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Sep 17 2012

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Types of Capital Market Instruments

Capital market instruments, Capital market, secondary market, financial institutionCapital market instruments are fixed-income obligations that trade in the secondary market, which means anyone can buy and sell them to other individuals or institutions. Marketable securities are exchanged through the organized markets for example, stock exchanges and its Representative dealers and brokers who sell and buy marketable securities on behalf of their customer in exchange of commission.  

Capital market instruments fall into four categories: (1) Treasury securities, (2) government agency securities, (3) municipal bonds, and (4) corporate bonds.

  • Treasury Securities: All government securities issued by the Treasury department of Govt. are fixed income instruments. They may be bills, notes, or bonds depending on their times to maturity. Specifically, bills mature in one year or less, notes in over one to 10 years, and bonds in more than 10 years from time of issue government obligations are essentially free of credit risk because there is little chance of default and they are liquid.
  • Government Agency Securities Agency securities are sold by various agencies of the government to support specific programs, but they are not direct obligations of the treasury department. Mortgage bonds that sell bonds and uses the proceeds to purchase mortgages from insurance companies or savings and loans; and the home loan which sells bonds and loans the money to its banks, which in turn provide credit to savings and loans and other mortgage-granting institutions. Other agencies are the government banks for cooperatives.
  • Municipal Bonds Municipal bonds are issued by local government entities as either general obligation or revenue bonds. General obligation bonds are backed by the full taxing power of the municipality, whereas revenue bonds pay the interest from revenue generated by specific projects. Municipal bonds differ from other fixed-income securities because they are tax-exempt. The interest earned from them is exempt from taxation by the government and by the state that issued the bond, provided the investor is a resident of that state. For this reason, municipal bonds are popular with investors in high tax brackets.
  • Corporate Bonds Corporate bonds are fixed-income securities issued by industrial corporations, public utility corporations, or railroads to raise funds to invest in plant, equipment, or working capital. They can be broken down by issuer, in terms of credit quality in terms of maturity i.e. short term, intermediate term, or long term, or based on some component of the indenture.

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