE SHORT TERM UNSECURED PROMISSORY NOTE WITH FIXED MATURITY.

• ONLY COMPANY WITH HIGH CREDIT RATING ISSUES CP’S

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REPURCHASE AGREEMENTS:

• REPO IS A FORM OF OVERNIGHT BORROWING AND IS USED BY THOSE WHO DEAL IN GOVERNMENT
SECURITIES.

• THEY ARE USUALLY VERY SHORT TERM REPURCHASES AGREEMENT, FROM OVERNIGHT TO 30 DAYS
OF MORE.

BANKER’S ACCEPTANCE:

• A BANKER’S ACCEPTANCE (BA) IS A SHORT-TERM CREDIT INVESTMENT CREATED BY A NON-

FINANCIAL FIRM.

• BA’S ARE GUARANTEED BY A BANK TO MAKE PAYMENT.

• ACCEPTANCES ARE TRADED AT DISCOUNTS FROM FACE VALUE IN THE SECONDARY MARKET.

• BA ACTS AS A NEGOTIABLE TIME DRAFT FOR FINANCING IMPORTS, EXPORTS OR OTHER

TRANSACTIONS IN GOODS.

• THIS IS ESPECIALLY USEFUL WHEN THE CREDIT WORTHINESS OF A FOREIGN TRADE PARTNER IS
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UNKNOWN.
THANK YOU

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