Question

Describe different categories of investments in financial assets and list the accounts used by giving examples.( at most 4 pages allowed)

Answer 1

What are Financial Assets?

The financial assets can be defined as an investment asset whose value is derived from a contractual claim of what they represent. These are liquid assets as the economic resources or ownership can be converted into something of value such as cash. These are also referred to as financial instruments or securities. They are widely used to finance real estate and ownership of tangible assets.

These are basically legal claims and these legal contracts are subject to future cash at a predefined maturity value and predetermined time frame.

Types of Financial Assets

These all can be classified in different categories according to the features of the cash flow associated with them.

#1 – Certificate of Deposit (CD)

This type of financial asset is an agreement between an investor (here, company) and a bank institution in which the customer (Company) keep a set amount of money deposited in the bank for the agreed term in exchange for a guaranteed rate of interest.

#2 – Bonds

This type of financial asset is usually a debt instrument sold by companies or government in order to raise fund for short-term projects. A bond is a legal document that states money the investor has lent the borrower and the amount when it needs to be paid back (plus interest) and the bond’s maturity date.

#3 – Stocks

Stocks do not have any maturity date. Investing in stocks of a company means participating in the ownership of the company and sharing its profits and losses. Stocks belong to shareholders until and unless they sell them.

4 – Cash or Cash Equivalent

This type of financial asset is the cash or equivalent reserved with the organization.

#5 – Bank Deposits

These are the cash reserve of the organization with Banks in saving and checking accounts.

#6 – Loans & Receivables

Loans and Receivables are those assets with fixed or determinable payments. For banks, loans are such assets as they sell them to other parties as their business.

#7 – Derivatives

Derivatives are financial assets whose value is derived from other underlying assets. These are basically contracts.

All the above assets are liquid assets as they can be converted into their respective values as per the contractual claims of what they represent. They do not necessarily have inherent physical worth like land, property, commodities, etc.