Capital market instruments

Capital market instruments

These are debt and equity instruments which have maturities greater than one year. They have far wider price fluctuations than money market instruments and are considered to be fairly risky investments. The most common capital market instruments in use include:

  • Corporate stocks
  • Mortgages
  • Corporate bonds
  • Marketable long-term government securities
  • State and local government bonds
  • Bank commercial loans
  • Consumer loans

(a) stocks
These are equity claims on the net income and assets of a corporation. They confer on the holder, a number of rights as well as risks. They are two types of corporate stocks:
i. Common stock
ii. Preferred/preference shares

i. Common stock
It is the most important form of corporate stock, it represents residual claim against the assets of the issuing firm. It also entitles the owner to share in the net earnings of the firm when it is profitable and to share in the net market value (after all debts are paid) of the company assets if it is liquidated.
Stock holders risk exposure is limited to the extent of investment in the company. If a company with outstanding shares of common stock is liquidated, the debts of the firm are paid first from the assets available, then preferred stock holders are paid their share and whatever remains is distributed among the common stock holders on a pro-rata basis. The volume of stock that a corporation may issue is known as the authorized share capital and additional shares can only be issued by amending the articles and memorandum of association with the approval of current stock holders in a general meeting.

(ii) Preferred stock
These carry a stated annual divided stated as a percentage of the par value e.g. a 8% preference share is entitled to 8% divided on each share held provided the company declares a divided. They occupy the middle ground between debt and equity including the advantages and disadvantages of both instruments used in raising long-term finance. In case of liquidation, they are paid after other creditors but before equity holders. They have no voting right.

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