1.1 Financial Instruments - Debt, part 1

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1.1 Financial Instruments - Debt, part 1

University of Texas at Austin
Fin 320f - Foundations of Finance
Foundations of Finance Documents

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An investment of knowledge always pays the best interest Benjamin Franklin US diplomat, inventor, author & printer (1706 – 1790) Foundations of Finance 1.1 Financial Instruments Debt Instruments, part 1  Imagine you need $25,000 this week  How will you get the money?  Your options: • Borrow the money: get a cash advance on a credit card, get a loan from a bank or family… • Sell something you own: sell your car, bike or electronics via E-bay or Craigslist? 2011 - 2023© H Toprac 3 How do people raise cash?  When companies need extra cash, they have the same two options: • Borrow the money, or • Sell something they own, above and beyond their regular product or service; that is, sell part of the company  The first option is called issuing debt; the second, issuing equity 2011 - 2023© H Toprac 4 How do companies raise cash?  Financial instruments (aka securities) are debts and equities that: • Companies “issue” to obtain immediate cash inflows, and • Investors buy in the hope of obtaining future cash inflows  Debt instruments: Bonds, Loans, Treasury bills, Commercial paper, etc.  Equity instruments: Common stock, preferred stock 2011 - 2023© H Toprac 5 What is a financial instrument?

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