Question

Describe different types of credit market instruments and provide examples

Answer 1

Credit market refers to market in which companies and government issue debt to their investors through different forms .

Types of credit market instruments :

1) simple loan

2) fixed payment loan

3) coupon bond

4) discount bond

1) simple loan - In simple loan the lender provides fixed amount of money to borrower with fixed interest rate . The amount of money is repaid with interest after fixed period of time . On maturity both principle amount and interest is paid to the lender .

For eg : Banks is most common lender that provides loan to borrower .bank provides loan to companies at a fixed rate of interest which is repaid after fixed period of time .

2) fixed payment loan - fixed payment loan is also called fully amortized loan .It is almost same as simple loan but the difference between the both is that in fixed payment loan , the principal amount and interest is divided into regular intervals which has to be paid ( monthly ). A part of principle amount and interest rate is paid after every regular interval.

For eg : A loan of 1000 is taken , for 1 year then a amount of 100 will be paid every month .

3) coupon bond - coupon bond pays the owner or buyer of the bond a fixed interest rate for a fixed period of time on amount paid by the owner . A fixed amount is paid every year till the maturity of the bond .on maturity the principle amount is paid back to the owner .

For eg - A coupon bond with face value of 200 is purchased and every year 20 is paid as interest till 10 years and after 10 years .after 10 year principle amount of 200 is also paid back

4) discount bond - A discount bond is a bond which is sold at discounted rate .The bond is purchased at value below the face value and on maturity face value is paid to the lender . Discount bond does not consist of any interest rate .

For eg : a discount bond of face value 1000 is sold for 900 for one year period .after one year amount of 1000 is paid to the owner of bond