Financial Instrument

Financial Instrument – A financial instrument is a contractual agreement between two or more parties that creates a financial asset for one party and a financial liability or equity instrument for another. Financial instruments are used by investors, companies, and institutions to invest, raise capital, hedge risks, or manage cash flows. Key Characteristics: Represents ownership (equity), a contractual right (debt), or both. Can be traded or settled in financial markets. Functions as an asset for the holder and a liability or equity obligation for the issuer. Types of Financial Instruments: Equity Instruments: Shares, stock options. Debt Instruments: Bonds, debentures, loans. Derivatives: Futures, options, swaps.

Key Point: Financial instruments are essential for capital formation, investment planning, and risk management, enabling parties to predict and manage future financial outcomes.

Example: If a company issues a bond, it creates a financial liability for the company (repayment obligation) and a financial asset for the investor (entitlement to interest and principal)..