1.3 INNOVATIVE FINANCIAL INSTRUMENTS.pptx

Innovative financial instruments

1. INNOVATIVE FINANCIAL INSTRUMENTS In order to keep in tune with the changing times and changing customer needs a number of innovative financial instruments have come in to the financial markets in recent years. They are:   1. Commercial Paper - short term money market instrument - with a fixed maturity of 3 to 6 months - issued by banking and non-banking companies - sold at discount and redeemed at face value - high denomination, suitable for institutional investors and companies

2. INNOVATIVE FINANCIAL INSTRUMENTS 2. Treasury Bill - a money market instrument issued by central government - issued at discount and redeemed at par - Govt. has issued short term Treasury Bills of 182 days and 364 days  

3. INNOVATIVE FINANCIAL INSTRUMENTS   3. Certificates of deposits - a money market instrument issued by scheduled commercial banks only - unlike a deposit receipt it is a negotiable (transferable) instrument and has a secondary market. - high denomination, suitable for institutional investors and companies

4. INNOVATIVE FINANCIAL INSTRUMENTS 4. Inter-Bank Participations (IBPs) - this scheme is confined to scheduled banks only for a period from 91days to 180 days. - this money market instrument is not popular.   5. Zero-Interest Convertible Bonds / Debentures - no interest payable - convertible into equity after a specified period

5. INNOVATIVE FINANCIAL INSTRUMENTS 6. Deep Discount Bonds - no interest payable - issued at a deep discount and redeemed at face value -IDBI in February’96 issued bonds with a face value of Rs.2,00,000 at a discounted price of Rs.5,300 with a maturity period of 25 years. - can be gifted to any person   7. Index-linked Guilt Bonds - inflation free money market instruments - maturity value is linked to the index prevailing as on the date of maturity

6. INNOVATIVE FINANCIAL INSTRUMENTS 8. Option Bonds - option available to the investor to get the interest as cumulated or non-cumulated. - if cumulated, the interest will be given at the maturity, if not half yearly. 9. Secured Premium Notes - interest will be paid only after 3 years - companies with high capital intensive can opt this.

7. INNOVATIVE FINANCIAL INSTRUMENTS 10. Medium term Debentures - having medium term maturity period - very popular in Germany 11. Variable Rate Debentures - debt instruments having compound rate of interest. - interest rate varies from time to time as in the case of Dearness Allowance calculation  

8. INNOVATIVE FINANCIAL INSTRUMENTS   12. Equity with 100% Safety Net - some companies make 100% safety net offer to the public - they give a guarantee to the issue price even if the market price falls below the face value.   Example : Nominal/Face value of an equity share Rs.100 Issue Price Rs.400 Market Price Rs.300 In the above situation, the company is ready to get the equity back for Rs.400

9. INNOVATIVE FINANCIAL INSTRUMENTS 13. Cumulative Convertible Preference Shares - dividend is cumulated with capital and converted into equity shares.   14. Convertible Bonds - converted into equity (fully or partly) after specific period   15. Debentures with call and put option - a debt instrument issued by a company - under call option, the issuing company will redeem the debentures before maturity at a specified price. - under put option, the debenture holder has the right to seek redemption before the maturity at a predetermined price.

10. INNOVATIVE FINANCIAL INSTRUMENTS 16. Easy Exit Bond - enables the investors to encash the bond at any time after 18 months.   17. Retirement Bond - enables the investor to get an assured monthly income for a fixed period after the expiry of the ‘ wait period’ - longer the wait period, higher the monthly income - investor will also get a lump sum on maturity - can be gifted to others. 18. Regular Income Bond - offers an attractive interest rate payable half yearly, redeemable earlier - IDBI Regular Income Bond’96 offered 16% income

11. INNOVATIVE FINANCIAL INSTRUMENTS 19. Infrastructure Bond - a kind of debt instrument which gives tax benefit to investors u/s 88, 54EA, and 54EB of Income Tax Act. - HUDCO issued such bonds and they are listed in important stock exchanges. 20. Dual Currency Bonds - interest is paid in one currency and redeemable in another currency Others Bonds raised in USA is known as Yankee Bonds Bonds raised in Japan is known as Samurai Bonds