What is a financial instrument in your own words? (2024)

What is a financial instrument in your own words?

A financial instrument refers to any type of asset that can be traded by investors, whether it's a tangible entity like property or a debt contract. Financial instruments can also involve packages of capital used in investment, rather than a single asset.

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What is a basic financial instrument?

The most common basic financial instruments are cash, trade debtors, trade creditors and most bank loans. For a debt instrument (receivable or payable) to be basic, returns to the holder must be: •a fixed amount; •a positive fixed rate or a positive variable rate; or.

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What is the legal definition of a financial instrument?

A financial instrument is an instrument that has monetary value or records a monetary transaction or any contract that imposes on one party a financial liability and represents to the other a financial asset or equity instrument. Stock, bonds, and options contracts are some examples of financial instruments.

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What is an instrument in banking terms?

Bank Instrument means any guarantee, indemnity, letter of credit (including any Import L/C and any standby letter of credit), tender bond, bid bond, performance bond or advance payment bond or any instrument of a similar nature (whether entailing autonomous, primary liability on the part of the issuer, or accessory, ...

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What are the financial instrument items?

Financial instrument items Scope of IND AS 32
  • Cash deposited into bank Financial asset.
  • Gold bullion deposited into bank NO, Financial asset.
  • Trade account receivables Financial asset.
  • Investment in debt instruments Financial asset.
  • Investments in equity instrument Financial asset.
  • Prepaid expenses NO, Financial asset.
Jun 25, 2016

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What is the most basic financial instrument?

Sec. 4. Cash and other Financial Assets.

Cash is the most basic financial instrument because it is the medium of exchange and is the basis on which all transactions are measured and recognized in the financial statements.

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What is the difference between a financial asset and a financial instrument?

Financial instruments are classified as financial assets or as other financial instruments. Financial assets are financial claims (e.g., currency, deposits, and securities) that have demonstrable value.

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What is not considered a financial instrument?

The following are examples of items that are not financial instruments: intangible assets, inventories, right-of-use assets, prepaid expenses, deferred revenue, warranty obligations (IAS 32. AG10-AG11), and gold (IFRS 9.

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Is a credit card a financial instrument?

A Credit Card is a financial instrument that allows you to avail of credit on all your financial transactions. In simple terms, a Credit Card is a debt instrument that allows you to buy things now and pay for it later.

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Is a loan considered a financial instrument?

Financial instruments: equity, guarantees, and loans.

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What are financial instruments characteristics?

Financial instruments obligate one party (person, company, or government) to transfer something to another party. Financial instruments specify payment will be made at some future date. Financial instruments specify certain conditions under which a payment will be made.

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What is considered an instrument?

musical instrument, any device for producing a musical sound. The principal types of such instruments, classified by the method of producing sound, are percussion, stringed, keyboard, wind, and electronic.

What is a financial instrument in your own words? (2024)
What is the difference between a security and a financial instrument?

There is a difference between a security and a financial instrument. Not all financial instruments are securities, but all securities are financial instruments. Primarily, the securities (instruments) are designed to be traded on the secondary markets (creation of exchange).

What is new financial instrument?

The most important new financial instruments at present are note issuance facilities, swaps, options and futures, forward rate agreements, Eurobonds of various types, and other bonds.

What are financial instruments on the balance sheet?

Financial instruments recognized in the balance sheet include cash and cash equivalents, securities, other financial receivables, trade receivables, trade payables, loans and derivatives. Current investments and derivatives are recognized on the trade date.

Is accounts receivable a financial instrument?

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They typically arise when an entity provides money, goods or services directly to a debtor with no intention of trading the receivable.

What are Type 1 financial instruments?

Type I Financial Instruments Business

There are mainly three types of Type I Financial Instruments Business: (i) “Purchase and Sale / Solicitation of Securities” such as shares, bonds, etc. with high liquidity, (ii) “Underwriting,” and (iii) holding in trust / management of securities.

What are the most complicated financial instruments?

Complex financial instruments include derivatives (such as options and warrants, forwards, and futures) and hybrid/compound instruments (such as convertible debt, debt with detachable warrants, and perpetual debt).

What are long term financial instruments?

Definition. Long-term finance can be defined as any financial instrument with maturity exceeding one year (such as bank loans, bonds, leasing and other forms of debt finance), and public and private equity instruments.

What financial assets are the safest?

Treasury Bills, Notes and Bonds

U.S. Treasury securities are considered to be about the safest investments on earth. That's because they are backed by the full faith and credit of the U.S. government. Government bonds offer fixed terms and fixed interest rates.

Is a house a financial asset?

An asset is anything you own that adds financial value, as opposed to a liability, which is money you owe. Examples of personal assets include: Your home. Other property, such as a rental house or commercial property.

Is financial instrument liability or equity?

A financial instrument will be a financial liability, as opposed to being an equity instrument, where it contains an obligation to repay. Financial liabilities are then classified and accounted for as either fair value through profit or loss (FVTPL) or at amortised cost.

Are financial instruments assets or liabilities?

The term “financial instruments” covers both financial assets and financial liabilities, from straightforward cash to embedded derivatives. For example, all trade receivables, payables, bank loans, inter-company balances and debts and shares in another entity fall within the scope of this standard.

What are the four characteristics of a financial instrument?

The four fundamental characteristics that determine the value of a financial instrument are (1) The size of the payment that is promised; (2) When the promised payment is to be made; (3) the likelihood that the payment will be made; (4) The conditions under which the payment is to be made.

Which of the following are examples of financial instruments?

Basic examples of financial instruments are cheques, bonds, securities. There are typically three types of financial instruments: cash instruments, derivative instruments, and foreign exchange instruments.

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