Posted in Finance, Accounting and Economics Terms, Total Reads: 401
Definition: Primary Instruments
Primary instruments refer to financial instruments whose price is directly associated with its market value. Cash, receivables, payables, Stocks, certificates of deposits (CD), bonds and other financial instruments that have their own intrinsic value based directly on the market value are examples of primary instruments. Secondary investments on the other hand, are financial instruments whose price is based on the value of the underlying asset. Derivative instruments such as options, forward and futures contracts, swaps, etc are examples of secondary financial instruments.
Primary financial instruments can be classified into three categories:
• Financial Assets - An asset that derives its value on the basis of a claim made to itself. Examples of financial assets include cash, accounts receivables, notes receivables, loan principal amount receivables, bonds receivables, etc.
• Financial Liabilities - An obligation that an entity owes as a result of past transactions. The settlement of the obligation results in the transfer of assets, providing services, etc. Examples of financial liabilities include accounts payables, notes payables, loan principal amount payables, bonds payables, etc.
• Equity Securities – A financial instrument that represents a proportional claim in the assets and profits of a corporation, thereby signifying a proportional ownership in the corporation. Government and corporate bonds, stocks and other securities are examples of equity securities.