Equity Instruments and Financial Markets

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Questions and Answers

Who are the real owners of a company?

Preferred Stockholders

Bond Investors

Debenture Holders

Common Stockholders (correct)

Which group of stockholders benefits from excess profits during profitable periods?

Debenture Holders

Preferred Stockholders

Bond Investors

Common Stockholders (correct)

In which market do users of funds issue new securities through public offerings or private placements?

Primary Market (correct)

Money Market

Secondary Market

Capital Market

Which market involves the sale of previously owned securities?

Secondary Market Signup and view all the answers

What is the first offering of stock called in a public setting?

Initial Public Offering (IPO) Signup and view all the answers

Where does the sale of new securities take place for one investor or a group of investors?

Primary Market Signup and view all the answers

Which financial instrument evidences a residual interest in the assets of an entity?

Ordinary Share Capital Signup and view all the answers

What is a characteristic of debt instruments?

Fixed returns due to fixed interest rates Signup and view all the answers

In what market is an initial public offering (IPO) conducted?

Primary market Signup and view all the answers

Which type of financial instrument typically provides higher interest rates than Treasury bonds?

Corporate Bonds Signup and view all the answers

What do returns from equity instruments primarily come from?

Dividends and stock price appreciation Signup and view all the answers

In a liquidation scenario, who has the priority over assets of a company?

Preferred Stockholders Signup and view all the answers

What is the main purpose of mutual funds?

To allow small investors to diversify their portfolio Signup and view all the answers

Which financial institution invests payments from employees on their behalf?

Pension funds Signup and view all the answers

What is a characteristic of a financial asset according to IAS 32.11?

An equity instrument of another entity Signup and view all the answers

What is the primary characteristic of a financial liability?

To deliver cash or other financial instrument to another entity Signup and view all the answers

In which market are financial instruments initially issued?

Primary market Signup and view all the answers

What do equity instruments represent in the context of financial markets?

Ownership interest in an entity Signup and view all the answers

Study Notes

Financial Instruments and Markets

Financial instruments can be exchanged with another entity under unfavorable conditions.

Debt and Equity Instruments

Debt instruments have fixed returns due to fixed interest rates.
Examples of debt instruments: Treasury Bonds and Treasury Bills (low interest rates, low risk of default), Corporate Bonds (higher interest rates, higher risk).
Equity instruments have varied returns based on company performance.
Returns from equity instruments come from dividends or stock price appreciation.
Types of equity instruments: Preferred Stock (priority over common stock in asset claims, fixed dividend rate), Common Stock (real owners of the company, benefit from company growth).

Financial Markets

Financial market: a marketplace for creating and trading financial assets (e.g., shares, debentures, bonds, derivatives, currencies).
Classified into: Primary vs. Secondary Markets, Money Markets vs. Capital Markets.

Primary and Secondary Markets

Primary Market: raises money by issuing new securities (debt or equity) through public offerings or private placements.
Secondary Market: suppliers of funds sell previously owned securities.

Financial Institutions

Mutual Funds: owned by investment companies, enabling small investors to invest in diversified portfolios.
Pension Funds: receive payments from employees and invest on their behalf (e.g., GSIS, SSS).
Other financial institutions: unit investment trust fund (UITF), investment banks, and credit unions.

Financial Assets and Liabilities

Financial Instrument: a document representing a legal agreement involving monetary value.
Financial Asset: cash, equity instrument of another entity, contractual right to receive cash or another financial asset, or exchange instruments under favorable conditions.
Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds.
Financial Liability: a contractual obligation to deliver cash or another financial instrument to another entity.

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Description

Learn about equity instruments such as common stock, and understand the role of common stockholders in a company's growth and dividends. Explore the concept of financial markets as marketplaces for creating and trading financial assets.