Definition of Instruments

Instruments

Financial securities, such as money market instruments or capital market insturments.

Alternative mortgage instruments

Variations of mortgage instruments such as adjustable-rate and variablerate
mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several seldom-used
variations.

Derivative instruments

Contracts such as options and futures whose price is derived from the price of the
underlying financial asset.

Fixed-income instruments

Assets that pay a fixed-dollar amount, such as bonds and preferred stock.

Financing Instruments

This is a generic term that refers to the many different forms of financing a business may use. For example - loans, shares, and bonds are all considered financing instruments.

Banker's acceptance

A short-term credit investment created by a non-financial firm and guaranteed by a
bank as to payment. Acceptances are traded at discounts from face value in the secondary market. These
instruments have been a popular investment for money market funds. They are commonly used in
international transactions.

Capital market

The market for trading long-term debt instruments (those that mature in more than one year).

Debt market

The market for trading debt instruments.

Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.

Derivative markets

Markets for derivative instruments.

Discount securities

Non-interest-bearing money market instruments that are issued at a discount and
redeemed at maturity for full face value, e.g. U.S. Treasury bills.

Exempt securities

instruments exempt from the registration requirements of the Securities Act of 1933 or the
margin requirements of the SEC Act of 1934. Such securities include government bonds, agencies, munis,
commercial paper, and private placements.

Financial engineering

Combining or dividing existing instruments to create new financial products.

First notice day

The first day, varying by contracts and exchanges, on which notices of intent to deliver
actual financial instruments or physical commodities against futures are authorized.

Future

A term used to designate all contracts covering the sale of financial instruments or physical
commodities for future delivery on a commodity exchange.

Futures

A term used to designate all contracts covering the sale of financial instruments or physical
commodities for future delivery on a commodity exchange.

Hybrid

A package containing two or more different kinds of risk management instruments that are usually
interactive.

Last trading day

The final day under an exchange's rules during which trading may take place in a particular
futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery
of underlying physical commodities or financial instruments, or by agreement for monetary settlement
depending upon futures contract specifications.

Note

Debt instruments with initial maturities greater than one year and less than 10 years.

Other capital

In the balance of payments, other capital is a residual category that groups all the capital
transactions that have not been included in direct investment, portfolio investment, and reserves categories. It
is divided into long-term capital and short-term capital and, because of its residual status, can differ from
country to country. Generally speaking, other long-term capital includes most non-negotiable instruments of a
year or more like bank loans and mortgages. Other short-term capital includes financial assets of less than a
year such as currency, deposits, and bills.

Paper

Money market instruments, commercial paper and other.

Required yield

Generally referring to bonds, the yield required by the marketplace to match available returns
for financial instruments with comparable risk.

Safekeep

For a fee, bankers will hold in their vault, clip coupons on, and present for payment at maturity
bonds and money market instruments.

Substitute sale

A method for hedging price risk that utilizes debt-market instruments, such as interest rate
futures, or that involves selling borrowed securities as the primary assets.

Synthetics

Customized hybrid instruments created by blending an underlying price on a cash instrument with
the price of a derivative instrument.

capital structure, or capitalization

Terms that refer to the combination of
capital sources that a business has tapped for investing in its assets—in
particular, the mix of its interest-bearing debt and its owners’ equity. In a
more sweeping sense, the terms also include appendages and other features
of the basic debt and equity instruments of a business. Such things
as stock options, stock warrants, and convertible features of preferred
stock and notes payable are included in the more inclusive sense of the
terms, as well as any debt-based and equity-based financial derivatives
issued by the business.

Cost of capital

The blended cost of a company’s currently outstanding debt instruments
and equity, weighted by the comparative proportions of each one. During a capital
budgeting review, the expected return from a capital purchase must exceed this cost
of capital, or else a company will experience a net loss on the transaction.

Money Market

A financial market in which short-term (maturity of less than a year) debt instruments such as bonds are traded.

Market Value

A quoted market price per unit times the number of units being valued. Synonymous
with fair value for financial instruments when a quoted market price is available.

Cash Equivalents

instruments or investments of such high liquidity and safety that they are virtually equal to cash.

Common Shares

Are equity instruments that take no security against assets, have no fixed terms of repayment and pay no fixed dividends.

Convertible Debenture

Are debt instruments that are convertible into common or preferred shares, take secondary or no security against assets, have flexible terms of repayment and charge fixed or floating interest rates.

Preferred Shares

Are equity instruments that take no security against assets, have flexible terms of repayment and pay fixed or floating dividends.

Present Value (PV)

Are equity instruments that take no security against assets, have flexible terms of repayment and pay fixed or floating dividends.

Senior Debt

Are debt instruments that provide financing, take primary security against either specific or all assets of the borrower, have fixed terms of repayment and charge fixed or floating interest rates.

Subordinated Debt

Debt instruments that provide financing for acquisitions, expansion and restructuring, take secondary security against assets, have fixed or flexible terms of repayment and charge fixed or floating interest rates.

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