Capital Markets and Financial Instruments

Chapter 2 explains why capital is raised, how claims on capital are structured, and where those claims trade. It ties together investors, issuers, instruments, and market venues before later chapters go deeper into specific products.

This chapter is most useful when students compare instruments rather than memorize labels. The exam often tests whether a product belongs in the money market, the capital market, the primary market, or the secondary market, and why that distinction matters.

Exam Focus

• Distinguish money-market instruments from capital-market instruments by term, purpose, and risk profile.
• Compare debt, equity, and managed-product claims on issuer cash flows and residual value.
• Separate primary-market financing from secondary-market trading and explain why both are necessary in a functioning capital market.

In this section

• Investment Capital and Financial Claims
  Investment capital, direct and indirect investment, the characteristics of capital, and the main suppliers and users of capital.
• Financial Instruments and Claims
  Differences between debt, equity, derivatives, and managed products by claim type, cash-flow pattern, and risk profile.
• Financial Markets and Trading Venues
  Primary and secondary markets, auction and dealer markets, trading venues, electronic trading, and current settlement practice.