Financial instruments Financial instruments are assets that have a monetary value or record a monetary transaction. To coordinate the exchange of capital between borrowers and lenders, financial instruments trade in the financial markets. These financial instruments can be categorized on the basis of their issuers, maturity, risk, and other factors. Identify the financial instruments based on the following descriptions. Description Financial Instrument Backed by the U. S. government, these financial instruments are short-term debt obligations with a maturity of less than one year. They are considered risk free Investments. Issued by corporations, these unsecured debt instruments are used to fund corporate short-term financing requirements. If issued by a financially strong company, they have less risk These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated. Issued by corporations, these financial instruments fund their long-term financing requirements and have less risk than equity securities. Which of the following instruments are traded in the capital markets? A. Certificates of deposit. B. Common stocks. C. Treasury bills. D. Preferred stocks. E. Corporate bonds. The process in which derivatives are used to reduce risk exposure is called:.

1. Identification of financial instruments:

Treasury Bills: Backed by the U.S. government, these financial instruments are short-term debt obligations with a maturity of less than one year. They are considered risk free Investments.

Commercial Papers: Issued by corporations, these unsecured debt instruments are used to fund corporate short-term financing requirements. If issued by a financially strong company, they have less risk.

Money Market Instruments: These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated.

Corporate Bonds: Issued by corporations, these financial instruments fund their long-term financing requirements and have less risk than equity securities.

2. Instruments traded in the capital markets are:

B. Common stocks

D. Preferred stocks

E. Corporate bonds.

3. The process in which derivatives are used to reduce risk exposure is called:

Hedging

Explanation:

Financial instruments can be stocks, bonds, commercial papers, or treasury bills.  Some financial instruments are capital market instruments (e.g. stocks and bonds), while others are money market instruments (e.g. commercial papers and treasury bills).

When the value of a contract depends on an underlying financial asset, it is called a derivative. Examples of underlying instruments are bonds, commodities, currencies, interest rates, market indexes, and stocks.

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