Discuss the Instruments used in Financial Accounts Paper (Essay Sample)

Financial Instruments
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The term financial instruments refer to right agreements where there is an exchange of money for payment of premiums, interests or acquisition of rights between one party and another.
Types of Financial Instruments and Risks Associated
Bonds
These are fixed return instruments. Their benefits are for raising income. They are used as a way of garnering profits by most private entities. It involves issuing of money by the lender in exchange for returns in the form of interest. The risks associated with bonds are interest rate risk, call risk and issuer risk. Interest rate risk involves risks due to changes in rates in the market. The interest rate may rise or fall. Low-interest rates are a risk as they lead to a loss. Call risks include risk due to withdrawal by the issuer before maturity time is reached. This affects negatively the expected returns. Issuer risks occur when an issuer is not in a position to pay back the obligations.
Equities
Equities include a financial security where one has shares in a company. The equities are exchanged in a stock market or traded directly from the company through the Initial Public Offering (IPO). The returns are usually high as it is a long-term investment. However, the risk is high in this type of financial instrument. The risks involved in Equities are company risks, price risks and dividend risks. Dividend risks occur when the company undergoes losses thus the payment of dividends may not be possible, as the company is not making any profits. Price risks are caused by the fluctuations in the price of shares. Company risks occur because of company making lose or going bankrupt. The investor will lose the funds as he or she owns part of the company.
Deposits
It involves investing income in a bank, a post-office or any other financial institution. This type of instrument is subject to risk- return spectrum. The main risk in deposits is interest rate risks. The interest rate may rise or fall. Low-interest rates are a risk as they lead to a loss by the investor.
Mutual Funds
This type of financial instruments includes group investing where a group of individuals pool their finances together and have them managed by a professional finance advisor with purposes of investment. This type of investment is cost efficient and has fewer risks. The investment levels are very low as one can have monthly investments of $1000. The main risks involve are management risks and evaluation risks. Management risks occur due to less competence staff or professional. The management might make bad decisions resulting in losing.
Cash equivalents
Cash equivalent instruments include investing on high liquid options. Examples are money market funds and treasury bills.
Impact of financial crisis on domestic and global economy
As outlined in the Harvard case study, the three main effects of the financial crisis are, low domestic lending and bank failures, low export earnings and reduction in financial inflows. The financial crisis experienced led to negative effect to the financial institutions. This led to a decline in stock market and thus many banks were not in a position to lend reducing investment levels. In terms of export inflows, most countries depend on export returns for economic growth. The financial crisis had a significant impact on the international monetary fund (IMF). This led to declines in commodity prices, the demand for goods, less tourism and other services hence lowering the expor...