Which financial instrument represents a debt owed by a company?
Bonds and debentures are among the most popular types of fixed-income debt instruments.
Debt instruments are any form of debt used to raise capital for businesses and governments. There are many types of debt instruments, but the most common are credit products, bonds, or loans. Each comes with different repayment conditions, generally described in a contract.
Bonds are the most common debt instrument. Bonds are created through a contract known as a bond indenture. They are fixed-income securities that are contractually obligated to provide a series of interest payments of a fixed amount and also repayment of the principal amount at maturity.
Debt instruments include debentures, bonds, certificates, leases, promissory notes and bills of exchange. These allow market players to shift debt liability ownership from one entity to another. Throughout the instrument's life, the lender receives a specific amount as a form of interest.
A bond is a debt obligation, like an Iou. Investors who buy corporate bonds are lending money to the company issuing the bond. In return, the company makes a legal commitment to pay interest on the principal and, in most cases, to return the principal when the bond comes due, or matures.
| Government Bonds | They are issued for a fixed term and can be redeemed only on maturity. |
|---|---|
| Debt-Mutual Funds | Open-ended debt mutual funds are liquid. |
| Certificate of Deposit | CDs can be redeemed only after maturity, so they have limited liquidity. |
Equity-based financial instruments represent ownership of an asset. Debt-based financial instruments represent a loan made by an investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of financial instrument.
There are typically three types of financial instruments: cash instruments, derivative instruments, and foreign exchange instruments.
Cash is the definition of liquid and inherently provides no return - you could earn interest on cash by depositing it in a bank but then you are creating a debt obligation in effect - the cash inherently, as in cash in a physical safe, generates zero return nominal by definition.
Corporate Debt refers to the amount of money that a company borrows from different sources to finance its operations and growth. Such funds could come from issuing bonds, bank loans, or commercial papers, for instance.
Is a debt instrument a loan?
Debt instruments include short-term instruments-debt tools used for daily financial requirements repaid within five years, while long-term instruments are used for bigger investments such as a company's future planning with a repayment period of above 5years. Debt instruments include bank borrowing/loans.
Examples of debt instruments include bonds (government or corporate) and mortgages. The equity market (often referred to as the stock market) is the market for trading equity instruments. Stocks are securities that are a claim on the earnings and assets of a corporation (Mishkin 1998).
Debt is anything owed by one party to another. Examples of debt include amounts owed on credit cards, car loans, and mortgages.
Liabilities are the debts your business owes. Expenses include the costs you incur to generate revenue. For example, the cost of the materials you use to make goods is an expense, not a liability. Expenses are directly related to revenue.
Overnight Fund is the safest among debt funds. These funds invest in securities that are maturing in 1-day, so they don't have any credit or interest risk and the risk of making a loss in them is near zero.
Conceptually, the nominal value of a debt instrument can also be calculated by discounting future interest and principal payments at the existing contractual19 interest rate(s)20 on the instrument; these interest rates may be fixed rate or variable rate.
Long-term financial instruments include bonds, mortgages, and certain types of loans, while short-term financial instruments include treasury bills, commercial paper, and short-term loans.
Debt financing involves the borrowing of money whereas equity financing involves selling a portion of equity in the company. The main advantage of equity financing is that there is no obligation to repay the money acquired through it.
Debt securities are negotiable financial instruments, meaning they can be bought or sold between parties in the market. They come with a defined issue date, maturity date, coupon rate, and face value. Debt securities provide regular payments of interest and guaranteed repayment of principal.
The two most prominent financial instruments are equities and bonds. Equities (or shares) are the ownership of a portion of a company, which can then be traded. The value of this portion may fluctuate depending on the company's performance and market conditions, making equities a potentially risky investment.
What are the two basic types of financial instruments?
Stocks and bonds are two types of financial instruments. Companies can raise capital by issuing bonds or stocks. A stock is a debt instrument issued by corporations. A Treasury bond is a debt instrument issued by corporations.
Cash is the most basic financial instrument because it is the medium of exchange and is the basis on which all transactions are measured and recognized in the financial statements.
Answer and Explanation: The correct answer to the given question is option D. Stocks.
Debt instruments are the assets that require a fixed payment with interest to the holder. Its examples include mortgages and bonds (corporate or government). Stocks cannot be called a Debt instrument.
Lastly, the risk profile differs: debt instruments are generally considered safer as they offer fixed returns and have a higher claim on assets during liquidation, unlike equities.
