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Financial Instruments

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13 views

Financial Instruments

Uploaded by

gabriellestewart334
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Financial instruments

Companies and governments (through the central bank) issue financial instruments. These
instruments provide a means for other companies and individuals to participate in business
activity by lending or investing (and earning an income), and even decision-making. These
instruments are called securities. Securities are certificates proving entitlement to debt
repayment or part-ownership of a company. Securities are traditionally divided into debt
securities and equity. Debt securities are a loan to the business or the government. Equity
security constitutes part-ownership of company. Figure 15.3 shows the difference between
debt and equity securities.

The types of securities are:


 Treasury notes (bills) and bonds. These are debt securities issued by the government,
hence the use of the term ‘Treasury’. Bills and bonds represent loans to the
government. The buyer of a bill or bond is giving the government a loan. Treasury
bills are short-term loans, usually for 91 or 182 days. The Bank of Guyana issues 364-
day Treasury bills. Bonds are long term loans of a 5-, 10-, 20- or 30-year period.
Government bonds carry a lower rate of interest than corporate bonds. These
securities are considered low risk, as the government does not default on repayment.
They are a source of finance to the government.

 Corporate bonds. Corporate bonds are long-term debt security issued by companies or
corporations. A bondholder is a creditor who has a claim against the company equal to
the value of the bond. Once the claim of the bondholder is paid off, the bondholder
has no claim on the company. Corporate bonds are a source of finance for companies.

 Municipal bonds. Municipal bonds represent the debt of a municipality or other


governmental unit other than central government. It is a source of finance and is a
loan made by the buyer to the government unit. The funds received from the sale of
these bonds are used to finance community projects such as road building, drainage,
and park maintenance. Some municipal bonds might entitle the holder to tax credits.
 Equity securities. These are certificates of stock that represent ownership in the
company. A stockholder is a part-owner of the company. For example, if a company
has 100 000 shares of stock and you own 1000, you own one per cent of the company.
As a part-owner, you are entitled to part of the profits, which are paid in the form of
dividends. As a holder of ordinary shares, you also have a right to vote in the selection
of management.

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