Answer to Question #170347 in Finance for innocent kampumba

Question

The financial market is composed of products and services provided by financial institutions. Identify and describe the following financial institutions.

a).        Identify and explain at least five financial instruments (for each) traded in money and capital markets.                                                                                                               (20 Marks)

b).       distinguish the two types of markets in (a) above

Answer 1

Financial Instruments in Money Markets

i) Commercial paper

It is a type of short-term debt instrument issued by corporations for the financing of payroll, accounts payable and inventories.

ii) Trade credit

It is an arrangement to buy goods or services on account without making immediate cash or cheque payments.

iii) Bills

It is a printed or written statement of the money owed to a creditor for goods or services.

iv) Treasury Certificate of Deposit

It is a short-term loan from the Federal Reserve when the United States Treasury needs to borrow money.

Financial Instruments in Capital Markets

i) Bonds.

A bond is a contract between two companies where Companies or governments issue bonds because they need to borrow large sum of money.

ii) Retained Earnings

Retained earnings are an equity account and appear as a credit balance while negative retained earnings appear as a debit balance.

iii) Debentures

Is a long-term security yielding a fixed rate of interest, issued by a company and secured against assets.

iv) Shares

Are units of equity ownership interest in a corporation that exist as a financial asset providing for an equal distribution in any residual profits, if any are declared, in the form of dividends.

b) A Money Market is a random course of financial institutions, bill brokers, money dealers, banks, etc., wherein dealing on short-term financial tools are being settled while Capital Markets is a financial market where the company or government securities are generated and patronised with the intention of establishing long-term finance to coincide with the capital necessary