The capital market supply long term funds to corporations, government entities and other users of capital. The general type of debt instrument of the capital market is the bond. Bonds usually pay interest to the holder once in every six months (semi annually) and pay the principal or face amount upon maturity.
Treasury notes and treasury bonds: The long term bond issues of the treasury that are available to investors are the treasury notes and the treasury bonds. Treasury notes have original fixed maturities of not less than one and not more than ten years from the date of issue.
Public sector undertaking bonds:
PSU bonds are issued to finance projects of various public sector undertakings.
Debt securities of corporations with maturity of longer than one year are corporate bonds. The usual par value of a corporate bond is decided at the time of issue and the maturity period ranges from about two to as many as thirty years. During recent times, however, corporate bond issues have been of shorter maturities as inflation and economic uncertainties have caused investors to be less willing to commit their funds for longer periods of time.
Equity securities represent the residual ownership of the firm. Residual ownership means that the debt holders must first be paid off, before the company belongs completely to the equity holders. The two types of equity securities are common stock and preferred stock.
The common stockholders are the risk takers and they own a portion of the firm that is not guaranteed and they are last in line with claims on the company's assets in the event of a bankruptcy. In return for taking this risk, they share in the growth of the firm because the growth in the value of the company accrues to the common shareholders. The company may make a periodic cash payment called a cash dividend to the common stockholders. The common shareholder has no guarantee of receiving a...
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