Financial Assets
Financial asset is a claim against the income or wealth of a business form, household or the government. Financial assets are usually represented by certificates like stock certificates, receipts like bank receipts, computer record files and other documents like insurance policies. Financial assets are created by or related to the lending of money.
Examples of financial assets: Stock, bonds, insurance policies, deposits in a bank, options and future contracts.
Characteristics of financial assets:
Financial assets promise return to their owners.
Financial assets serve as the purchasing power for the holders
Financial assets do not depreciate like physical assets
Physical condition of financial assets is not relevant in determining the market value.
Their transportation costs are very low
Storage cost is low
They have little or no value as commodity
Financial assets can easily be converted in form and substituted by other assets.
Types of financial assets:
Money - is a financial asset that is generally accepted in payment for the purchase of goods and services.
Equity securities: represent ownership share in a business firm and are claims in the firms profits and proceeds from the sale of the assets of the firm. Example - common stock, preferred stock .
Debt securities - entitle their holders to a priority claims over the holders of equity securities to assets and income of a business firm. For example - bonds, notes, accounts payable, savings account.
There are two types of debt securities:
Negotiable debt securities - can be transferred from holder to holder as a marketable security. For example - coupon bonds.
Non-negotiable securities - cannot be legally transferred. Like savings account, government bonds.
Derivatives - derivative is a financial instrument for which the ultimate profit of the investor depends directly on the value of another security.
There are three types of derivatives:
Future contracts - is the agreement which provides for the future exchanges of the particular asset at a specified delivery date, usually 9 months, in exchange for specified payment at the time of delivery. Full payment is not made until the delivery date, and usually about 10% of the value of the asset is paid as advance at the time of the contract.
Options - gives rights to buy or sell s particular financial asset at a specified price within a stated period of time.
Warrants - warrants is also an option issued by a corporation that gives the holder the right to acquire a firms common stock at a specified price within a designated time period. The warrant does not ________ the ownership of the stock, only the option to buy the stock.
