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International Financial Instruments

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Malik Masim

on 7 April 2015

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Transcript of International Financial Instruments


International Financial Instruments
Conclusion
FINANCIAL INSTRUMENTS AND THEIR RISKS
The investors must have sufficient expertise and experience to evaluate the financial instrument in question.
The investor must be aware of the risks in connection with investing in the financial instrument concerned and the market where it is traded.
The investor must acquaint him / herself with the terms and conditions which apply to the financial instrument concerned and the markets where it is traded.
The investor must be able to evaluate, either on his/her own or with the help of advisors, the impact which external factors, such as economic cycles, interest rate movements etc., can have on investments in the financial instrument concerned.
Financial Instruments
is the written legal obligation of one party to transfer something of value, usually money, to another party at some future date, under certain condition
What is financial instruments and what they are ?
DEBT
TREASURE BILL
Treasury Bills, indicates, are short-term instruments with maturities of no more than one year. They fill investment needs similar to money market funds and savings accounts.
T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks)
EQUITY
Common stock is one of the equity instruments issued by a public company to raise funds from the public.
The shareholders have the privilege of being entitled to co-ownership of the company in addition to having the right to vote at the shareholders meeting as per the proportion of shares.
Preferred stock, another equity instrument, involves shareholders’ participation as a business owner as in common stock.
The variation lies in that the preferred shareholders are entitled to receive repayment of capital prior to the common shareholders.
Financial Instruments are very significant intangible assets, which are expected to provide future benefits in the form of a claim to future cash. It is a tradable asset representing a legal agreement or a contractual right to evidence monetary value or ownership interest of an entity. Under the subject of Financial Management, Financial Instruments Mainly refers to situations in which decisions must be made in respect to allocation of scarce resources and competing needs and also pays attention to efficiency of allocation and distribution of assets and incomes behind and around the allocation process. Financial Instruments are typically traded in financial markets where price of a security is arrived at based on market forces.
THANKS!
International Financial Instruments
KHAZAR University, MBA
Financial Management
Derivative Instruments / Equity and Debt
Cash Instruments / Securities
How do we use them?
Financial instruments, like money, can function as a means of payment or a store of value. These instruments are also risk transfer. For certain instruments, buyers are shifting risk to the seller, and are basically paying the seller to assume certain risks. Insurance policies are a prime example of this.
Most financial instruments are standardized in that they have the same obligations and contract for buyers.
Example:
Google stock shares are the same obligation, regardless of buyer. This standardization reduces costs and makes it easier for buyers and sellers to trade these instruments over and over. In addition to this standardization, financial instruments must provide certain relevant information about the issuer, the characteristics and the risks of the security. This information requirement is a way to even the playing field among different parties and reduce unfair advantages.
is an amount of money borrowed by one party from another. Many corporations or individuals use debt as a method for making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.
The
TREASURE DEBT
NOTES AND BONDS
CORPORATE DEBT
SENIOR UNSECURED DEBT
SECURED DEBT
SUBORDINATED DEBT
CREDIT SPREADS
A government creates budgets to determine how much it needs to spend to run a nation. Often, however, a government may run a budget deficit by spending more money than it receives in revenues from taxes.
Treasury Notes are intermediate- to long-term investments, typically issued in maturities of two, three, five, seven and 10 years. These are typically purchased for specific future expenses, such as college tuition, or used to generate cash flow during retirement. Interest is paid semi-annually.
A debt security issued by a corporation and sold to investors. The bond is backed by the company's ability to pay interest andprincipal, which typically comes from money earned from future operations. In some cases, the company's physical assetsmay be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. Most corporate bonds are taxable and have maturities of more than one year. Corporate debt thatmatures in less than one year typically is called commercial paper.
A corporation can borrow money by issuing bonds or getting a bank loan. Both are different forms of debt. “Senior” means that the debt has priority over other types of debt in bankruptcy; “unsecured” means that the debt is not secured by any specific collateral.
A secured debt is an obligation that you owe, and backed by collateral that a creditor can recover if you default.
Secured debts (or liens) can be voluntary or involuntary. Home mortgages and car loans are examples of secured debts that you incur voluntarily. Real property taxes, by contrast, are involuntary liens. Debt backed or secured by collateral to reduce the risk associated with lending. An example would be a mortgage, your house is considered collateral towards the debt. If you default on repayment, the bank seizes your house, sells it and uses the proceeds to pay back the debt.
Assets backing debt or a debt instrument are considered security, which means they can be claimed by the lender if default occurs. Obviously unsecured debt is higher risk, and as such lenders of unsecured money typically require a much higher return.
Subordinated debt is a class of debt whose holders have a claim on the company's assets only after the senior debtholders' claims have been satisfied. Subordinated debt offers investors a risk/return profile above that of senior debt, but below the risk/return profile of pure equity.
Subordinated debt can be used for growth capital, acquisitions, recapitalizations, and management and leveraged buyouts. This type of debt usually carries an interest rate between 13% and 25%.
Subordinated debt can be a good way for private company owners to obtain growth capital, since the dilutive effect on their company ownership can be minimized despite the equity kickers.
A corporate issuer might fail to make required payments on a bond, corporate bonds are riskier than Treasury bonds, and therefore must pay a higher coupon to be priced at par. The difference between the corporate coupon and the coupon of a Treasury bond with the same maturity (or some other reference interest rate) is called the credit spread. Spreads are expressed in basis points, where one basis point is one hundredth of one percent

INTERNATIONAL NOTES AND BONDS
Euro Notes
Euro Commercial Paper
Medium Term Euro Notes
Foreign Bonds & Euro Bonds
Global Bonds
Straight Bonds
Floating Rate Notes
Convertible Bonds
Cocktail Bonds
MORTGAGE
Subordinated debt is a class of debt whose holders have a claim on the company's assets only after the senior debtholders' claims have been satisfied. Subordinated debt offers investors a risk/return profile above that of senior debt, but below the risk/return profile of pure equity.
Subordinated debt can be used for growth capital, acquisitions, recapitalizations, and management and leveraged buyouts. This type of debt usually carries an interest rate between 13% and 25%.
Subordinated debt can be a good way for private company owners to obtain growth capital, since the dilutive effect on their company ownership can be minimized despite the equity kickers.
ASSET-BACKED SECURITY
STOCKS
A company sells ownership interests in the form of stock to buyers of the stock. Stock typically takes the form of shares of either common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.
is a security whose income payments and hence value is derived from and backed by a specified pool of underlying assets. Lenders pool their loans together and sell them to investors. The lenders receive an immediate lump-sumpayment and the investors receive the payments of interest and principal from the underlying loan pool. This process called securitization.
An
FUNDS
OPTIONS AND FUTURES
CURRENCY
SWAPS
INSURANCE
Funding is act of providing resources usually in form of money. It includes mutual funds, exchange-traded funds, real estate investment trusts, hedge funds and many other funds. The fund buys other securities earning interest and and capital gains which increases the share price of the fund. Investors of the fund may also receive interest payments.
Options and futures are bought and sold either for capital gains or to limit risk. For instance, the holder of XYZ stock may buy a put, which gives the holder of the put the right to sell XYZ stock for a specific price, called the strike price.
A definition of intermediate generality is that a currency is a system of money in common use, especially in a nation. Currency trading likewise is done for capital gains or to offset risk. It can also be used to earn interest, as is done in the carry trade. For instance, if a trader believed that the Euro was going to decline with respect to the United States dollar, then he could buy dollars with Euros, which is the same thing as selling Euros for dollars.
Swaps are an exchange of interest rate payments calculated as a percentage of a notional principal that is paid at periodic intervals. One leg of the swap pays a fixed rate of interest and the other leg pays a floating rate of interest. However, only the net amount is exchanged.
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. Insurance contracts promise to pay for a loss event in exchange for a premium. For instance, a car owner buys car insurance so that he will be compensated for a financial loss that occurs as the result of an accident.
The morgage is used by purchasers of real property to raise money to buy the property to be purchased or by existing property owners to raise funds for any purpose. The loan is "secured" on the borrower's property.
MORTGAGE
An
An equity instrument refers to a document which serves as a legally applicable evidence of the ownership right in a firm, like a share certificate. Equity instruments are, generally, issued to company shareholders and are used to fund the business.
GENERAL RISK FACTORS
Economic risk
Political risk
Currency risk
Inflation risk
Liquidity risk
RISK ON INDIVIDUAL TYPES OF FINANCIAL INSTRUMENTS
BONDS
Issuer risk /Solvency risk
Interest rate risk
Prepayement risk
SHARES / EQUITIES
Investment risk
Risk due to price volatility
Dividend risk
October 22, 2014
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