SOURCES OF FINANCE & FINANCIAL

INSTRUMENTS

Negotiated

Spontaneous

TYPES OF FINANCE

FINANCE

SHORT TERM FINANCE

MEDIUM TERM FINANCE

LONG TERM FINANCE

CLASSIFICATION ACCORDING TO TERM FINANCE

Short term finance are required primarily

to meet working capital requirements.

The focus is on maintaining liquidity at a

reasonable cost.

SHORT TERMS FINANCE

Short Term

Finance

Working Capital finance

Trade Credit

Inter-Corporate Deposits

Factoring

Commercial Paper

Medium term finance is defined as money

raised for a period for 1 to 5 years.

The medium term funds are required by a

business mostly for the repaired and

modernizing of machinery.

MEDIUM TERM FINANCE

Medium Term Finance

Commercial Banks &

State Financial

Institutions

Lease Financing

Hire Purchase

External Commercia

l Borrowings

Euro & Foreign Bonds

Long term finance refer to

those requirements of funds which are for

a period exceeding 5-10 years.

LONG TERM FINANCE

Long term

finance

ShareDebentures

New Debt Instrument

s

Retained Earnings

Depository

Schemes

Venture Capital

Securitization

Financial instruments are contracts that

gives rise to Financial asset to one

equity.

Financial liability or and equity

instrument to another entity.

MEANING OF FINANCIAL INSTRUMENT

FINANCIAL INSTRUMENTS

PRIMARY INSTRUMENTS

Receivables, PayablesLoans and advances

Debentures and bondsInvestment in equity instruments,

Cash and bank balances

DERIVATIVE INSTRUMENTS

Options, futures,swaps,cap,collar,flo

or, forward rate agreement(fra) etc.

Deposits

SDRs

Borrowings

Loans

Shares and other equity

Debentures or bonds

Other account receivables

and payables

Financial derivatives

Letter of guarantee

Letter of credit

Financial commitments

Pledged financial assets

TYPES OF FINANCIAL INTRUMENTS

Deposits include all claims on the central

bank and other depository corporations,

represented as bank deposits

Fall into two categories:

Transferable deposits

OTHER deposits (non-transferable

deposits).

DEPOSITS

SDRs are international reserve assets created by the IMF

and allocated to member countries to supplement existing

official reserves.

SDRs are not treated as the IMF’s liability. SDRs are

held only by the IMF member countries and by a limited

number of international financial organizations.

SDR holdings are held exclusively by official authorities,

which are normally the central banks.

SDRs(Special Drawing Rights)

Normally, borrowings are not considered as a

separate financial instrument.

Borrowing is carried out through other

financial instruments,

For example, through loans, deposits, etc

BORROWINGS

Loans are financial assets that are created when a creditor lends

funds directly to a debtor(borrower),evidenced by non-

negotiable documents.

Short-term loans – short-term loans normally involve loans

with maturity of one year or less.

Medium-term loans - depending on practices applied in

countries, loans with maturity from 1 to 5 years are classified as

medium-term loans.

Long-term loans – long-term loans include the loans with

maturity that exceeds those of short- and medium-term loans.

LOANS

Shares are financial instruments that represent or provide

evidence on ownership rights of the holders over

enterprises or organizations, including financial

institutions.

Shares and other equity comprise all instruments and

records acknowledging, after the claims of all creditors

have been met, claims on the residual value of a

corporation

SHARES

Types of equity are:

1) Ordinary shares that

provide for ownership right in an enterprise or

corporation;

2) Preferred shares that

provide right for claim over residual value of

an enterprise, equity participation in limited

liability companies.

EQUITY

The term ‘creditor ship securities’ also known as

‘debt capital’ represents debentures and bonds.

They occupy a significant place in the financial

plan of the company.

A debenture or a bond is an acknowledgement

of A debt. It is a certificate issued by a company

under its seal acknowledging A debt due by its

holders.

DEBENTURES OR BONDS

Unsecured and secured debentures

Redeemable and irredeemable debentures

Zero interest bonds/debentures

Zero coupon bonds

Guaranteed debentures

Collateral debentures

TYPES OF DEBENTURES AND BONDS

Accounts receivable/payable include

trade credits, advances and other

receivables or payables.

This category includes also items such as

debtors and creditors, tax liabilities and

other accounts receivable/payable.

OTHER ACCOUNT RECEIVABLES AND PAYABLES

Financial derivatives are financial instruments that are

linked to specific assets (other financial instruments, goods).

By nature, these instruments are similar to contingent

instruments.

Claims and liabilities related to financial instruments will

arise after a specific period of time. In this case, contingency

of an instrument relates only to the time regardless of

occurrence of any other event or condition

FINANCIAL DERIVATIVES

In a forward contract, the

counterparties agree to exchange, on

a specified date,

a specified quantity of an

underlying item (financial or real asset) at

an agreed-upon contract price.

FORWARDS

A future contract is an

agreement between seller and the buyer

that calls for the seller to deliver to the

buyer a specific quantity, grade of an

identified commodity at a fixed time in

the future and at a price agreed to when

the contract is first entered into.

FUTURES

The buyer of an option acquires the right but

not the obligation to purchase or sell a specific

asset. I.E. The right to exercise the option

The option obtains a market value.

The statistical recording of options should be

carried out in the same way as for the forwards.

OPTIONS

A swap represents a spot purchase (sale) of a financial asset with a condition of forward sale (purchase).

Swap agreement is a type of a forward, in which the parties agree to exchange different currencies, that is to buy (sell) any currency for another currency

Types of SWAPs Interest rate Swaps Currency Swaps

SWAPS

Guarantee involves an

obligation by the economic entity to

assume the other entity’s financial

obligation if that other party defaults.

LETTER OF GUARANTEE

A letter of credit is an obligation to make

payment against documents received.

The amounts to be paid upon receipt of the

documents become liabilities of the bank.

Letters of credit are used to finance

international trade operations

LETTER OF CREDITS

Equity Warrants- The equity warrants is a paper attached

to a bond preferred stock that gives the holder the right to

buy a fixed number of company’s equity shares at a

predetermined price at a future date.

Secured Premium Notes(SPNs)- The secured premium

note is a tradable instrument with detachable warrant

against which the holder gets equity shares after a fixed

period of time.

INNOVATIVE FINANACIAL INSTRUMENTS

Callable Bond- A callable bond is a bond that can be called in and paid off by issuer at a price, called the ‘call price’ stipulated in the bond contract.

It gives the advantage to issuer company to call the existing bonds if the interest rates fall in the market below the bond’s coupon rate.

• Floating/Variable or Adjustable Rate Bonds- The rate of interest payable on these bonds varies periodically depending upon the market rate of interest payable on the gilt-edged securities.

• Deep Discount Bonds(DDBs)- The deep discount bond does not carry any interest but it is sold by the issuer company at a deep discount from its eventual maturity(normal) value.

PREPARED BYRENUKADEVI.KADALI