Basic Financial Instruments

1521 Words Jan 11th, 2011 7 Pages
Origin of the word “finance”
Two versions: medieval Latin language (XIII-XIV centuries) contained words finatio, financia meaning “obligatory payment”; in English language the word is alleged to be derived from the word fine (XI century) which was the synonym of tax.

Finance: evolution of meaning
XVIII century – mid-XX century – “finance” meant funds of the state; since mid-XX century – “finance” also covers the area of financial decisions made by corporations and individuals.

□ Finance can be defined as the art and science of managing money [Gitman, 1989]. □ Finance is concerned with the process, institutions, markets, and instruments involved in the transfer of money among individuals, businesses and governments.
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Facilitates secondary market transactions. Unlike the organized exchanges, the OTC market doesn’t have a trading floor. The buy and sell orders are completed through a telecommunications network.

Types of financial instruments

Type of issuer 1. Government, government agencies 2. States (regions, provinces), municipalities 3. Corporations 4. Financial institutions Maturity 1. Short-term instruments 2. Long-term instruments

By level of risk 1. Risk-free instruments (treasury bills) 2. Low-risky securities (treasury notes and bonds), investment grade corporate bonds, blue-chip stocks) 3. High-risky securities (junk bonds, stocks) 4. Financial instruments issued by corporations: goals □ To finance operations □ To invest in new projects □ To expand their business □ To repay debt Commercial paper – short-term debt with maturity of not more than 270 days □ Issued by larger, known corporations (GE – $80 bln) □ Issued at discount □ Higher rates than comparable treasury bills because of higher default risk than government securities Corporate bond – long-term debt security, promising a bondholder interest payments on a regular basis and payback of a par (face) value at maturity. Maturities Short-term: 1-5 years Intermediate-term: 5-10 years Long-term: 10-20 years Interest is
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