FINANCIAL INSTRUMENTS

By 1

Tatwamasi Mohapatra
 TYPES:

• CAPITAL MARKET INSTRUMENTS

• MONEY MARKET INSTRUMENTS

2
 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 COMPANYWHO
HAVE CONTROL OVER WORKING OF THE COMPANY.
3
 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 ALLTHE 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 OFLIQUIDATION
OR WINDING UP OF THE COMPANY.

• PREFERENCE SHARE CAPITAL IS A HYBRID FORM OF LONGTERM FINANCE.

PREFERENCE SHARE HAS THE FEATURES OF EQUITY AND DEBENTURES:

• PREFERENCE DIVIDENDS ARE PAYABLE ONLY AFTER TAXPROFITS(PAT).
• PAYMENT OF PREFERENCE DIVIDEND DEPENDS ON THE DISCRETION OF BOD’S.
5
• 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 ATA 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.

6
 CLASSIFICATION OF PREFERENCE
SHARES:
• CONVERTIBLE AND NON CONVERTIBLE PREFERENCE SHARES:
• CONVERTIBLE PREFERENCE SHARES CAN BE CONVERTED INTO AN ORDINARY EQUITY SHARE ATSOME
AGREED TERMS AND CONDITIONS.

• NON CONVERTIBLE SIMPLY DO NOT HAVE THIS OPTION BUT HAS ALL OTHER NORMALCHARACTERISTIC OF A
PREFERENCESHARE.

• REDEEMABLE AND IRREDEEMABLE PREFERENCESHARES:

• REDEEMABLE PREFERENCE SHARES CAN BE REDEEMED OR REPAID AFTER THE EXPIRY OF AFIXED
 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

7
• PARTICIPATING AND NON PARTICIPATING PREFERENCE SHARES:
• PARTICIPATING PREFERENCE SHARES HAVE THE RIGHT TO
PARTICIPATE IN PROFITS OF THE COMPANY 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. 8
 DEBENTURES

• A DEBENTURE IS AN INSTRUMENT ISSUED BYA COMPANY UNDER ITS

COMMON SEAL ACKNOWLEDGING A DEBT AND SETTING FORTH THE
TERMS UNDER WHICH THEYARE 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.
9
 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 OFTHE
COMPANY .I.E. IF THE COMPANY IS WINDING UP, ASSETS WILL BE NOT BE SOLD IN ORDER
TO PAY THE DEBENTURE HOLDERS.

10
 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. THEYARE 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 NOTRECORDED
IN A REGISTER OF THE COMPANY. SUCH DEBENTURES ARETRANSFERABLE
11
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 TYPICALLYA LOAN THAT IS SECURED BYA SPECIFIC

PHYSICAL ASSET.
12
 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.

13
 DERIVATIVE INSTRUMENTS
• FUTURE: A FUTURE CONTRACT IS A STANDARDIZED CONTRACT, TRADED ON A
FUTURES EXCHANGE, TO BUY OR SELL A CERTAIN UNDERLYING INSTRUMENT
ATA CERTAIN DATE IN FUTURE, AND AT A SPECIFIC PRICE.
• FORWARD: A FORWARD CONTRACT IS AAN AGREEMENT BETWEEN TWO PARTIES
TO BUY OR SELLAN ASSETATA 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.

14
 MONEY MARKET INSTRUMENTS
TREASURY BILLS:
• TREASURY BILLSARE SHORT TERM MATURITY PROMISSORY
NOTE ISSUED BY GOVERNMENT.
• THEYARE ISSUED WITH THREE-MONTH, SIX-MONTH AND
ONE-YEAR MATURITIES.
• THEYARE PURCHASED FOR A PRICE THAT IS LESS THAN THEIR
PAR (FACE) VALUE; WHEN THEY MATURE, THE GOVERNMENT
PAYS THE HOLDER THE FULL PAR VALUE.

15
 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

16
 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 OVERNIGHTTO 30 DAYS
OF MORE.

BANKER’S ACCEPTANCE:
• A BANKER’S ACCEPTANCE (BA) IS A SHORT-TERM CREDIT INVESTMENT CREATED BYA NON-
FINANCIAL FIRM.

• BA’S ARE GUARANTEED BY ABANK TO MAKE PAYMENT.

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

• BAACTS 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
17
UNKNOWN.
THANK YOU

18