Financial Instruments Homework Help

Financial Instruments is a means of raising finance. Financial instrument is an instrument having monetary value or recording a monetary transaction. According to the IAS 32 and 39, a financial instrument is defined as “ any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity .”

A Financial instrument is either a real, electronic or virtual document representing a legal agreement which involves some kind of monetary value. In today’s financial market, the financial instruments can be classified as Equity based, debt based, representing a loan made by an investor to the owner of the asset. The main objective of International Standard IAS32 is to clarify the distinction between Liabilities and Equity and to ensure that financial liabilities and equity Instruments are correctly identified in an entity’s financial statements.

Features of the Financial Instruments are: Money Market Instruments: These are those instruments which have the maturity period of less than one year and they serve as a key link in the transmission of monetary policy. Capital Market Instruments: Instruments which have the maturity period of more than one year. The wide range of the financial instruments available in the today’s marketplace allows for the efficient flow of capital amongst the world's investors

There are two major categories of financial Instruments:

1) Cash Instruments: Those instruments whose value is determined directly by the market.

2) Derivative Instruments: Those financial instruments which derive their value from the value and characteristics of one or more underlying entities such as an asset, interest rate or index.

The Financial Instruments can also be categorized by “asset class” either Equity based (reflecting ownership of the issuing entity like Common Stock and Preferred stock.) or Debt based(reflecting a loan the investor has made to the issuing entity like Commercial Paper, Treasury Bills, Debentures, Mortgage Loans and Bonds) . If the instrument is debt based, it can be further categorized into Short Term (less than 1 year) or Long term.