List and explain the operation of any three capital market instruments
Capital market instruments are debt and equity instruments with maturities of greater than one year. As mentioned above capital markets tends to have greater wide price fluctuations than money market instruments. Capital markets instruments are therefore considered to be highly risky instruments. Examples of instruments in the capital market include stocks, mortgages, corporate bonds, government bonds, provincial and municipal government bonds consumer, and commercial bank loans. These instruments are discussed below.
- Stocks – sometimes called share, refers to equity claims on the net income and assets of the corporation.
- Mortgage – as we know mortgages are loans to households or firms to purchase housing, land, or other real structures, where the very structure being purchased serves as collateral security for the loans. This is one of the largest debt instrument markets, offered by banks, life insurance companies, trust, and mortgage loan companies.
- Corporate bonds – these are bonds issued by large corporations with very strong credit ratings. Usually, they pay interest payments twice a year and also pays the face value at the date of maturity. Corporate bonds can be convertible bonds or non-redeemable bonds, redeemable bonds. Convertible bonds will be converted to equity before or at the agreed time. Redeemable bonds will be redeemed at a premium, or at par, or a discount on the date of maturity.
- Government bonds – this is long-term government bonds offered by the South African government. There are usually used to finance government deficit, and they are the most liquid capital markets instruments.
- Provincial and municipal bonds – these bonds are issued by municipalities or provincial governments to finance expenditures on schools, roads, hospitals, and other large projects.
- Consumer and commercial bank loans – these are loans offered by the bank to consumers and business people. Finance companies also offer consumer loans to consumers.
