Download Financial Markets: Facilitating Capital Formation and Risk Management and more Study notes Corporate Finance in PDF only on Docsity!
Corporate Objectives
To develop core competencies in selected areas and exploit the market opportunities in these areas to the best advantage of the Corporation. To continuously undertake horizontal and vertical diversifications thereby enabling sustained growth of business. To make best use of financial strength of the Corporation in expanding its business. To lay emphasis on quality of services to customers so as to develop long-term business relationship with buyers and suppliers in and outside the country. To undertake market intervention operation as and when advised by the Government of India. To create new infrastructure and make optimum utilisation of infrastructure available with the Corporation. To strive to pay adequate returns to the stakeholders. To fulfil Corporation’s social responsibility by following ethical business practices and reinforcing commitment to customers, employees, partners and communities. To undertake on a continuous basis training / re-training of existing manpower and induct professionally qualified young talent so as to create a cadre of highly professional and motivated managers. To ensure an efficient and streamlined system of operations, with minimum transaction costs. To act as a facilitator to small and medium exporters and importers.
What is Wealth Maximization?
Wealth maximization is the concept of increasing the value of a business in order to increase the value of the shares held by its stockholders. The concept requires a company's management team to continually search for the highest possible returns on funds invested in the business, while mitigating any associated risk of loss. This calls for a detailed analysis of the cash flows associated with each prospective investment, as well as constant attention to the strategic direction of the organization. The most direct evidence of wealth maximization is changes in the price of a company's share Problems with Wealth Maximization A company may minimize its investment in safety equipment in order to save cash, thereby putting workers at risk. A company may continually pit suppliers against each other in the unmitigated pursuit of the lowest possible parts prices, resulting in some suppliers going out of business. A company may only invest minimal amounts in pollution controls, resulting in environmental damage to the surrounding area.
What is profit maximisation?
An enterprise manufactures and sells a definite amount of a commodity. The enterprise’s profit, denoted by π , is defined as the difference between its TR (total revenue) and TC (total cost of production). In other words, π = TR – TC
The gap between TR and TC is the enterprise’s profits. An enterprise wishes to maximise its profit and likes to recognise the amount or quantity q 0, at which its profits are maximum. By definition, at any quantity other than q 0 , the enterprise’s profits are less than q 0. Here, the question is how do we recognise q 0. For profits to be maximum, three conditions must hold at q 0. The cost price p, must be equal to MC. The marginal cost must be non-decreasing at q 0. For the enterprise to continue to manufacture in the short run, the cost price must be greater than the average variable cost (p > AVC), whereas in the long run, the cost price must be greater than the average cost (p > AC). Condition 1 Profits are nothing but the difference between total revenue and total cost. Both TR and TC increase as the output increases. As long as the change in total revenue is greater than the change in total cost, the profits continue to rise. Recall that the change in TR per unit increase in the output is the marginal revenue, and the change in total cost per unit increase in the output is the marginal cost. Condition 2 Now, let us consider the second condition that must hold good when the profit-maximising output degree is positive. Note that at output degrees q 1 and q 4 , the market price is equivalent to the marginal cost. However, at output level q 1 , the marginal cost curve is a downward graph. We claim that q 1 cannot be a profit-maximising output degree.
- Corporate Social Responsibility (CSR) : Successful corporations often engage in CSR initiatives that aim to improve social welfare within the communities they operate. This may involve philanthropic activities, environmental sustainability efforts, or partnerships with social welfare organizations.
- Innovation and Technology : Corporate growth is often associated with advancements in technology and innovation. These developments can have far-reaching implications for social welfare, such as improved access to healthcare, education, and essential services.
- Income Inequality : While corporate growth can contribute to overall economic development, it may also exacerbate income inequality if not accompanied by equitable distribution of wealth and opportunities. Addressing this aspect is crucial for ensuring that corporate growth positively impacts social welfare across all segments of society. Balancing Social Welfare and Corporate Growth Achieving a harmonious balance between promoting social welfare and fostering corporate growth is essential for sustainable development. Policymakers, businesses, and civil society must collaborate to create an environment where both objectives complement each other. Effective governance plays a pivotal role in ensuring that social welfare policies support inclusive economic growth while maintaining a conducive environment for businesses to thrive. Striking this balance requires continuous evaluation, adaptation of policies, and a commitment to addressing emerging societal needs while fostering an enabling environment for corporate innovation and expansion. In conclusion, the relationship between social welfare and corporate growth is intricate and dynamic. Both concepts are interdependent, with the potential to either reinforce or impede each other’s progress based on how they are managed within a given socio-economic context. : Impediments to Wealth Maximization Wealth maximization is the primary goal of any business or individual seeking financial success. However, there are several impediments that can hinder the achievement of this objective. These impediments can be categorized into internal and external factors, each with its own set of challenges. Internal Factors
- Lack of Financial Discipline : One of the key internal impediments to wealth maximization is the lack of financial discipline. This can manifest in various forms such as overspending, mismanagement of
resources, or failure to adhere to a budget. Without proper financial discipline, it becomes challenging to accumulate and grow wealth over time.
- Inefficient Capital Allocation : Inefficient capital allocation within an organization can significantly impede wealth maximization. This may include investing in projects with low returns, failing to diversify investments, or making decisions based on short-term gains rather than long-term value creation.
- Poor Risk Management : Inadequate risk management practices can pose a significant obstacle to wealth maximization. Failure to identify, assess, and mitigate risks effectively can lead to substantial financial losses, thereby hindering the accumulation of wealth.
- Lack of Innovation : In today’s dynamic business environment, a lack of innovation can impede wealth maximization. Businesses that fail to innovate and adapt to changing market trends may struggle to remain competitive and generate sustainable long-term profits.
- Inadequate Governance and Leadership : Weak governance structures and ineffective leadership can hinder wealth maximization efforts within an organization. This can lead to mismanagement, ethical lapses, and strategic missteps that erode shareholder value and impede wealth creation. External Factors
- Economic Volatility : Fluctuations in the broader economic environment, including factors such as inflation, interest rates, and currency fluctuations, can pose significant challenges to wealth maximization. These external economic forces can impact investment returns, consumer purchasing power, and overall business performance.
- Regulatory Changes : Shifts in regulatory frameworks and policies can create obstacles for wealth maximization. Compliance costs, changes in tax laws, and evolving industry regulations can affect the profitability and operational efficiency of businesses, thereby impacting their ability to maximize wealth.
- Market Disruptions : Disruptions in the market due to technological advancements, industry shifts, or geopolitical events can impede wealth maximization efforts. Businesses may face challenges in adapting to these disruptions, leading to potential revenue declines and decreased wealth accumulation.
- Global Uncertainty : Geopolitical instability, trade tensions, and global events such as pandemics or natural disasters can introduce uncertainty into the business environment, impacting investment decisions and overall wealth creation strategies.
- Social and Environmental Factors : Increasing emphasis on social responsibility and environmental sustainability has led businesses to consider non-financial impacts on wealth maximization. Balancing profit objectives with social and environmental considerations presents challenges that can impede traditional wealth maximization efforts.
Challenges in Financial Markets Despite their importance, financial markets face several challenges including market volatility, regulatory changes, cybersecurity threats, and systemic risks. These challenges require continuous monitoring and adaptation by market participants and regulators to maintain stability and integrity within the financial system. In conclusion, financial markets are essential components of modern economies, providing a platform for capital allocation, investment opportunities, risk management, and price discovery. Their functions are critical in driving economic growth and development while also presenting various challenges that require ongoing attention and management. . Money Market The money market refers to the financial marketplace where short-term borrowing and lending of funds occur. It is a key component of the global financial system and plays a crucial role in facilitating liquidity and funding for various entities, including governments, financial institutions, and corporations. The money market is characterized by the issuance and trading of short-term debt securities, such as Treasury bills, commercial paper, certificates of deposit, and repurchase agreements. Functions of the Money Market
- Liquidity Management : The money market provides a platform for institutions to manage their short-term liquidity needs efficiently. Participants can easily convert their financial assets into cash or invest excess funds in short-term instruments to earn returns while maintaining liquidity.
- Short-Term Borrowing and Lending : It serves as a venue for short-term borrowing and lending activities, allowing entities to meet their short-term funding requirements. Borrowers can access funds quickly, while lenders can earn interest on their surplus funds.
- Interest Rate Determination : The money market influences short-term interest rates through the forces of supply and demand for short-term funds. Central banks often use open market operations in the money market to implement monetary policy and regulate interest rates.
- Facilitating Trade in Financial Instruments : Money market instruments are actively traded, providing investors with opportunities to buy and sell short-term debt securities. This enhances market efficiency and price discovery. Instruments in the Money Market
- Treasury Bills (T-Bills) : These are short-term government securities with maturities ranging from a few days to one year. They are issued at a discount to face value and redeemed at par value upon maturity, with the difference representing the interest earned by the holder.
- Commercial Paper : This represents unsecured promissory notes issued by corporations to raise short-term funds. Commercial paper typically has maturities ranging from 1 to 270 days and is commonly used to finance working capital needs.
- Certificates of Deposit (CDs) : CDs are time deposits offered by banks and financial institutions with fixed maturities and specified interest rates. They provide a secure investment option for individuals and institutions seeking low-risk returns.
- Repurchase Agreements (Repos) : Repos involve the sale of securities with an agreement to repurchase them at a later date at a slightly higher price, effectively serving as collateralized short-term loans. Regulation and Oversight The money market is subject to regulatory oversight aimed at ensuring transparency, stability, and investor protection. Regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States play a crucial role in supervising money market activities and enforcing compliance with relevant regulations. Role in Monetary Policy Central banks utilize the money market as a tool for implementing monetary policy objectives. Through open market operations, central banks can influence the level of reserves in the banking system, thereby impacting short-term interest rates and overall economic conditions. Global Significance The money market has global significance as it facilitates efficient allocation of funds across borders, enabling international trade and investment activities. It also serves as a key source of funding for governments and corporations worldwide. In conclusion, the money market is an essential component of the financial system, providing avenues for short-term borrowing, lending, liquidity management, and interest rate determination. Its diverse range of instruments and its role in monetary policy make it a critical driver of economic activity at both national and international levels. .
In conclusion, capital markets are vital components of the financial system, serving as engines for economic growth by facilitating efficient allocation of capital between those who need it and those who have it. These sources were used to gather comprehensive information on capital markets, including definitions, functions, types of participants, and global aspects. Unit---- 2 Financial Forecasting Financial forecasting is the process of making predictions about a company’s future financial performance. It involves estimating future revenues, expenses, and cash flows to help businesses make informed decisions. Financial forecasting is crucial for budgeting, planning, and strategic decision-making. Importance of Financial Forecasting Financial forecasting is essential for businesses as it helps in several ways:
- Budgeting and Planning : By forecasting future financial performance, businesses can create budgets and allocate resources effectively.
- Decision Making : It aids in making strategic decisions such as expansion, investment, or cost-cutting measures based on predicted financial outcomes.
- Risk Management : Forecasting helps in identifying potential financial risks and developing strategies to mitigate them.
- Investor Confidence : Accurate financial forecasts can enhance investor confidence by demonstrating a clear understanding of the company’s future prospects.
- Performance Evaluation : It provides a benchmark for evaluating actual financial performance against the forecasted figures. Methods of Financial Forecasting Several methods are used for financial forecasting:
- Qualitative Methods : These include expert opinion, market research, and Delphi method where experts provide their opinions anonymously.
- Quantitative Methods : Time series analysis, regression analysis, and econometric modeling are quantitative techniques used for forecasting based on historical data.
- Predictive Analytics : Advanced statistical techniques and machine learning algorithms are employed to forecast future financial trends based on large datasets.
- Scenario Analysis : This method involves creating multiple scenarios based on different assumptions to assess the potential impact on financial outcomes. Challenges in Financial Forecasting Financial forecasting comes with its own set of challenges:
- Uncertainty : Economic volatility, market dynamics, and unforeseen events make it difficult to predict future financial outcomes accurately.
- Data Quality : Forecast accuracy heavily relies on the quality and reliability of historical data used for analysis.
- Complexity : As businesses grow, the complexity of forecasting increases due to a wider range of variables and factors influencing financial performance.
- Dynamic Business Environment : Rapid changes in technology, regulations, and consumer behavior add complexity to the forecasting process. Common Size Statement A common size statement, also known as a common size financial statement, is a financial document that displays all items as percentages of a common base figure. This type of financial statement is used to analyze the financial performance and position of a company over time and to compare it with other companies in the same industry. The common size statement helps in identifying trends, making comparisons, and evaluating the relative proportions of different line items within a company’s financial statements. Preparation of Common Size Statement The preparation of a common size statement involves converting each line item on the financial statement to a percentage of a common base figure. For example, on the income statement, each revenue and expense item is expressed as a percentage of total revenue. On the balance sheet, each asset, liability, and equity item is expressed as a percentage of total assets. This standardization allows for easy comparison across different time periods and among companies of varying sizes.
The comparative size statement typically involves expressing each line item on a financial statement as a percentage of a base amount. Common base amounts include total revenue for income statements, total assets for balance sheets, and net cash flows from operating activities for cash flow statements. This normalization allows for meaningful comparisons across different time periods or among companies of varying sizes. Application in Financial Analysis Financial analysts use comparative size statements to conduct various types of analysis:
- Vertical Analysis : This involves expressing each line item on a financial statement as a percentage of another item within the same period. For example, expressing each expense item on an income statement as a percentage of total revenue.
- Horizontal Analysis : Here, the comparative size statement is used to compare line items across multiple periods. This helps in identifying changes in the relative importance of different components over time.
- Benchmarking : Comparative size statements are also used for benchmarking against industry averages or competitors’ financials to assess relative performance and identify areas for improvement. Unit ----- 3 Introduction to Debt Instruments Debt instruments are financial securities that represent borrowings of funds from investors. These instruments are issued by entities, such as corporations or governments, to raise capital for various purposes, including financing operations, making investments, or funding projects. Debt instruments are an essential component of the financial system, as they facilitate the transfer of capital from savers to borrowers, thereby promoting economic growth and development. Types of Debt Instruments There are several types of debt instruments, each with unique characteristics and risks. Some of the most common types include:
- Bonds: Bonds are fixed-income securities that represent a loan made by an investor to a borrower (usually a corporation or government). Bonds have a specified maturity date, at which point the borrower repays the principal amount to the investor. Bonds also pay a fixed or variable interest rate, known as the coupon, which is paid to the investor periodically until the bond matures.
- Commercial Paper: Commercial paper is a short-term, unsecured debt instrument issued by corporations to raise funds. These instruments typically have maturities of less than one year and are sold at a discount to their face value. Commercial paper is considered a highly liquid and low-risk debt instrument, as it is usually backed by the creditworthiness of the issuing corporation.
- Mortgage-backed Securities: Mortgage-backed securities (MBS) are debt instruments that are backed by a pool of mortgage loans. When an individual or a family takes out a mortgage, the loan is bundled with other mortgages and sold to an investor as an MBS. The investor receives periodic payments of principal and interest from the borrowers, which are passed through to the security holders. MBS are considered riskier than other debt instruments due to their exposure to the housing market and the creditworthiness of the borrowers.
- Asset-backed Securities: Asset-backed securities (ABS) are debt instruments that are backed by a pool of assets, such as loans, receivables, or leases. ABS can be backed by various types of assets, including auto loans, credit card receivables, or student loans. The cash flows generated by the underlying assets are used to make payments to the security holders. ABS are considered less risky than MBS, as they are backed by a more diverse range of assets.
Characteristics of Debt Instruments Debt instruments possess several key characteristics that differentiate them from other financial securities:
- Fixed or Variable Interest Rates: Debt instruments typically offer either a fixed or variable interest rate, which determines the periodic payments made to the investor. Fixed-rate debt instruments provide investors with predictable cash flows, while variable-rate instruments offer the potential for higher returns if interest rates decline.
- Maturity: Debt instruments have a specified maturity date, at which point the borrower repays the principal amount to the investor. Maturities can range from short-term (less than one year) to long-term (more than ten years).
- Credit Risk: Debt instruments are exposed to credit risk, which is the risk that the borrower will default on its obligations. The creditworthiness of the borrower is a critical factor in determining the interest rate and the risk associated with the debt instrument.
- Interest Rate Risk: Debt instruments are also exposed to interest rate risk, which is the risk that changes in interest rates will affect the value of the debt instrument. When interest rates rise, the value of existing debt instruments with lower interest rates may decline. 1..
Coupon and Yield Relationships In the context of bonds, the coupon rate and yield are two essential components that determine the return an investor can expect. The coupon rate is the fixed annual interest rate that the issuer pays to the bondholder, while the yield is the effective rate of return based on the bond’s current market price. Understanding the relationship between coupon rates and yields is crucial for investors to make informed decisions. Inverse Relationship The relationship between coupon rates and yields is generally inverse. When a bond’s price rises, its yield falls, and vice versa. This inverse relationship exists because the coupon rate determines the fixed interest payments, while the yield reflects the return based on the bond’s current market price. Therefore, when a bond’s price increases, its fixed coupon payments represent a smaller percentage of the new, higher price, resulting in a lower yield. Conversely, when a bond’s price decreases, its fixed coupon payments represent a larger percentage of the new, lower price, leading to a higher yield. Impact of Market Conditions Market conditions also play a significant role in shaping the relationship between coupon rates and yields. In a low- interest-rate environment, where newly issued bonds offer lower coupon rates, existing bonds with higher coupon rates become more attractive to investors. As a result, these higher-coupon bonds may see their prices rise, leading to lower yields. Conversely, in a high-interest-rate environment, existing bonds with lower coupon rates may experience price declines as newer bonds with higher coupon rates enter the market, causing their yields to increase. Yield to Maturity Yield to maturity (YTM) is another important concept related to bond yields. YTM represents the total return an investor can expect if they hold the bond until it matures. It takes into account not only the bond’s coupon payments but also any capital gains or losses if the bond is purchased at a premium or discount to its face value. YTM provides a more comprehensive measure of a bond’s return compared to its current yield, as it considers both the coupon payments and any potential capital gains or losses upon maturity. Risk Considerations When analyzing the relationship between coupon rates and yields, it’s crucial to consider risk factors such as interest rate risk and credit risk. Interest rate risk refers to the potential impact of changing interest rates on bond prices and yields. Bonds with longer maturities are generally more sensitive to interest rate changes, leading to greater fluctuations in their prices and yields. Credit risk pertains to the issuer’s ability to meet its debt obligations; bonds with higher credit risk typically offer higher yields to compensate investors for taking on additional risk. : Bond Pricing Theorems Bond pricing theorems are fundamental principles in finance that help determine the value of bonds in the market. These theorems provide a framework for understanding how bond prices are calculated and how they fluctuate based on various factors such as interest rates, time to maturity, and credit risk. There are several key bond pricing theorems that are widely used in financial analysis and investment decision-making. Present Value Theorem
The present value theorem states that the price of a bond is equal to the present value of its future cash flows. In other words, it asserts that the value of a bond is determined by discounting all its future coupon payments and the final principal repayment at an appropriate discount rate. This theorem is based on the concept that a dollar received in the future is worth less than a dollar received today due to the time value of money. Yield to Maturity Theorem The yield to maturity (YTM) theorem is another important principle in bond pricing. It states that the yield to maturity of a bond is the discount rate at which the present value of all future cash flows from the bond equals its current market price. In essence, it provides a way to calculate the annualized return on a bond if it is held until maturity, taking into account its current market price, coupon payments, and final principal repayment. Interest Rate Risk Theorem The interest rate risk theorem addresses the impact of changes in interest rates on bond prices. It asserts that when interest rates rise, bond prices fall, and vice versa. This relationship exists because as interest rates increase, newly issued bonds offer higher yields, making existing bonds with lower yields less attractive and thus decreasing their market value. Conversely, when interest rates decrease, existing bonds with higher yields become more valuable, leading to an increase in their prices. Credit Risk Theorem The credit risk theorem focuses on the influence of credit risk on bond prices. It emphasizes that bonds issued by entities with lower creditworthiness will trade at lower prices compared to similar bonds with higher credit ratings. This reflects the higher perceived risk associated with default or delayed payments by lower-rated issuers, leading investors to demand a higher yield as compensation for taking on this risk. UNIT 4
What is time value for money? How is it computed and incorporated in financial decision
making?
Time Value of Money The time value of money (TVM) is a fundamental concept in finance that reflects the idea that a sum of money today is worth more than the same sum in the future due to its potential earning capacity. In other words, money has a time value because it can be invested to generate returns over time. This concept is based on the premise that a rational investor would prefer to receive a payment of a fixed sum of money today rather than the same amount in the future, as the present sum can be invested and earn interest or other returns over time. Calculation of Time Value of Money The time value of money is computed using various financial formulas and equations. The most common calculations related to TVM include present value (PV), future value (FV), interest rate (r), and the number of periods (n). These calculations are used to determine the worth of a cash flow or series of cash flows at different points in time. The formulas for these calculations take into account factors such as compounding periods, discount rates, and the timing of cash flows. The present value (PV) formula is used to calculate the current worth of a future sum of money, taking into account a specified interest rate. It is represented as: PV = FV / (1 + r)^n
3. Sharpe Ratio The Sharpe ratio is a measure of risk-adjusted return. It evaluates the return of an investment relative to its risk, as measured by standard deviation. A higher Sharpe ratio indicates better risk-adjusted performance. This method allows investors to compare the risk-adjusted returns of different investments and assess whether the returns are worth the risk taken. 4. Capital Asset Pricing Model (CAPM) CAPM is a widely used model for estimating the expected return on an investment based on its risk. It takes into account the risk-free rate, beta coefficient, and expected market return to calculate the expected return for a particular investment. By using CAPM, investors can determine whether an investment offers adequate compensation for the level of risk taken. 5. Modern Portfolio Theory (MPT) MPT considers how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing diversification. By analyzing the correlation between different assets’ returns and their individual volatilities, MPT provides insights into constructing efficient portfolios that balance risk and return. 6. Value at Risk (VaR) VaR is a statistical technique used to measure and quantify potential losses in investments over a specific time frame at a certain confidence level. It provides an estimate of how much a set of investments might lose under normal market conditions over a specified period. VaR helps investors understand the potential downside risk associated with their investments. 7. Monte Carlo Simulation Monte Carlo simulation involves using computer algorithms to generate random variations in financial models based on input variables such as asset prices, interest rates, and volatilities. By running multiple simulations, investors can assess the range of potential outcomes and associated risks for their investments. 8. Historical Returns Analysis Analyzing historical returns involves examining past performance data of an investment to understand its average return, volatility, and drawdowns over different time periods. This method provides insights into how an investment has behaved in various market conditions and helps in assessing its potential future performance. In conclusion, these methods offer diverse approaches to compute risk and return, allowing investors to make informed decisions based on their risk tolerance, investment goals, and market expectations.
6.Different types of Debt instruments with their main features and characteristics
Types of Debt Instruments with Main Features and Characteristics Debt instruments are financial assets that document a promise to repay a borrowed amount along with interest at a specified time. There are various types of debt instruments, each with its unique features and characteristics. Here are some of the main types:
1. Bonds: Bonds are debt securities issued by governments, municipalities, or corporations to raise capital. They have a fixed maturity date and pay a specified interest rate, known as the coupon rate, at regular intervals. Bonds can be classified into various categories based on their issuer, maturity, and the nature of the underlying assets. For example, government bonds are issued by national governments to finance public spending, while corporate bonds are issued by companies to fund their operations or expansion. 2. Treasury Securities: These are debt instruments issued by the U.S. Department of the Treasury to finance the national debt and government spending. Treasury securities include Treasury bills (T-bills), Treasury notes, and Treasury bonds. They are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.
3. Mortgage-Backed Securities (MBS): MBS are created from pools of mortgages that are bundled together and sold to investors. These securities provide investors with a claim on the interest and principal payments from the underlying mortgages. MBS can be issued or guaranteed by government-sponsored enterprises such as Fannie Mae and Freddie Mac or by private financial institutions. 4. Commercial Paper: Commercial paper is a short-term debt instrument issued by corporations to meet short-term obligations, such as payroll and inventory expenses. It typically has a maturity of less than 270 days and is usually sold at a discount from face value. 5. Certificates of Deposit (CDs): CDs are time deposits offered by banks and credit unions, where investors deposit funds for a specified period in exchange for a fixed interest rate. CDs have fixed maturities ranging from a few months to several years. 6. Corporate Bonds: These are debt securities issued by corporations to raise capital for various purposes, such as expansion, acquisitions, or working capital needs. Corporate bonds can be classified based on their credit rating, which reflects the issuer’s creditworthiness. 7. Municipal Bonds: Municipal bonds are debt securities issued by state and local governments or their agencies to finance public projects such as schools, highways, and utilities. They offer tax advantages to investors because the interest income is often exempt from federal income tax. 8. Convertible Bonds: Convertible bonds give bondholders the option to convert their bonds into a predetermined number of common stock shares of the issuing company at certain times during their life or upon maturity. 9. Floating Rate Notes (FRNs): FRNs are debt instruments with variable interest rates that adjust periodically based on a reference rate, such as LIBOR or the U.S. Treasury bill rate. 10. Zero-Coupon Bonds: Zero-coupon bonds do not pay periodic interest but are sold at a discount to face value and redeemed at face value upon maturity, providing investors with a return through capital appreciation. Each type of debt instrument has its own risk-return profile, liquidity characteristics, tax implications, and other unique features that make them suitable for different investment objectives and risk tolerances.
Types of Shares and Their Main Features
Shares are units of ownership in a company, and they represent a claim on the company’s assets and earnings. There are various types of shares, each with its own unique features and characteristics. Understanding the different types of shares is essential for investors and individuals looking to participate in the stock market. Here are some of the main types of shares and their features:
1. Common Shares: Common shares, also known as ordinary shares, are the most common type of shares issued by companies. Holders of common shares have voting rights at shareholder meetings, allowing them to participate in important company decisions. These shares also provide potential for capital appreciation and dividend income, although dividends are not guaranteed.
