Question

How can we explain about the following financial instruments or financial intermediaries?

1. Repurchase agreements;

2. Euro bonds;

3. Junk bonds;

4. Venture capital fund

5. Collateralized debt obligations.

Answer 1

1.financial instruments

A financial instruments is a monetary contract between parties.We can create,trade & modify them.It is mainly of two types:-cash instruments or derivative instruments.The securities that market value directly is called cash instruments whereas derivative instruments is a contract that derives its value on the basis of performance of any underlying entity.

2.Repurchase agreement

It is a form of short term borrowings for dealers in government securities.In this agreement a dealer sell govt. securities to investor for a very short period may be on an overnight basis & buy them back after a day at a slight higher price.for e.g.:-A bank sells bonds to another bank and agrees to buy the bond back later at a higher price.

3.Euro bonds

It is an international bond that is denominated in a currency not native to the country where it is issued.e.g:-Euro dollars,Euro-yen bond.It alllows corporations to raise fund by issuing bonds in a foreign currency.

4.Junk bonds

A junk bond is a type of debt that has been given low credit rating by the ratings agency.junk bonds are highly risky.It is only good for those who need the higher return and can afford greater risk.

5.Venture capital funds

It refers to financing given by well-off of investors or investment banks to small busineses which they think will have big growth in future.It is highly risked & great return opportunity investment.

6.Collaterlized debt obligations

It is a complex structure financial instrument that is backed by a pool of loans & other assets and sold to institutional investors.It is a type of derivative.They called colletral because the promised repayments of the loans are the collateral.example:-mortgage-backed securities are comprised of mortgage loans.

Hope this will help you.If it really does then please give a thumbs up.