Types of Money Market Instrument

Types of Money Market Instrument

The money market is a market where different financial instrument are traded . The money market is basically a trading venue for financial institution and other large scale enterprise to trade in different kind of financial instruments. The following types of financial instrument are traded in money market.

1. Short Term investments
2. Long Term investment
3. Deposit Certificate
4. Treasury Bills
5. Foreign Exchange
6. Discounting Bill of Exchange

Types of Financial Decisions

Types of Financial Decisions

The Management is required to make following types of financial decision.

1. Investment Decisions
2. Capital Structure Decisions
3. Dividend Decisions

Types of Investment Decisions
The investment decision is further classified into three areas which includes following.

1. New projects Decision
2. Working Capital Requirement Decisions
3. Short Term Investment of surplus fund

Important Factor for Project and short term Investment

The management must consider the following factor before investing in new projects or placing funds in short term investment.

1. Rate of Expected Return
2. Risk involved in particular project or investment

Types of Financial Decisions

The management has to make the following Financial decision

• How much finance Required
• Which project is to be financed
• How much dividend is to be paid
• How to arrange the finance
• For how long Finance required

Types of Dividend Decisions

The management has to decide that how much dividend to be distributed depends on following factor.

1. Source of funding
2. Cash flow requirement of the entity
3. Share holder expectation for Dividend
4. Companies ordinance requirement

The investment decision diffidently require the special consideration for the rate of return because the investment is made to earn profit but the return rate and risk associated are taken into account jointly. Because some investment offer you tremendous profit opportunity but involve very high risk. This is important to understand that investment decision must be rational both in terms of rate of return and risk associated with those decision.


The financial structure of the entity is also important decision is to be made. The different structure offer different advantages and disadvantages . some offer flexibility and other involve high cost. Therefore the management has to decide a mix which serve its purpose in best possible way.

Types of Debt Finance

Types of Debt Finance

The following are important debt finance available to the organization,

1. Preference Shares
2. Debentures
3. Bonds
4. Bank Loans
5. Finance Lease
6. Sale and Lease Back
7. Trade Credit
8. Bank Overdraft
9. Mortgaged Loan

The above mentioned debt finance can be classified as under

1. Long Term Debt Finance
2. Medium Term Debt Finance
3. Short Term Debt Finance

Long term debt finance typically means the finance for more than five years . This finance include preference share, Debentures, Bonds
Medium term Finance typically means the finance between three to five years. This finance include finance lease, Sale and leaseback,.
Short Term Finance typically mean finance for up to one year and includes bank overdraft, trade credit.

Debentures

What are Debentures

The debenture is an instrument issued by company to obtain long term finance normally for more than ten years. The instrument is issued under company common seal and term of debenture are mentioned at the debenture instrument. 


The debenture can be classified into two types

1. Secured Debenture
2. Unsecured Debenture

1.Secured Debenture 

A denture can be issued against fixed charges or floating charge and in case of default such assets can be sold to pay the debenture loan. The debenture normally offer fixed rate of return .

2.Unsecured Debenture 

 The unsecured debenture does not carry any security for repayment . This facility is more like a trade credit for long term with and fixed rate of return.

Types of Bonds

Types of Bonds

The bond is typically a un secured debenture , however, sometime bond and debenture are used in same meaning. The following the main types of bonds available in the market.

1. Simple Bond
2. Deep Discount Bonds
3. Zero Coupon Bonds

Simple Bond :- A simple bond mean a bond carry a fixed rate of return issued at nominal value.

Deep Discount Bond :- A bond which is issued at discount and will be redeemed at nominal value. This bond also carry a fixed rate of return, however, this rate is far below than market rate of ordinary bond.


Zero Coupon Bond :- The bond is another type of deep discount bond but this type does not carry any fixed rate of return.

Asset based Valuation

Asset based Valuation

There are following types of Assets based Valuation

1. Net Book Value Method
2. Net Realizable Value Method
3. Replacement Cost Method

1.Net Book Value Method

In this method the value is calculated by deducting the liabilities from the assets and the residual amount is the value business. The amount is calculated on the book value of the assets and liabilities.

2.Net Realizable Value Method

This method is extension of net book value method with inclusion of net realizable value instead of book value. This method is used to calculate the minimum acceptable price.

3.Replacement cost Method.

This method explains that how much it will cost to build a new business from this stage. This method is used to calculate the maximum acceptable to the owner.

Payback Period

 Payback

The payback period method we calculate the period in which the investment is received from the project.

Advantages of Payback

1.Easy to calculate

This method is very easy to calculate and does not involve complex calculation 

2. Easy to interpret

This method can easily be explained and interpret . This period can simply explain that how long will it take to recover the investment.

3.suitable in High Risk project

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Disadvantages

1. Limited in scope

it does not take into account all cash flow and only limited cash flows are considered.

2. More focus on recovery 

This method put little light on the profitability of the project.

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Advantages of JIT inventory System

Advantages of JIT inventory System

The Just in time inventory system focus to order inventory when it is required.This system has number of advantages which includes the following

Holding Cost is Reduced
The main advantage is the holding cost which includes ware house cost, insurance cost etc are reduced.
Risk of physical Damage Reduced
There are number of physical risk attached to inventory such as fire , earthquake . with introduction of this system these risks are reduced.
Better Control over inventory
This system improves organization control over the inventory.

Advantages of Internal Equity

Advantages of Internal Equity

The internal equity financing is referred to use the retained earning , it means that payment to share holder in the form of dividend is restricted and fund are utilized as financing source.
The following are the primary advantages of using internal equity.

1. No issue Cost:- Raise equity finance diffidently involve some cost but by using internal equity option this cost is Zero.
2. Ownership Structure does not change :- The other important factor of using the equity financing to keep the ownership structure in tact.
3. No Obligatory payment :- Dividend is not an obligatory payment instead it is at the discretion of management. So liquidity requirement of organization does not suffer.

Accounting Rate of Return

Accounting Rate of Return

Under this method the average profit is divided by the average investment. The results then compared with the expected result and if the results meet the expectation then project is accepted.

Formula for Accounting Rate of Return

= Average Profit/Average Investment

Average Investment =(Initial Investment + Residual Value)/2

Advantages of Accounting Rate of Return

1. Easy to Calculate

This method is based on profit therefore it is easy to calculate and understand. This method does not require any special skill for calculating the result under this method.

2. More Reliable

This method is based on financial statement therefore can be relied.

3.Cost Saving

Financial manager can easily calculate the result under this methods therefore no special consultant or financial expert is required. Therefore heavy cost of such consultant may be saved.

Disadvantages of Accounting Rate of Return

1.Manipulation of Profit

As the profit can be manipulated therefore the results under this method can also be manipulated.

2. Different Results

As the profit can be calculated in different way therefore the result under this method may vary .

3. Time Value is ignored

Time value is ignored under this method.

4. Little Light on investment

This method put little information the timing of investment.

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