The Handbook of Financial Instruments

Chapter 1Overview of Financial Instruments

Frank J. Fabozzi, Ph.D., CFA

Adjunct Professor of Finance School of Management Yale University

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, or machinery. Intangible 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 are intangible assets. For financial assets, the typical benefit or value is a claim to future cash. This book deals with the various types of financial assets or financial instruments.

The entity that has agreed to make future cash payments is called the issuer of the financial instrument; the owner of the financial instrument is referred to as the investor. Here are seven examples of financial instruments:

• A loan by Fleet Bank (investor/commercial bank) to an individual (issuer/borrower) to purchase a car
• A bond issued by the U.S. Department of the Treasury
• A bond issued by Ford Motor Company
• A bond issued by the city of Philadelphia
• A bond issued by the government of France
• A share of common stock issued by Microsoft Corporation, an American company
• A share of common stock issued by Toyota Motor Corporation, a Japanese company

In the case of the car loan by Fleet Bank, the terms of the loan ...