Financial instruments are assets that have a monetary value or record a monetary

Question

Financial instruments are assets that have a monetary value or record a monetary transaction. To coordinate the exchange of capital between borrowers and lenders, financial instruments trade in the financial markets. These financial instruments can be categorized on the basis of their issuers, maturity, risk, and other factors. Identify the financial instruments based on the following descriptions. Backed by the U.S. government, these financial instruments are short-term debt obligations with a maturity of less than one year. They are considered risk-free investments. Issued by a non financial firm, these financial instruments are guaranteed by a bank. There is less risk involved because of bank backing. These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (COs). and commercial paper. They can be easily liquidated. Issued by corporations, these financial instruments give their holders a class ownership in a company. They are considered the most risky but provide higher expected returns. Which of the following instruments are traded in the capital markets? Check all that apply. Common stocks Preferred stocks Eurodollar time deposits Bankers acceptances Commercial paper The process in which derivatives are used to reduce risk exposure is called

Explanation / Answer

1) United States Treasury Securities (Popularly known as Treasury Bills i.e., T-bills) are backed by the U.S. government and carry short term debt obligations with a maturity of less than one year. They are risk-free investments.

2) Bankers Acceptances are the financial instruments issued by non-financial firm and guaranteed by a bank. There is less risk involved because of bank backing.

3) Money market instruments are the investment pools that consists of short-term instruments such as Treasury bills (T-bills), Commercial papers and Certificate of deposits etc. They can be liquidated easily.

4) Equity Shares are issued by the corporations. These financial instruments give their holders a class ownership in a company. They are considered the most risky but provide higher expected returns.

Common stock, Preferred Stocks are traded in the Capital Markets.

(NOTE):- Bankers acceptances, Commercial Paper, Eurodollar Time deposits etc. are the money market instruments.

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