Handbook of Finance: Financial Markets and Instruments

Chapter 1. Overview of Financial Instruments and Financial Markets

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

Abstract: Broadly speaking, an asset is any possession that has value in an exchange. Assets can be classified as tangible or intangible. A tangible asset is one whose value depends on particular physical properties—examples are buildings, land, and machinery. Assets, by contrast, represent legal claims to some future benefit. Their value bears no relation to the form, physical or otherwise, in which these claims are recorded. Financial assets, also referred to as financial instruments, are intangible assets. For financial assets, the typical benefit or value is a claim to future cash. Financial markets are classified as cash/spot markets and derivatives markets. Financial markets play a key role in the financial system of all economies. In most economies financial instruments are created and subsequently traded in some type of financial market.

Keywords: financial assets, financial instruments, issuer, investor, debt instrument, equity instrument, fixed income instruments, maturity, coupon rate, floating-rate securities, amortizing instrument, call provision, put provision, prepayment, search costs, liquidity, price discovery process, capital market, secondary market, primary market, over-the-counter market, derivatives markets, derivative instruments, futures contract, option contract

Participants in financial markets must ...