Essay Revision Question 1

Question 1

What is a debt instrument?

Answer 1

• it entitles the holder a claim to the income stream produced by the borrower and assets of the borrower if they default.

Can be secured (provides the lender with a claim over specified assets if they defaults)

Or unsecured (no claims)

Question 2

Types of debt instruments?

Answer 2

Corporations:
Debentures + unsecured notes (long term, capital markets)
commercial bills, promissory notes (short term,money markets)
Term loans, overdrafts and mortgage loans (banks)

Government:
Treasury bonds/notes

Question 3

What is equity?

Answer 3

Ownership of an asset (no matter how small).
Equity can be In a business in the form of shares.
You may receive a dividend.

Question 4

What is a hybrid?

Answer 4

A financial instrument that incorporates the characteristics of both debt and equity.
Ex: preference shares

Question 5

Name the four financial instruments?

Answer 5

Debt
Equity
Hybrids
Derivatives

Question 6

What is risk?

Answer 6

The variability or uncertainty of returns.

The possibility that the expected outcome may be different from the expected outcome

Question 7

What is return/yield?

Answer 7

Total financial benefit received (capital gain & interest) expressed as a percentage.

Question 8

What is liquidity?

Answer 8

Your accessibility to cash, and other sources of funds to meet day to day expenses and commitments.

Question 9

Distinguish between debt, equity and hybrid financial assets in terms of risk, return and liquidity?

Answer 9

Financial instruments are classed into three broad categories

• equity (a claim of ownership over an asset)
• debt (a loan that must be repaid)
• hybrid (combo of debt & equity)
• derivatives (used to manage risk)

The levels of risk, returns and liquidity depends on whether it is short, medium or long term arrangement, whether it is on the debt, capital or money market and interest rates.

Question 10

What are the 4 main attributes of financial assets?

Answer 10

Risk
Return
Liquidity
Time pattern of cash flows

Question 11

What is a debt?

Answer 11

• a loan that must be repaid
• represent a contractual claim against an issuer
• requires the borrower to make specified payments like periodic repayments and principle repayments over a period of time.