Ambayec, Mounicha C.

June 26, 2020

BSA-1 FM 19 Mrs. Mary Joy Teodosio

Insights on Video 2: Financial Instruments

The entire gist of the video highlights an underlying question which says: “What
is the return of financial instruments?” It was explained that investors earn from financial
instruments when they buy, sell or hold them. With this, we are taught about the
different investment classes particularly equity and debt securities and how each of
them works including the risks and returns they embody. The table below summarizes
my understanding on the differences between these two based from the video:

An investment class is a group of investments that exhibit the same characteristics.

The two most common type of investment classes are equity and debt securities.
Equity Securities Debt Securities
Are also called as “shares of stock” Are also called as “bonds”
It represents part ownership It is a fixed income instrument that
represents a loan by an investor to a
borrower. It is a liability of the issuing
company
If surplus units invests in stocks or if you The surplus units or the investor is not a
buy shares of stock, you become part part owner but a creditor hence he is not
owner of the company entitled to the profits of the company.
The share of profits or returns in stocks The return in investment is the interest.
are called dividends. o Maturity value= Principal +
Interest
If an investor decides to hold his If an investor decides to hold his bond
investments in equity securities, his investment until maturity, then he is
return is represented by dividends. entitled to receive interest across the
term of the bond.
However, if an investor wishes to trade However, if the investor decides to trade
his investment, he can either gain a profit his bond investment, then the effect may
or loss depending on how much is the fall under these two instances:
market price when he traded it. 1. If the investor is able to trade the
bond for more than its face value,
then it is said to be traded at a
premium.
2. If less than the face value, then it
is said to be traded at a discount.

Now, to answer the closing question which was: “If you were a deficit unit, which
would you prefer to issue: equity securities or debt securities?” then I would answer
such question by saying that I would prefer to issue debt securities since I am the deficit
unit. As I am in need of funds and resources, then I cannot, in any way, give extra
resources to those who need them, so I have to borrow money to suffice my financial
needs. In conclusion, decisions on investing in equity and debt securities actually rely
on a large number of factors such as the current economic status and changes, your
financial capacity, to name a few. All you need to do is to assess the situation and
understand what the situation requires you to do either to invest or to borrow funds or
resources.