Financial instruments

Question 1

Who issues financial instruments?

Answer 1

Companies ad govts through the central bank issue financial instruments

Question 2

What do financial instruments provide? And what are they called

Answer 2

These instruments provide a means for other companies and individuals to participate in business activity by lending or investing or by even decision making.
These instruments are called securities

Question 3

What exactly are securities?

Answer 3

Certificates providing entitlement to debt repayment or part ownership of a company. Securities are traditionally divided into debt securities and equity

Question 4

Debt/Equity security

Answer 4

Debt security= a loan to the business or govt
Equity security= constitutes part ownership of a company

Question 5

Debt security loans

Answer 5

• a loan to the issuer
• principal and interest to be repaid eg. bonds, debentures, notes/bills

Question 6

Equity security shares

Answer 6

• ownership in company
• entitlement to dividends and voting rights in the case of ordinary shares eg. company stocks

Question 7

List the type of debt securities are

Answer 7

treasury notes, bills and bonds, corporate bonds, municipal bonds

Question 8

treasury notes, bills and bonds

Answer 8

• These are debt securities issued by the govt. (C.B) hence, the use of the term “treasury”
• T.B are short term loans, usually for 91 or 182 days
• Treasury notes are usually medium termed loans with a 2 to 3 year period
• TB are long term loans for 5-10 years or a 20 to 30 year period
• Govt Bonds carry a lower rate of interest than corporate bonds. They are a source of finance to the govt.

Question 9

Corporate bonds

Answer 9

• These are long term debt securities issued by companies or corporations.
  -A bond holder is a creditor who has a claim against the company equal to the value of the bond
• Once the claim of the bond holder is paid off, the b.holder has no claim on the company.
  -Corporate bonds are a source of finance for companies

Question 10

Municipal bonds

Answer 10

• These represent the debt of municipality or other govt unit other than central govt.
• The funds received from the sale of these bonds are used to finance community projects such as road building, drainage and path maintenance

Question 11

Certificate of deposit

Answer 11

• A savings account that holds a fixed amt of money for a fixed period of time and in exchange, the issuing bank pays interest. When you cash in or redeem your C.D you receive the money you originally invested + interest