Question

“Financial assets refer to legal documents that provide evidence of ownership and claim”. Write your understanding and views on the importance of financial assets. Support your explanation by referring to the relevant published references (books or journal articles). 

please help me answer at least minimum 2 pages

Answer 1

FINANCIAL ASSETS defines as an asset which provide right to receive contractual cash flows or any other financial asset. It is liquid asset that gets its value from a contractual right or ownership claim. Financial assets can be derivative or non-derivative in nature.

Cash, Receivables, Loan and Advances to party, stocks, bank, investment in bonds and equity are the example of the financial assets.

Importance of Financial Asset:

· Financial assets are easily converted in cash that provide liquidity to business on the requirement of business. The purest form of financial asset is cash and cash equivalent-money market accounts, bonds etc.. Liquid accounts can be converted at any time for paying the obligation and covering financials emergencies or pressing demands.

· Financial assets have the ability to appreciate in value like investment in bond or equity is increasing as per market condition.

· The value of a financial asset is only as strong as the underlying entity.

· Financial asset are represent the strength of business. It provides the base of company and improve or increase the net worth of company.

· For Public Sectors- financial assets helps to produce outcomes-                                                              

(i) Traditional working capital products such as cash & Receivables

(ii) Risk management products such as derivatives

(iii) Financial instruments and investments such as equity or loans, advances

· Financial assets can be used as a medium of exchange or can be converted into money at little cost or risk. This attractive property for investors is called moneyless. Divisibility and Denomination refers to the minimum amount or size in which assets can be traded. For instance, US bonds are generally sold in $ 1,000 denominations, commercial paper in $25,000 units and deposits are infinitely divisible.

· Financial assets is reversibility, also referred to as turnaround cost or round-trip cost. It indicates the cost of buying an asset and then re-selling it.

· The Cash Flow is the return associated to the investment on financial assets corresponded in different forms according to the type of financial asset as dividends and options of stocks or coupon payments on bonds. Term to maturity is the length of the period until the final repayment date or the date at which the owner can demand the asset liquidation

· The degree of liquidity of an instrument can be determined either in the financial market or it can be determined by means of contractual obligations. An example of agreement that can determine the degree of liquidity of an instrument is the claim of a private pension fund. In this case, the asset is clearly considered illiquid in that the claim can be satisfied not before the retirement date

· It is the Risk/Return predictability, for which the riskiness associated to an asset depends on the uncertainty about future interest rates and future cash flow (nominal expected returns). In case the future cash flow is known in advance, as contractually determined, the uncertainty may regard only the solvency of the debtor.

· A financial asset can be also regarded as a combination of two or more simpler financial instruments whose value is the sum of the price of its component parts. For instance, the price of a callable bond corresponds to the price of a similar non-callable bond less the value of the option that allows the issuer to redeem the bond early.

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