Capital market Instrument:

•Treasury note and bonds.

•Federal agency debt.

•Municipal bonds

•Corporate bonds

•Common stock

Treasury notes and bondsThis is a form of Govt borrowing..T-note maturities up to 10 years.Where as bonds are issued with maturities ranging from 10 to 30 years.Both are issued in denominations of 1000 or more.Both of them make semi annual coupon payments that enablesThe Govt to sell the securities at or near par value.

Beside their differing maturities at issuance, the major distinction

Between T-note and T-Bonds that T-Bonds may be callable during A given period, usually the last five years of the bond’s life.The call provision gives the right to repurchase the bond at par value

Federal Agency debt

Some Govt agencies issue their own securities to finance their activities. These agencies usually are formed to channelCredit to a particular sector of the economy that the Govt believes that might not receive adequate credit through normal private sources

Although the debt of federally sponsored agencies is not Explicitly insured by the federal Govt, it is widely assumed that Govt would step up if an agency neared default.

Thus these assets are considered extremely safe.

Municipal bonds:

Municipal bonds are issued by estate and local Governments.They are similar to treasury and corporate bonds except thatTheir interest income is exempt from federal income taxation.Capital gain taxes ,however must be paid on these bonds, when the matures or if they are sold for more than the investor’s purchase price

Two types of municipal bonds can be distinguished . These are General obligation bonds, which are backed by the “full faith and Credit” of the issuer.Another form is revenue bonds, which are issued to finance particular projects and are backed by either by the revenues

Municipal bonds

From that project or by the particular municipal agency operating the project.

Typical issuers of revenue bonds are airports, hospital or port authorities.

Obviously revenue bonds are riskier in terms of default than

are general obligation bonds.

The key feature of the Municipal bonds is their tax exempt status. The investor’s are willing to accept lower yields

Corporate Bonds:Corporate bonds enable the private firms to borrow money

These bonds are similar in structure to treasury issue-they typically pay semi annual coupon over their lives and return Face value to the bond holder at maturity.They differ most importantly from treasury Bonds in degree of risk. Default risk is a real consideration in the purchase of corporate bonds.The bonds have specific collateral backing them in the event of firm bankruptcy.Unsecured bonds are called debentures, which have no collateral

Corporate BondsCorporate bonds usually come with options attached.Callable bonds give the firm the option to repurchase theirBond from the holder at a stipulated call price.

Convertible bonds give the holder the option to convert eachBond into stipulated number of shares

Mortgage and Mortgage backed securities

Common StockCommon stocks are also known as equity securities orEquities, represents ownership shares in a corporations.Each share of common stock entitles its owner to one vote on any matters of corporate governance that are put to vote at the corporation’s annual generalMeeting.•Corporations are controlled by a board of directors elected byShare holders.The Board, which meets only a few times eachyear, selects manager who actually run The corporations on day to day basis.•Managers have the authority to make most decisionswithout the Boards specific approval.•The Boards mandate is to oversee the management to ensure that it acts in the best interest of shareholders

Common stock:The members of the board are elected in the annual meeting.Shareholders who do not attend the annual meeting can vote by proxy empowering another party to vote in their name.Two most important characteristics of the common stock Is residual claim and limited liability featureResidual claim means in liquidation the shareholders have a claim to what is left over after all other claimants suchAs tax, employees, suppliers, bondholders and other creditors have been paid.For a firm not in liquidation , share holders have claim to the part Of operating income left over after tax and interest have been paid.Limited liability means most shareholders can lose in the eventOf failure of the corporations is their original investment.