Question

. Define each of the following types of credit market instruments and identify one common example of each type: (a) simple loan; (b) fixed payment loan; (c) coupon bond; (d) discount bond. (e) Are loans and bonds credit and/or debt instruments? Briefly explain.

Answer 1

The definition of loan can be any amount borrowed from anyone and payment of such amount with interest on the principal amount borrowed is to be done after a fixed period of time.

(a). Simple loan : is such a loan on which interest only on the principal is to be paid.

(b). Fixed payment loan : is such type of loan on which the fixed amount of installment payment is made throughout the life of the loan. Also the amount of payment made remains the same.

(c). Coupon bond : is a type of bond issued by the issuer on which their are no records of purchaser and coupons are attached to such bonds representing the amount of interest to be paid. Coupon bonds are also known as bearer bonds.  

(d).  Discount bonds : are a such type of bonds which are issued by the issuing company at a discount i.e below their par or face value.

(e). Loans and bonds much of the time are credit instruments, as these increases the creditors of the company and repayment of such loans and bonds are to be done after a fixed period of time. Also loans and bonds are shown in the liabilities of the company.