Complex Financial Instruments - Overview Flashcards
Convertible debt
A compound instrument that includes:
1. Debt: Bond pays interest at specified rate and pays face amount at maturity.
2. Equity: Option to exchange bond for common shares; usually a
predetermined number, during a specified time frame, without the need to
pay additional cash.
Perpetual debt
An instrument where there is a contractual right to receive payments of interest
at fixed dates into the indefinite future, either with no right to receive return of
principal or a right to a return of principal under terms that make it unlikely.
Convertible preferred shares
Preferred shares that have the option to convert into common shares. Both
components are equity.
Mandatorily redeemable or retractable preferred shares
Mandatorily redeemable: Issuer must redeem the shares on or before a specified
date for a fixed or determinable amount.
Retractable: Holder has the right to force the entity to redeem the shares by
providing cash or another asset.
Options
Contracts that give the holder the right, but not the obligation, to buy (call
options) or sell (put options) a specified asset for a specified price and for a
specific period of time. Issued options are presented as equity.
Forward and futures
contracts
Forward contracts are contracts between parties to buy or sell an asset on a
specific date in the future, at a specified price. Futures contracts are forward
contracts at standardized prices and settlement dates, so that they may be traded
on a stock market.
Warrants
Contracts that entitle the holder to buy or sell the underlying shares of the issuing
entity at a fixed price until the expiry date. Can be issued attached to both bonds
and shares.
Interest rate swaps
Contracts in which two entities agree to exchange interest rates on debt. This
generally involves one entity with a fixed rate exchanging a rate with an entity that
holds a variable rate.
