Explain briefly and in general terms what is the meaning of a security and how it facilitates direct lending and borrowing. (5)
A security is sometimes called financial instrument, that gives a claim on the issuer’s future income or assets (any financial claim or piece of property that is subject to ownership). There are two main types of securities namely the bond security and the stock security.
A bond is an example of a debt security, that promises to make payments periodically for a specified period of time. Direct lending and borrowing is possible through the purchase of the bonds by individuals or companies of government bonds, or purchase of corporation bonds, municipality bonds. As individuals purchase these bonds, there are giving the government, municipality or a corporation their surplus funds and the issuer is borrowing, and thus direct lending and borrowing.
A common stock, sometimes called a stock or share is another form of a security. This type of security represents a form of ownership in a corporation. It is a security that has a claim on the earnings and assets of the corporation, through dividends or residual part upon liquidation. Issuing stock and selling it to the public is a way for corporations to raise funds to finance their activities. Stock in relationship to direct lending, means that those with surplus funds will purchase the share in a corporation, the corporation will use the funds. In this regard, there is direct lending and borrowing.
