"Financial instruments that are used for raising capital resources are affected by the preference factors for choosing and it is different for issuers and for investor." Explain briefly and also classify the instruments.

Answer 3(a) Financial instruments are usually used by the Government, Corporations and Companies. The instruments used by the corporate sector to raise funds are selected on the basis of (i) investor preference for a given instrument, (ii) the regulatory framework, which regulate the issue of security. Factors affecting the preferences for choosing any instruments: For issuers For investor Cost Return Post Tax Cost of Capital Tax on return received Servicing Yield Debt-equity ratio and debt service capabilities Risk reward ratio Ceding the control in case of equity Gaining the control in case of equity Company Law, SEBI Regulations etc. Marketability and liquidity Classification of Instruments Hybrid Instruments Hybrid instruments are those that combine two or more different financial instruments. Hybrid securities often referred to as hybrid by combining the features of equity with bond, preference and equity etc. Examples of Hybrid instruments are: Convertible preference shares, Cumulative convertible preference shares, convertible debentures, non-convertible debentures with equity warrants, partly convertible debentures, partly convertible debentures with Khokha (buy-back arrangement), Optionally convertible debenture, warrants convertible into debentures or shares, secured premium notes with warrants etc. Pure Instruments Equity shares, preference shares and debentures/ bonds which were issued with their basic characteristics in tact without mixing features of other classes of instruments are called Pure instruments. Derivatives Instruments Derivatives are contracts which derive their values from the value of one or more of other assets (known as underlying assets). The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Some of the most commonly traded derivatives are futures, forward, options and swaps.