Finance Terminology - II

Finance Terminology

Bonds:

Bonds are product issued by corporate and government entities to finance and expand their projects. The issuer promises to pay interests annually or biannually to the investors and the principal amount on the maturity date.

There are mainly two types of bonds:

·         Corporate Bond: These kinds of bonds are issued by companies are either can be investment grade or non-investment grade bond. Investment grade bonds are issued by stable companies with low risk of default so it assures you low interest while in case of non-investment grade bonds interest rates will be high but companies are not stable resulting in more risk of default.

·         Government Bond: These kinds of bonds are issued by cities, country and states to fund capital projects, such as building roads, schools and hospitals.

Entities and Asset Classes:

1.       Equities: Defined in previous Blog. Please refer Finance Terminology Part I.

2.       Fixed-Income Securities:

·         A Fixed-Income security is a debt instrument that promises the fixed returns in form of interests paid to investors.

·         The issuer also returns the principal amount to the investor on the maturity date.

·         The most common type of fixed income securities are bonds (As defined above).

3.       Indices:

·         Is used to measure the changes and performance of securities market.

·         It is created by third-party.

·         Each index has its own calculation methodology.

·         For Example: Dow Jones Industrial Average (DJIA) is also a very well-known index, but it only represents stock values from 30 of the nation's publicly traded companies.

4.       Derivatives:

·         Derivative is a financial security whose value depends or derived from other assets or group of assets.

·         Two main types of derivatives are Futures and Options.

·         Future is an agreement between two parties for the sale of an assets on the price and date agreed by both the parties.

·         Options is like the Future; the only difference is that buyer is not obligated to make transactions if he/she not to.

5.      Entities:    

•      An entity is the party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed entity. A entity receives a fee for providing financing.