Question

explain

8) the basic financial instruments that corporations issue including what cash flow rights and what control rights are associated with each type of financial instrument.

9) the sources of capital that large, public firms are rely upon to make investments.

Answer 1

Solution 8:- Types of Financial Instrument:-

Types of financial instruments	Type of Cash Flow/Income	Type of Rights
1. Equity Finance which covers:- Equity in mutual funds Money market mutual funds	Dividends, Withdrawals of income from quasi corporations Reinvested Earnings	Ownership Control. Right to Vote in decisions of the company
2. Debt	Bonds in the form of Securities and Loan in the form of Cash	Debt is an obligation to the company and therefore it is accompanied by obligation for principal and interest
3. Financial derivatives:- Forward Option Swap	Cash flow in the form of market value which can be obtained on the basis of market price of underlying financial instruments	Rights vary with the nature of financial instrument. Forward contract execution is mandatory only after the expiry of fixed maturity date In option the buyer acquires the right and not the obligation to sell a specific asset It is an agreement in which parties exchange right to sell and buy different set of currencies.

Solution 9:- Sources of Capital that large public firms rely upon are :-

1. Equity:- Equity gives the right in the ownership of the company. It also gives voting right and right to participate in the affairs of the company.Although it carries high degree of risk yet high rate of return can be expected from the equity, Public Firms are mostly interested in investment for long term and in expectation of high return. Therefore equity is highly recommended for such business firms.

2. Loan Capital / Debt:- Debt is acknowledgement of debt incurred by the company. It carries and obligation for repayment after a fixed maturity date. It also carries a fixed return as interest . Risk associated with this type of capital is comparatively low and therefore public firms which are risk averse this form of capital is best suited.