Question

Financial instruments Financial instruments are assets that have a monetary value or record a monetary transaction. To coordinate the exchange of capital between borrowers and lenders, financial instruments trade in the financial markets. These financial instruments can be categorized on the basis of their issuers, maturity, risk, and other factors.

Identify the financial instruments based on the following descriptions.

a. Backed by the U.S. government, these financial instruments are short-term debt obligations with a maturity of less than one year. They are considered risk-free investments.
b. Issued by money-centered financial firms, these short- or medium-term insured debt instruments pay higher interest than a regular savings account. They are low-risk instruments and have low returns.
c. These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated.
d. These financial instruments are contractual agreements that give one party a long-term agreement to use an asset by providing regular payments.

Which of the following instruments are traded in the capital markets? Check all that apply.
a. Common stocks
b. Corporate bonds
c. Preferred stocks
d. Certificates of deposit
e. Long-term bank loans

The process in which derivatives are used to reduce risk exposure is called :________

Answer 1

1a. Backed by the U.S. government, these financial instruments are short-term debt obligations with a maturity of less than one year. They are considered risk-free investments.

Identification: U.S. Treasury Bills (T-bills)

b. Issued by money-centered financial firms, these short- or medium-term insured debt instruments pay higher interest than a regular savings account. They are low-risk instruments and have low returns.

Identification: Certificate of deposit

c. These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated.

Identification: Money Market Mutual Fund

d. These financial instruments are contractual agreements that give one party a long-term agreement to use an asset by providing regular payments.

Identification: Lease Agreement

2. The instruments which are traded in capital markets are Common Stock, Preferred Stock, Corporate Bonds and Certificates of deposits excluding Long-term bank loans.

3. The process in which derivatives are used to reduce risk exposure is called hedging.