Financial Instruments

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Financial Instruments

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Financial Instruments

Financial instruments are monetary contracts between parties that represent an asset to one party and a liability to another. They are classified primarily as debt, equity, or derivatives.

Debt Instruments

Debt instruments represent borrowed funds that must be repaid, typically with interest.

Instrument	Description
Government Bonds	Long-term debt instruments issued by the Government of Nepal (GoN) to finance its budget deficit and development projects.
Treasury Bills (T-Bills)	Short-term debt instruments issued by the GoN, typically for maturities of 91, 182, or 364 days. They are sold at a discount and mature at face value.
Debentures	Long-term debt instruments issued by corporations to raise capital. They pay a fixed rate of interest and are repayable on a specific date.
Commercial Paper	Short-term, unsecured promissory notes issued by highly rated corporations to meet short-term financing needs, with maturities typically ranging from 30 to 270 days.

Equity Instruments

Equity instruments represent ownership stakes in a company.

Ordinary Shares (Common Stock): Represents an ownership interest in a company, granting voting rights and the right to receive dividends and capital gains.
Preference Shares: A hybrid security that typically offers a fixed dividend payment and has priority over ordinary shareholders in receiving dividends and in asset distribution during liquidation. They usually do not carry voting rights.

Derivative Instruments (Limited in Nepal)

Derivative instruments are financial contracts whose value is derived from an underlying asset, index, or rate. Their use in Nepal's regulated market is currently limited.

Forwards: A customized contract between two parties to buy or sell an asset at a specified price on a future date. They are typically over-the-counter (OTC) and non-standardized.
Futures: Standardized forward contracts traded on an organized exchange, requiring daily mark-to-market adjustments and margin calls.
Options: Contracts that give the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specified price (strike price) on or before a certain date.

Nepal Government Securities

The Nepal Rastra Bank (NRB) issues various government securities on behalf of the Government of Nepal to manage public debt and monetary policy:

Development Bonds: Long-term bonds issued to finance national development projects.
Citizen Savings Bonds: Aimed at retail investors to promote a savings culture and provide investment opportunities.
Treasury Bills: Short-term government debt mentioned above.
Issuance: These securities are typically sold to commercial banks and other institutional investors through competitive auctions conducted by NRB.
National Saving Certificates: Another instrument targeted at retail investors, offering fixed returns.