Financial

Instruments and
Investment Risk
Analysis
INVESTMENT INSTRUMENTS
Learning outcomes
1. Identify the diverse array of Capital Market
Instruments
2. Categorize various financial Instruments
3. Understand how financial instruments are issued and
traded.
What Is a Financial Instrument?
Refers to a document which signifies a legal of binding
agreement between two parties.
Financial instruments are assets that can be traded, or
they can also be seen as packages of capital that may be
traded.
These assets can be cash, a contractual right to deliver
or receive cash or another type of financial instrument,
or evidence of one's ownership of an entity.
Common stock is a
type of security that
represents
ownership of equity
in a company.
Preferred stock is a
type of stock that
pays shareholders a
specified dividend
and has priority
over common stock
for receiving
dividends.
A corporate bond
is debt issued by a
company in order
for it to raise
capital.
A check is a written, dated, and signed instrument that instructs a
bank to pay a specific. amount to the bearer. A payor is the person or
entity that writes the check, while the payee is the. person to whom the
check is addressed.
A Letter of Credit is a contractual
commitment by the foreign buyer's
bank to pay once the exporter ships
the goods and presents the required
documentation to the exporter's bank
as proof.
Understanding Financial
Instruments
Financial instruments can be real or virtual documents
representing a legal agreement involving any kind of
monetary value.
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.
Types of Financial Instruments
Cash Instruments: The values of cash instruments are directly influenced
and determined by the markets. These can be securities that are easily
transferable. Cash instruments may also be deposits and loans agreed upon
by borrowers and lenders.

Examples:
❖Equity Instruments
❖Bonds
❖Loans-
❖Borrowings
❖Receivables and Payables
❖Deposit of Cash
Equity Instruments
Any contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities.

Example:
Preferred Stock
Equity Options
Equity Warrants
Equity Hybrids
Exchange Traded Funds – ETFs
Equity Swaps
Bonds
Are issued by governments and corporations when they
want to raise money.
By buying a bond, you're giving the issuer a loan, and
they agree to pay you back the face value of the loan on
a specific date, and to pay you periodic interest
payments along the way, usually twice a year.
Loan Instruments
Loan Instruments means the loan agreements,
promissory notes, mortgages, deeds of trust, security
agreements, pledge agreements, guaranty agreements,
insurance policies, financing statements, and any other
such contract documents relating to the Loans.
Borrowing instruments
Generally, the instruments used are some form of
term debt, credit, or other revolving debt—credit
instruments that you can continually draw on—
with repayment conditions defined in a contract.
Types of Financial Instruments
Derivative Instruments: Refers to a type of financial contract whose value is
dependent on an underlying asset, group of assets, or benchmark. A derivative is set
between two or more parties that can trade on an exchange or over the counter (OTC).

Examples:
❑Futures contracts- The buyer is obligated to purchase the underlying asset at
the set price and date.
❑Options contracts- Gives the buyer the right, but not the obligation, to buy or
sell something at a specific price on or before a specific date
❑Swaps- is an agreement to exchange future cash flows.
❑Forward contracts- is where a buyer agrees to purchase the underlying asset
from the seller at a specific price on a specific date.
Why Use Derivatives?
Hedging
Derivatives can be used as a way to limit risk and exposure for an
investor.
Speculating
On the flip side, instead of using derivatives to reduce risk,
speculators could use derivatives to generate profits from it.
Types of Asset Classes of
Financial Instruments
Debt-Based Financial Instruments
Short-term debt-based financial instruments last for one year or less.
Securities of this kind come in the form of T-bills and commercial paper.
Cash of this kind can be deposits and certificates of deposit (CDs).
Long-term debt-based financial instruments last for more than a year.
Under securities, these are bonds. Cash equivalents are loans.
Equity-Based Financial Instruments
Securities under equity-based financial instruments are stocks.
Exchange-traded derivatives in this category include stock options and
equity futures.
Role Play: Issuer and Investor
Characters:
Issuer (Government/Firms)
Investors
Scenario: Issuers need to issue bond, stocks, or other instruments to raise
capital, while investors decide whether to allocate their funds based on risk and
returns.
1. If you deposit your money into a
savings account, what might the bank
give you in return?
a. Interest
b. A loan
c. Insurance
d. A bond
2. What type of Financial instrument
cash deposit belongs?
a. Equity-Based Financial Instruments
b. Debt-Based Financial Instruments
c. Cash Instruments
d. Derivatives Instruments
3. What does a check (Financial
Instrument) promise?
a. A promise to pay
b. A loan from you to the bank
c. Free money to spend
d. Invalid way to pay
4. “Gail”, Fictional farm owner of Healthy Hen Farms is worried about
the
recent fluctuations in chicken prices due to reports of bird flu. Gail
wants
to protect her business against another spell of bad news. she meets
an
investor who enter into a futures contract with her. What type of
Financial
Instrument Gail used to manage the volatility of the chicken market?
a. Equity-Based Financial Instruments
b. Debt-Based Financial Instruments
c. Cash Instruments
d. Derivatives Instruments
5. It is a real or virtual document
representing a legal agreement involving
any kind of monetary value.
a. Investment Instruments
b. Financial Instruments
c. Financial Market
d. All of the above
Assignment
Select a publicly traded company and track its stock price for a
week.
Take note any news events that might impact the stock price
and write a brief report on their observations.