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Major Financial Instruments

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					Major Financial Instruments Used
       In Stock Exchange




                        By: Mohammad Abeel Tareen
             Definition

• Financial Instrument: is a
  contract that represent financial
  assets of one party (Lenders),
  and financial liability instruments
  of other party (Borrowers).
             Major Types

• Stocks
• Bonds
Stock: is a share of ownership of a
  company.

Bond: is a debt instruments issued by
 corporate, governments and other entities
 in order to finance projects or activities
                    Risk On Bonds

• The most well-known risk in         • Market interest rates are a
  the bond market is interest rate      function of several factors such
  risk - the risk that bond prices      as the demand for, and supply
  will fall as interest rates rise.     of, money in the economy, the
  By buying a bond, the                 inflation rate, the stage that the
  bondholder has committed to           business cycle is in as well as
  receiving a fixed rate of return      the government's monetary
  for a fixed period. Should the        and fiscal policies. However,
  market interest rate rise from        interest rate risk is not the only
  the date of the bond's                risk of investing in
  purchase, the bond's price will       bonds; fixed-income
  fall accordingly. The bond will       investments pose four
  then be trading at a discount to      additional types of risk for
  reflect the lower return that an      investors:
  investor will make on the bond.
                   Risk On Bonds
• Call Risk                         • Reinvestment Risk
  The risk that a bond will be        The risk that the proceeds from
  called by its issuer. Callable      a bond will be reinvested at a
  bonds have call provisions,         lower rate than the bond
  which allow the bond issuer to      originally provided. For
  purchase the bond back from         example, imagine that an
  the bondholders and retire the      investor bought a $1,000 bond
  issue. This is usually done         that had an annual coupon of
  when interest rates have fallen     12%. Each year the investor
  substantially since the issue       receives $120 (12%*$1,000),
  date. Call provisions allow the     which can be reinvested back
  issuer to retire the old, high-     into another bond. But imagine
  rate bonds and sell low-rate        that over time the market rate
  bonds in a bid to lower debt        falls to 1%. Suddenly, that
  costs.                              $120 received from the bond
                                      can only be reinvested at 1%,
                                      instead of the 12% rate of the
                                      original bond.
            Types of Risk on Bonds
•                                      •   Default Risk
    Reinvestment Risk                      The risk that the bond's issuer will
                                           be unable to pay the contractual
                                           interest or principal on the bond in
•   The risk that the proceeds from        a timely manner, or at all. Credit
    a bond will be reinvested at a         ratings services such as Moody's,
    lower rate than the bond               Standard & Poor's and Fitch give
    originally provided. For               credit ratings to bond issues, which
    example, imagine that an               helps to give investors an idea of
    investor bought a $1,000 bond          how likely it is that a payment
    that had an annual coupon of           default will occur. For example,
                                           most federal governments have
    12%. Each year the investor            very high credit ratings (AAA); they
    receives $120 (12%*$1,000),            can raise taxes or print money to
    which can be reinvested back           pay debts, making default unlikely.
    into another bond. But imagine         However,
    that over time the market rate         small, emerging companies have so
    falls to 1%. Suddenly, that $120       me of the worst credit (BB and
    received from the bond can             lower). They are much more likely
    only be reinvested at 1%,              to default on their bond payments,
                                           in which case bondholders will
    instead of the 12% rate of the         likely lose all or most of their
    original bond.                         investment.
     Company Or Corporation

• A company can be defined as an
  "artificial person", invisible, intangible,
  created by Law, with a discrete legal
  entity, perpetual succession and a
  common seal. It is not affected by the
  death, insanity or insolvency of an
  individual member.
        Types Of Companies

1. A company limited by guarantee.
   Commonly used where companies are
   formed for non-commercial purposes,
   such as clubs or charities. The members
   guarantee the payment of certain
   (usually nominal) amounts if the
   company goes into insolvent liquidation,
   but otherwise they have no economic
   rights in relation to the company.
        Types Of Companies

2. A company limited by shares. The
   most common form of company used for
   business ventures. Specifically, a limited
   company is a "company in which the
   liability of each shareholder is limited to
   the amount individually invested" with
   corporations being.
         Types Of Companies

3.Unlimited Companies A type of
  investment in which a partner or investor
  can lose an unlimited amount of money.
  Members of the company with unlimited
  liability has unlimited liability for which they
  are liable even from their personal
  property if required.

				
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posted:12/19/2010
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