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. Description Financial Instrument Backed by the US government, these financial instruments are fixed-rate debt securities with a maturity of more than one year. They are considered default free but are subject to interest rate risk. Issued by corporations, these unsecured debt instruments are used to fund corporate short-term financing requirements. If issued by a financially strong company, they have less risk. These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated. These financial instruments are contractual agreements that give one party a long-term agreement to use an asset by providing regular payments. Money market mutual funds

Explanation / Answer

Backed by the US government, these financial instruments are fixed rate debt securities with a maturity of more than 1 year. They are considered default free but are subject to interest rate risk

Treasury notes

Issued by corporations, these unsecured debt instuments are used to fund corporate short term financing requirements. If issued by a financially strong company, they have less risk.

Commercial paper

These financial instruments are contractual agreements, that give one party a long term agreement to use an asset by providing regular payments.

Long term bank loans

Instruments traded in the capital market are:

Common stock, Corporate bonds and Preferred stock

Certificate of deposit is a money market instrument. Long term bank loan is an agreement between bank and the borrower, hence it is not traded anywhere.

The process in which derivatives are used to reduce risk exposure is called Hedging

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