Presentation Business Finance

8/6/2019 Presentation Business Finance

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Major Financial Instruments Used

In Stock Exchange

By: Ahsan Tareen


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Definition

Financial Instrument: is acontract that represent financial

assets of one party (Lenders),and financial liability instrumentsof other party (Borrowers).


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Major Types

Stocks

BondsStock: is a share of ownership of acompany.

Bond: is a debt instruments issued bycorporate, governments and other entitiesin order to finance projects or activities


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Risk On Bonds

The most well-known risk inthe bond market is interest raterisk - the risk that bond priceswill fall as interest rates rise.

By buying a bond, thebondholder has committed toreceiving a fixed rate of returnfor a fixed period. Should themarket interest rate rise fromthe date of the bond'spurchase, the bond's price will

fall accordingly. The bond willthen be trading at a discount toreflect the lower return that aninvestor will make on the bond.

Market interest rates are afunction of several factors suchas the demand for, and supplyof, money in the economy, the

inflation rate, the stage that thebusiness cycle is in as well asthe government's monetaryand fiscal policies. However,interest rate risk is not the onlyrisk ofinvesting inbonds; fixed-income

investments pose fouradditional types of risk forinvestors:


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Risk On Bonds

Call RiskThe risk that a bond will becalled by its issuer. Callablebonds have call provisions,which allow the bond issuer to

purchase the bond back fromthe bondholders and retire theissue. This is usually donewhen interest rates have fallensubstantially since the issuedate. Call provisions allow theissuer to retire the old, high-

rate bonds and sell low-ratebonds in a bid to lower debtcosts.

Reinvestment RiskThe risk that the proceeds froma bond will be reinvested at alower rate than the bondoriginally provided. For

example, imagine that aninvestor bought a $1,000 bondthat had an annual coupon of12%. Each year the investorreceives $120 (12%*$1,000),which can be reinvested backinto another bond. But imagine

that over time the market ratefalls to 1%. Suddenly, that$120 received from the bondcan only be reinvested at 1%,instead of the 12% rate of theoriginal bond.


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Types ofRisk on Bonds

Reinvestment Risk

The risk that the proceeds froma bond will be reinvested at alower rate than the bond

originally provided. Forexample, imagine that aninvestor bought a $1,000 bondthat had an annual coupon of12%. Each year the investorreceives $120 (12%*$1,000),which can be reinvested backinto another bond. But imaginethat over time the market ratefalls to 1%. Suddenly, that $120received from the bond canonly be reinvested at 1%,instead of the 12% rate of theoriginal bond.

Default Risk

The risk that the bond's issuer willbe unable to pay the contractualinterest or principal on the bond ina timely manner, or at all. Creditratings services such as Moody's,Standard & Poor's and Fitch

give

credit ratings to bond issues, whichhelps to give investors an idea ofhow likely it is that a paymentdefault will occur. For example,most federal governments havevery high credit ratings (AAA); theycan raise taxes or pri

nt money topay debts, making default unlikely.However,small, emerging companies have some of the worst credit (BB andlower). They are much more likelyto default on their bond payments,in which case bondholders willlikely lose all or most of theirinvestment.


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Company Or Corporation

A company can be defined as an"artificial person", invisible, intangible,created by Law, with a discrete legalentity, perpetual succession and acommon seal. It is not affected by thedeath, insanity orinsolvency of an

individual member.


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Types OfCompanies

1. A company limited by guarantee.Commonly used where companies areformed for non-commercial purposes,such as clubs or charities. The membersguarantee the payment of certain(usually nominal) amounts if the

company goes into insolvent liquidation,but otherwise they have no economicrights in relation to the company.


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Types OfCompanies

2. A company limited by shares. Themost common form of company used forbusiness ventures. Specifically, a limitedcompany is a "company in which theliability of each shareholderis limited tothe amount individually invested" with

corporations being.


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Types OfCompanies

3.Unlimited CompaniesA type ofinvestment in which a partner orinvestorcan lose an unlimited amount of money.Members of the company with unlimitedliability has unlimited liability for which theyare liable even from their personal

property if required.

Presentation Business Finance

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