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Property of FIs
Property of FIs
The moneyness of the financial assets implies that they are easily convertible to
cash within a defined time and determinable value. The cost of transactions
involved in securing funds from them before the maturity date can be likened to
agency cost besides the cost of discounting some of them, which reduces their face
value. Therefore, these financial instruments are regarded as near money because
of the ease with which they can be traded for cash. Examples are Treasury bills,
Treasury certificates, Trade bills, Commercial papers, and Certificate of Deposits,
among others.
The risk involved in market making is related to market forces that are twofold
such as: Variability of the price; and Thickness of the market.
4 Cash flow
This refers to the return that an investor will derive from holding a financial asset,
which invariably depends on all the cash distributions that the asset will pay
holders. This is expressed in terms of the dividend on shares or coupon yield
payments that are associated with bonds.
The return on investment in a financial asset is also affected by the repayment of
the principal amount for a debt instrument and any expected price variation of the
stock. In calculation of expected returns on a financial asset, factors that should be
considered include non-cash payments in form of stock dividend yield and options
to purchase additional stock or the distribution of other securities that must be
factored in the consideration. The issue of inflation implies that there is difference
between normal effective return and real effective return on financial assets.
Therefore, the net real return on financial assets is the amount of cash returns that
are accruable after adjusting the nominal returns against inflation.
5 Maturity Period
There are some financial instruments being traded in the financial markets that
may not reach the stated maturity dates before they are terminated by the corporate
entities that use them to raise funds. There are reasons that may be responsible for
such situation which include the following:
Bankruptcy:- a situation in which the company is being unable to meet its external
financial obligations and therefore, declared bankrupt;
Call Provision:- the financial instrument being associated with call provision.
The case of call provision implies that the company as the debtor or user of the
funds takes responsibility of setting aside sinking funds with which to redeem the
instruments eventually..
6 Convertibility
This characteristic implies that a financial asset or instrument can be converted into
another class of asset which will still be held by the corporate entity has original
used to raise funds for its operations. The conversion can take a form of bond
being converted to bond, preference shares being converted to equity shares, and a
company bond being converted into equity shares of the company.
7 Currency
Financial assets are normally denominated in currencies of the various countries
around the world. This implies that financial assets in Japan are denominated in
Yen, those in the United States of America are in Dollars, those in United
Kingdom are in Pounds Sterling while those in China are in Yuan, etc.
Furthermore, it is important for investors to know the currency in which certain
financial assets are denominated when buy them.
8 Liquidity
You have learned from above that one of the main characteristics of financial
assets is the moneyness of such instruments which implies that they are easily
convertible to cash within a defined time and determinable value. The cost of
transactions involved in securing funds from them before the maturity date can be
likened to agency cost besides the cost of discounting some of them, which reduces
their face value. Hence,an accepted price these financial instruments are
regarded as near money because they are highly liquid in terms of the ease
with which they can be traded for cash. Good examples of highly liquid
financial instruments include Treasury bills, Treasury certificates, Certificate of
Deposits, Bills of Exchange, and shares of blue chip companies, e.g., Shares of
Cadbury, First Bank, Guaranty Trust Bank, etc.
However, there are some financial instruments that cannot be easily converted to
cash whenever the holders need money. Therefore, they are illiquid because the
holders may have to retain them till they are matured; alternatively they can only
trade them for very insignificant value in capital markets where there are jobbers
that may be willing to carry them in their stock of securities. Presently there are no
jobbers operating in the Nigerian Stock Exchange, and hence the stock brokers in
the Exchange are usually not willing to trade in financial instruments of weak
corporate entities.
9 Predictable Returns
Return predictability is a basic property of financial assets in that it is a major
determinant of their value. The volatility of returns denotes risk, which can be
reflected either in expected future cash flows or in risk adjusted discount rate.
The return on financial assets must be predictable for the purpose of their being
patronized by investors. For instance, the investors should be able to know the
percentage of interest that are attached to certain debt instruments before they will
be prepared to stake their funds on them. This is because performance of a
company cannot be taken for granted due to the mere fact that top management and
the boards of directors are known to be manipulating the accounting records of
their companies these days. This is more reason why investors are always very
skeptical in patronizing financial instruments of some corporate entities due to
their antecedents in manipulating their accounting records.
The rate of such taxes on financial assets is also subject to variation from time to
time depending on the interest of the government which must be adhered to by the
tax authorities. The tax status on financial assets also differs from one type of
security to another depending on the nature of the issuing companies or institutions
such as Federal, State, or local government.\
Callable Bonds
Callable bonds are bonds that give the issuer the right to redeem or buy back all or
part of the bond before it matures.
Putable Bonds
A putable bond is a bond that gives the bondholder the ability to sell the bond back
to the issuer at a predetermined price on predetermined dates.
Convertible Bonds
A convertible bond is where the bondholder has the right to exchange the bond for
a specified number of the company’s common shares. There are several benefits
for the bondholder that a convertible bond has over a non-convertible bond, the
first being that convertible bonds allow the investor to take advantage of a price
appreciation in the company’s shares.