FINANCIAL INSTRUMENTS

1ByTatwamasi Mohapatra

TYPES:

• CAPITAL MARKET INSTRUMENTS

• MONEY MARKET INSTRUMENTS

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CAPITAL MARKET INSTRUMENTS

EQUITY SHARES:

• EQUITY SHAREHOLDERS HAVE TO SHARE REWARD AND RISK

ASSOCIATED WITH OWNERSHIP OF COMPANY.

• EQUITY SHAREHOLDERS ARE THE OWNERS OF THE COMPANY WHO

HAVE CONTROL OVER WORKING OF THE COMPANY.

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FEATURES :

• PERMANENT CAPITAL: AN EQUITY SOURCE IS THE MAIN LONG TERM SOURCE OF

FINANCE. THEY CAN BE REDEEMED OR REFUNDED AT THE TIME OF LIQUIDATION FROM

THE RESIDUE LEFT AFTER MEETING ALL THE OBLIGATIONS.

• VOTING RIGHTS: EQUITY SHAREHOLDERS AS THE REAL OWNER OF THE COMPANY ,

THEY HAVE VOTING RIGHTS IN APPOINTING DIRECTORS AND AUDITORS OF THE COMPANY

, PARTICIPATE AND VOTE IN AGM.

• PRE-EMPTIVE RIGHT: EQUITY SHAREHOLDERS HAVE PRE-EMPTIVE RIGHT, WHICH

MEANS THEY HAVE LEGAL RIGHT TO BUY NEW ISSUES, BEFORE OFFERING TO THE PUBLIC.

PRE-EMPTIVE RIGHT IS THE OPTION GIVEN TO THE SHAREHOLDERS TO BUY A SPECIFIED

NUMBER OF SHARES AT A GIVEN PRICE.

• LIMITED LIABILITY: EQUITY SHAREHOLDERS ARE THE OWNERS OF THE COMPANY,

THEIR LIABILITY IS LIMITED TO THE EXTENT OF THE INVESTMENT IN THE SHARE. 4

PREFERENCE SHARES

PREFERENCE SHARE CAPITAL GIVES CERTAIN PRIVILEGES TO ITS HOLDERS:

• A PREFERENTIAL PRIVILEGE IN PAYMENT OF FIXED DIVIDED.

• PREFERENTIAL RIGHT AS TO REPAYMENT OF CAPITAL IN CASE OF LIQUIDATION

OR WINDING UP OF THE COMPANY.

• PREFERENCE SHARE CAPITAL IS A HYBRID FORM OF LONG TERM FINANCE.

PREFERENCE SHARE HAS THE FEATURES OF EQUITY AND DEBENTURES:

• PREFERENCE DIVIDENDS ARE PAYABLE ONLY AFTER TAX PROFITS(PAT).

• PAYMENT OF PREFERENCE DIVIDEND DEPENDS ON THE DISCRETION OF BOD’S.

• IRREDEEMABLE PREFERENCE SHARES ARE LONG TERM IN NATURE. 5

FEATURES:

• REDEEMABLE: PREFERENCE SHARE HAS LIMITED MATURITY PERIOD.

• FIXED RATE OF DIVIDEND: ISSUE OF PREFERENCE SHARES ARE AT A FIXED

RATE OF DIVIDEND.

• CONVERTIBLE: CONVERTIBLE PREFERENCE SHARES HAS THE FEATURE OF

CONVERSION OF PREFERENCE SHAREHOLDERS INVESTMENT INTO FULLY OR

PARTLY PAID EQUITY SHARES AT A PREDETERMINED RATIO WITHIN A GIVEN

PERIOD.

• VOTING RIGHTS: PREFERENCE SHARE HOLDERS DO NOT HAVE VOTING

RIGHTS.

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CLASSIFICATION OF PREFERENCE SHARES:

• CONVERTIBLE AND NON CONVERTIBLE PREFERENCE SHARES:

• CONVERTIBLE PREFERENCE SHARES CAN BE CONVERTED INTO AN ORDINARY EQUITY SHARE AT SOME

AGREED TERMS AND CONDITIONS.

• NON CONVERTIBLE SIMPLY DO NOT HAVE THIS OPTION BUT HAS ALL OTHER NORMAL CHARACTERISTIC

OF A PREFERENCE SHARE.

• REDEEMABLE AND IRREDEEMABLE PREFERENCE SHARES:

• REDEEMABLE PREFERENCE SHARES CAN BE REDEEMED OR REPAID AFTER THE EXPIRY OF A FIXED

PERIOD OR AFTER GIVING THE PRESCRIBED NOTICE AS DESIRED BY THE COMPANY.

• IRREDEEMABLE PREFERENCE SHARES CAN NOT BE REDEEMED DURING THE LIFE TIME OF THE COMPANY

• PARTICIPATING AND NON PARTICIPATING PREFERENCE SHARES:

• PARTICIPATING PREFERENCE SHARES HAVE THE RIGHT TO PARTICIPATE IN PROFITS OF THE COMPANY

APART FROM THE FIXED DIVIDEND.

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• CUMULATIVE AND NON CUMULATIVE PREFERENCE SHARES:

DIVIDEND OF CUMULATIVE PREFERENCE SHARES WILL HAVE TO

BE PAID AS LONG AS THE COMPANY EARNS PROFIT IN ANY YEAR.

WHEREAS, FOR NON CUMULATIVE PREFERENCE SHARES, A COMPANY

CAN SKIP THE DIVIDEND IN THE YEAR, THE COMPANY HAS

INCURRED LOSSES.

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DEBENTURES

• A DEBENTURE IS AN INSTRUMENT ISSUED BY A COMPANY UNDER ITS

COMMON SEAL ACKNOWLEDGING A DEBT AND SETTING FORTH THE

TERMS UNDER WHICH THEY ARE ISSUED AND ARE TO BE PAID.

• A PERSON WHO BUYS DEBENTURES IS DEBENTURE HOLDER AND

CREDITOR OF THE COMPANY.

• DEBENTURE CAN BE PRICED AS SAME MANNER AS SHARE.

• A DEBENTURE IS SECURED ONLY BY THE ISSUER’S PROMISE TO PAY THE

INTEREST AND LOAN PRINCIPAL.

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TYPES

SECURITY:

• SECURED/MORTGAGE DEBENTURES: DEBENTURES SECURED AGAINST ASSETS OF THE

COMPANY .I.E. IF THE COMPANY IS WINDING UP, ASSETS WILL BE SOLD AND DEBENTURE

HOLDERS WILL BE PAID BACK.

• MORTGAGE DEED: INCLUDES NATURE/VALUE OF THE SECURITY, DATE OF INTEREST

PAYMENT, AND RATE OF INTEREST, REPAYMENT TERMS, AND RIGHTS OF THE DEBENTURE

HOLDERS IF THE COMPANY DEFAULTS. IN THE EVENT OF DEFAULT OF COMPANY TO PAY

INTEREST OR PRINCIPAL INSTALLMENT, THEY CAN RECOVER THEIR MONEY VIA THE

ASSETS MORTGAGED.

• UNSECURED/NAKED DEBENTURES: DEBENTURES NOT SECURED AGAINST ASSETS OF THE

COMPANY .I.E. IF THE COMPANY IS WINDING UP, ASSETS WILL BE NOT BE SOLD IN ORDER

TO PAY THE DEBENTURE HOLDERS.

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TENURE:

• REDEEMABLE DEBENTURES: DEBENTURES WHICH HAVE TO BE REPAID WITHIN A

CERTAIN SPECIFIED PERIOD.

• IRREDEEMABLE/PERPETUAL DEBENTURES: THESE CAN BE PAID BACK AT ANY

TIME DURING THE LIFE OF THE COMPANY .I.E. THERE IS NO SPECIFIED PERIOD FOR

REDEMPTION. THEY ARE ALSO CALLED PERPETUAL DEBENTURES.

REGISTRATION:

• REGISTERED DEBENTURES: THESE ARE DEBENTURES THAT ARE REGISTERED

WITH THE COMPANY. IT RECORDS ALL DETAILS OF DEBENTURE HOLDINGS SUCH

AS NAME, ADDRESS, PARTICULARS OF HOLDING ETC.

• BEARER DEBENTURE: THESE ARE THE DEBENTURES WHICH ARE NOT RECORDED

IN A REGISTER OF THE COMPANY. SUCH DEBENTURES ARE TRANSFERABLE

MERELY BY DELIVERY.11

BOND

• A DEBT INSTRUMENT ISSUED FOR A PERIOD OF MORE THAN ONE YEAR WITH THE

PURPOSE OF RAISING CAPITAL BY BORROWING.

• GENERALLY, A BOND IS A PROMISE TO REPAY THE PRINCIPAL ALONG WITH

INTEREST (COUPONS) ON A SPECIFIED DATE (MATURITY). SOME BONDS DO NOT

PAY INTEREST, BUT ALL BONDS REQUIRE A REPAYMENT OF PRINCIPAL.

• A BOND IS TYPICALLY A LOAN THAT IS SECURED BY A SPECIFIC PHYSICAL ASSET.

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TYPES:

ZERO COUPON BONDS:

• DOES NOT HAVE A SPECIFIED INTEREST RATE, THEREBY TO COMPENSATE, THEY ARE ISSUED

AT A SUBSTANTIAL DISCOUNT.

SPECIFIC COUPON RATE BONDS:

• DEBENTURES ARE NORMALLY ISSUED WITH AN INTEREST RATE WHICH IS NOTHING BUT

THE COUPON RATE. IT CAN BE FIXED OR FLOATING. FLOATING IS ASSOCIATED WITH THE

BANK RATES.

CALLABLE BONDS:

• CALLABLE BONDS ARE THOSE BONDS THAT CAN BE CALLED IN AND PURCHASED AT A

PRICE. COMPANIES GENERALLY CALL BACK BONDS ONLY WHEN THE INTEREST RATES FALL

IN MARKET LESS THAN BOND INTEREST RATE.

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DERIVATIVE INSTRUMENTS

• FUTURE: A FUTURE CONTRACT IS A STANDARDIZED CONTRACT, TRADED ON A

FUTURES EXCHANGE, TO BUY OR SELL A CERTAIN UNDERLYING INSTRUMENT AT A

CERTAIN DATE IN FUTURE, AND AT A SPECIFIC PRICE.

• FORWARD: A FORWARD CONTRACT IS A AN AGREEMENT BETWEEN TWO PARTIES TO

BUY OR SELL AN ASSET AT A SPECIFIED POINT OF TIME IN THE FUTURE.

• OPTION: AN OPTION IS A CONTRACT THAT GIVES ONE PARTY THE RIGHT, BUT NOT

THE OBLIGATION TO PERFORM A SPECIFIED TRANSACTION WITH ANOTHER PARTY.

• SWAP: SWAP REFERS TO AN EXCHANGE OF ONE FINANCIAL INSTRUMENT FOR

ANOTHER BETWEEN THE PARTIES CONCERNED. THIS EXCHANGE TAKES PLACE AT A

PREDETERMINED TIME, AS SPECIFIED IN THE CONTRACT.

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MONEY MARKET INSTRUMENTS

TREASURY BILLS:

• TREASURY BILLS ARE SHORT TERM MATURITY PROMISSORY NOTE ISSUED BY

GOVERNMENT.

• THEY ARE ISSUED WITH THREE-MONTH, SIX-MONTH AND ONE-YEAR

MATURITIES.

• THEY ARE PURCHASED FOR A PRICE THAT IS LESS THAN THEIR PAR (FACE)

VALUE; WHEN THEY MATURE, THE GOVERNMENT PAYS THE HOLDER THE

FULL PAR VALUE.

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CERTIFICATES OF DEPOSITS:

• A CD IS A TIME DEPOSIT WITH A BANK.

• CD’S HAVE SPECIFIC MATURITY DATE, INTEREST RATE AND IT CAN BE ISSUED IN ANY

DENOMINATION.

COMMERCIAL PAPERS:

• IT IS A NEGOTIABLE SHORT TERM UNSECURED PROMISSORY NOTE WITH FIXED MATURITY.

• ONLY COMPANY WITH HIGH CREDIT RATING ISSUES CP’S

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REPURCHASE AGREEMENTS:

• REPO IS A FORM OF OVERNIGHT BORROWING AND IS USED BY THOSE WHO DEAL IN GOVERNMENT

SECURITIES.

• THEY ARE USUALLY VERY SHORT TERM REPURCHASES AGREEMENT, FROM OVERNIGHT TO 30 DAYS

OF MORE.

BANKER’S ACCEPTANCE:

• A BANKER’S ACCEPTANCE (BA) IS A SHORT-TERM CREDIT INVESTMENT CREATED BY A NON-

FINANCIAL FIRM.

• BA’S ARE GUARANTEED BY A BANK TO MAKE PAYMENT.

• ACCEPTANCES ARE TRADED AT DISCOUNTS FROM FACE VALUE IN THE SECONDARY MARKET.

• BA ACTS AS A NEGOTIABLE TIME DRAFT FOR FINANCING IMPORTS, EXPORTS OR OTHER

TRANSACTIONS IN GOODS.

• THIS IS ESPECIALLY USEFUL WHEN THE CREDIT WORTHINESS OF A FOREIGN TRADE PARTNER IS

UNKNOWN. 17

THANK YOU

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