Presentation topic:

Financial instruments.
Contents...

1. What are financial

instruments
2. Money market
3. Money market
instruments
4. Capital market
5. Capital market
instruments
What is meant by financial
instrument?
"A financial instrument is defined as a
contract between individuals/parties that
holds a monetary value. They can either
be created, traded, settled, or modified as
per the involved parties' requirement".
 Money market:

What is Money
market?
Money Market is a
financial market in
which only short-
term debt instru-
ments (maturity
less than one
year) are traded.
Money market
instruments:
. Treasury Bills
These instruments are issued at a discount and repaid at par at the
time of maturity. And are issued in lots of Rs. 25,000 for 14 days &
91 days and Rs. 1,00,000 for 364 days.
• Commercial papers
Corporates issue CP’s to meet their short-term working capital
requirements. Hence serves as an alternative to borrowing from a
bank. Also, the period of commercial paper ranges from 15 days to
1 year.
• Certificate of Deposit
(CD’s) is a negotiable term deposit accepted by commercial banks.
CD's can be issued to individuals, corporations, trusts, etc. Also,
the CD’s can be issued by scheduled commercial banks at a
discount. And the duration of these varies between 3 months to 1
year.
Continue...
• Call Money
It is a segment of the market where scheduled commercial banks lend or
borrow on short notice (say a period of 14 days). In order to manage day-
to-day cash flows.
• Promissory note
The promissory note is paper evidence of the debt that the borrower has
incurred. It outlines the amount of the loan, the interest rate to be paid,
and either the date when it needs to be paid in full or the repayment
schedule. “Basically, a promissory note is a promise to pay back money.
• Inter bank participation
Inter Bank Participation Certificates (IBPCs) bought by banks, on a risk
sharing basis, are eligible for classification under respective categories of
priority sector, provided the underlying assets are eligible to be
categorized under the respective categories of priority sector and the
banks fulfil the Reserve Bank ...
 Capital market:
What is
Capital
market?
capital markets
focus on long-
term securities
like stocks and
bonds.
 Capital market instrument:
1 . Equities
Equities, often referred to as stocks or shares, represent an ownership stake in a
company. Investing in equities gives investors a claim on part of the company's
earnings and assets. For example, if you own a share of a company like Apple, you
effectively own a tiny fraction of that business.

• There are five main types of shares, including:

Ordinary shares
These are the most popular type of shares because they shareholders a
voting right. While ordinary shareholders have the highest potential
financial gains, they are the last to pay if the company is to go
bankrupt.

Non-voting ordinary shares

These are ordinary shares that don’t give the holder a voting right.
Continue...

Preference shares
Preference shares carry no voting right though their holders can receive
preferential treatment when it comes to dividends. Preference
shareholders often receive a fixed dividend.

Cumulative preference shares

Cumulative preference shares allow the holders to receive the dividend
cumulatively. This means that if a dividend is not paid this year, it will be
paid in successive years as long as the company still makes profits.

Redeemable shares
Redeemable shares are sold on the agreement that the company can buy them back at
a later date.
Continue…

2. Bonds
Bonds, on the other hand, are debt securities. Governments and corporations
issue bonds to borrow money from investors for a specified period.

There are two main types of bonds:

Corporate bonds
Corporate bonds are debt securities issued by a company to raise
capital for their financial needs

Government bonds
These are bonds with a fixed rate of returns issued by the
government to cover its spending or pay for debts. It’s generally
safer to invest in government bonds than other securities, though
they are not risk-free due to interest rates, inflation, or liquidity
issues.
Continue...
3. Derivatives
Derivatives, another type of financial instrument, derive their value from
underlying assets like stocks, bonds, commodities, currencies, interest
rates, or market indexes. Options, futures, and swaps are common types of
derivatives. They serve as tools for hedging risk or speculating on future
price movements.
How financial instruments are important for an
economy?
Financial instruments are essential to the modern economy because they can be used
to manage risk, raise cash, and facilitate various financial transactions.

Financial instruments act as a means of payment (like money).

Financial instruments act as stores of value (like money).
• Financial instruments allow for the transfer of risk (unlike money).

It is made feasible by transferring money from physical assets with excess

values to those with deficit values. Businesses that concentrate on investing in
tangible assets might increase revenues by diversifying their inflation-hedged
portfolio.