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  3. The University Of Strathclyde (UOS)
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  5. AG312 - Advanced Corporate Finance and Financial M (AG312)

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Summary Lecture 1 – Financial Markets and Instruments Outline 2

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This document is an outline for a lecture on Financial Markets and Instruments. It discusses direct and indirect financing, sources of external capital, and the distinctions between debt and equity. It explains financial instruments, including money market and capital market instruments, and contra...

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  • June 17, 2024
  • 3
  • 2023/2024
  • Summary

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Lecture 1 – Financial Markets and Instruments

Outline 2

Direct financing

 Wholesale market
 Few participants
 Large transactions

Indirect financing

 Many participants
 Small transactions
 Larger market in aggregate

Sources of external capital

Capital markets

Debt and Equity

Debt: Bank loans, bonds, supplier credit, leases, informal

Equity: Ordinary shares, preference shares, warrants, informal



Debt and equity

- Debt holders have a contract specifying that their claims must be paid in full before the firm can
make payments to its equity holders ie debt claims are senior

- Payments to debt holders are generally viewed as a tax-deductible expense of the firm

Financial instruments - A financial instrument (also called security) is a claim on the issuer’s future
income or assets.

 Financial assets – money market instruments, bonds (debt instruments)
 Real assets – capital market instruments, stocks (equity)

Financial assets vs real assets

 Financial assets are claims against real assets. Real assets are houses, equipment, human
resources etc.
 Generally, borrowers obtain funds from lenders by selling newly issued claims (“IOU’s”)
against their (borrower’s) real assets. IOUs are essentially financial assets.



Money market instruments - Money market instruments is shorter-term security generally with one
year or less remaining to maturity

Capital market instruments - More than one year to maturity. Stock, residential mortgages, long-term
bonds, consumer loans etc.

Bond - A bond is a debt security/instrument that promises to make payments periodically for a
specified period of time

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