Financial Instruments
An Introduction
Financial contracts
between interested
parties.
Can be created, traded, modified
and settled.
Gives rise to
financial asset of one entity
and
financial liability or equity
instrument of another
entity.
Types
Cash Instruments:
Those whose value is
determined directly by the
markets.
Derivative Instruments:
Those which derive their value
from one or more underlying
entities such as an asset, index,
or interest rate.
 T - Bills

Short-term money market instruments, issued by the central bank on

behalf of the government to curb temporary liquidity shortfalls.

Utilized by the government

To raise short-term funds,

For fulfilling periodic

inconsistency between its
receipts and expenditure

Safest investment
instrument
 Features of T-Bills

Individuals, firms,
Issued either in companies, trust,
Minimum amount of
physical form as a banks, state
bid is Rs. 25000 and in
promissory note or government and
multiples thereof
dematerialized form financial institutions
are eligible to invest

Highly liquid
Issued at a discount, Assured yield, low
negotiable
but redeemed at par transaction cost
instruments
 Types of T- Bills

91 days 182 days 364 days

T-bills T-bills T-bills
• Tenure is 90 • Tenure is 182 • Tenure is 364
days days days
• Auctioned on • Auctioned • Auctioned
Wednesday, every every
and the alternate week alternate week
payment is on on
made on Wednesdays Wednesdays
following
Friday.
 Repo & Reverse Repo

Transaction in which two Indian Scenario:

parties agree to sell and 1. Repo Market governed by RBI
repurchase the same 2. Only Eligible parties can
security transact
3. Transactions carried out only in
Mumbai
For Seller
‘Repo Agreement’ Eligible Parties:
Banks, Primary Dealers, Mutual
For Buyer Funds, Insurance Companies, Non-
‘Reverse Repo Agreement’ Banking Finance Companies and
Housing Finance Companies

Rate of Interest Eligible Securities:

Known as Repo Rate Government Securities and T-Bills
 Significance of Repo & Reverse Repo
Liquidity Regulator Price Stability

• Commercial banks can meet their
requirement of immediate liquidity
• Avoid any liquidity crisis
• Also ensures there is no excess
liquidity
• RBI controls the rate of inflation
and stimulate the economic growth
by revising the repo rate on a half
yearly or quarterly basis.
Promissory Notes
 Explanation
PROMISE TO PAY
A written negotiable
instrument
duly signed by the maker
that contains an unconditional
promise
to pay the stated sum of money
to a particular person on the
order of that person or on
demand or on a specified date,
under given terms
Parties to the Note:
Drawer: Borrower of loan or Maker of
the Note
Drawee:Provider of Funds or the
Lender
Payee: Receiver of the amount of note
Short-Term for Inventory purchases
Long-Term for purchase of Fixed
Assets
 Characteristics

Clear and Drawn and duly

Written
unconditional signed by the
document
promise to pay maker

Amount to be Payment is to be
paid written in made in the
Properly stamped
both figures and country’s legal
words. currency.

Consist of various
terms and
conditions
 Government Securities

Bond issued by a government authority with a promise of

repayment upon maturity

Low-risk, since they are backed by the taxing power of the

government.

Securities with the highest market ratings.

Short term (usually called treasury bills, with original maturities of less
than one year) or long term (usually called government bonds or dated
securities with original maturity of one year or more).
 Shares

Smallest Unit Movable property and are

of Capital transferable

Bundle of rights and obligations

The share capital is divided
into a number of indivisible
Non refundable except in the
units of a fixed amount.
case of winding up and
Owner of the shares is called
reduction of capital
‘Shareholder’ and
the return he gets on his Types
investment is called Equity Shares
‘Dividend’ Preference Shares
 Equity Shares

Holders are real owners Merits:

Have voting rights in the
No burden on a company’s
meetings resources

Entitled to receive dividend Provision of long term

as are declared by the board finance
of directors No charge on the
Assets
Cannot be redeemed during
the life time of the company Fluctuating Rate of dividend
 Preference Shares

Classes of Preference Shares:

Preference for
compensation of
dividend
Prior right in regard to
repayments of capital
Cumulative and
Non-Cumulative
Convertible and
Non-Convertible
Participating and
Non-Participating
 Bonds

A debt instrument
Fixed- created for the
income security, purpose of raising
capital

Essentially loan agree

ments between the
bond issuer and an
investor
 Derivatives

Individuals who want to avoid

risk deal with others who are
willing to accept risk for a
price

Features:
1. Value changes with value of Contract between two
underlying asset parties which derives its
2. Can be traded on exchanges value/price from an
and involve low transaction underlying asset
costs
Underlying Asset could be equity,
3. Low level of credit risk
commodity or currency
 Derivative Products

Forwards Futures

Options Swaps