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Financial Assets (Instruments) - Coggle Diagram
Financial Assets (Instruments)
Assets
Real Asset: physically observable or touchable item
Financial: Represents to distribute cash flows (in future)
Major Financial Intrsuments
Examples: Treasury bills, repurchase agreements, federal funds,term loans, mortgages, common stock, Money market funds, preferred stock, eurodollars, negotiable CDs, etc.
Financial Instruments and the Firm's Balance sheet
Financial instruments so it can purchase the tangible assets necessary to produce income
Assets:
C.A
Cash/Investments (bonds, stocks)
AR
Inventory
Fixed A
Debt/ Liabilities:
Bonds Equity Stocks
Balance Sheet - Equity
Common equity: external (common stocks and prefer stocks) and internal (retained earnings)
Par Value: Nominal or face value of a stock or bond
Retained earnings: the firm has not paid out as dividend throughout its history
Additional paid-in capital: Difference between the value of newly issued stock and its par value
Debt - Is a collective loan to an individual company/government
Debt features:
Priority assets/earnings
Principal, face, maturity and par value.
Interest payments (most of the time)
Discounted securities (zero coupon bonds)
Maturity date (period of time/short or long term)
Control of the firm (voting rights)
Short-Term Debt
Examples:
Treasury Bill
Federal Funds
Eurodollar deposit
Money Market Mutual Fund
Long-Term Debt
Term Loans (Spreed/Flexibility/Low issuance costs)
Bonds
Government Bonds
Treasury notes or bonds: Issued (US government)
Municipal bonds: Issued (state or local government)
Corporate Bonds
Examples:
Mortgage bonds
Debenture
Income bond
Putable bond
Floating rate bond
Zero coupon bond
Junk bond
Bond Contract Features
Bond Indenture (Trustee)
Call provision
Sinking fund (buy bonds on the market)
Convertible (establish in the contract)
Bond Ratings
Moody's Investors Service
Standard and Poor's Corporation (S&P)
Investment grade bonds (AAA,AA,A,BBB,BB,B,CCC,CC,C, etc)
Criteria for rating bonds
Changes in ratings
Yields on Selected Long Term Bonds, 1990-2008
Stock (Equity)
Preferred stock (common stock in distribution)
Preferred stock (provide maturity)
Common stock
Classified, closely held and publicly held
Derivatives
Value depends on some underlying assets
Option: contract, give the right to buy or sell (call: holder can buy and put:holder can sell)
Convertibles: bonds or preferred stocks, can be exchange for common stock (depend on holder)
Futures: arrangement for delivery (future and a set price)
Swaps: agreement to exchange (cash flows or assets/future time)
Hedge Funds: Private pool of funds (specific range of return)
Rationale for Using Different Types of Securities
Difference in trade off
Appeal to broad market
Different securities
Which Financial Instrument is the Best?
Bonds, Preferred stock, Common stock,
Financial Instruments in
International Markets
American Depository Receipts (ADRs)
Foreign debt
Eurodebt
Equity instruments