LOANS AND SECURITIES

A loan is an arrangement in which a borrower takes money from a lender or a financial institution
and promises to return it within a fixed period of time and at a fixed rate of interest, which is
determined at the time the loan is granted. In most of the cases, a loan is returned in fixed
installments and each installment is a fixed amount of money.
There are various types of loans. Some of them can be classified as follows:
Secured Loan:
A secured loan is one in which loan is taken against an asset that is possessed by the person wishing
to take the said loan. For example, one can take a loan against property, a vehicle, jewellery etc. If
by any chance the loan cannot be repaid, the financial institution will sell that asset and recover the
amount. The interest rates may be lower for secured loans as compared to unsecured loans.
Unsecured:
If there is no asset which can be taken as a security, then the loan is said to be an unsecured loan. .
However, in order to qualify for this loan the person in question would have to have a good record
of credit history and have a good income. The interest rates for unsecured loans are usually higher
as compared to secured loans.
Subsidized loans:
These are awarded to those who qualify for it and the borrowers are not charged any rate of interest.
In India, the best example of subsidized loans are those given by rural banks or cooperative banks to
the farmers, especially for the purchase of farm equipments like tractors, pumps etc, or to
implement latest technology that would increase their produce. Some countries provide subsidized
loans to students to pursue their studies.
Unsubsidized loans:
These are given to lenders at a fixed rate of interest till the time the full amount is repaid. The
interest rates charged on this type of loan can be minimized by repaying the loan before the interest
accumulates.
Open-Ended loans:
These are loans in which can be taken several times. One can pay the loan and take a loan again.
There is however, a credit limit for these. The credit limit can be increased by the lender if the
person in question have a good record and do not default in payments. Credit cards and lines of
credit are a good example of open-ended loans.
Closed-Ended loans:

These are loans that are fixed at the time when they are taken. This means that the amount of
installments to be paid, whether monthly or half yearly etc., is fixed by the lender. These loans are
given against an agreed rate of interest. If desired one can repay the loan before the term allotted for
it ends. Some examples of open-ended loans are car loans, mortgage loans student loans.
Demand Loans:
These are short term loans and have to be paid by the borrower at any time it is asked to be repaid to
the lender. Unlike other types of loans, this loan does not have a date of maturity and at times may
not have specific schedule for repaying the loan. These loans are at times known as 'call loan' and
are given by lenders to borrowers with whom they have long standing business relationship. This
loan is good for the borrowers as they can repay it it according to their convenience.

Securities are financial instruments that represent a creditor relationship with a corporation or
government. Generally, they represent agreement to receive a certain amount depending on the
terms contained within the agreement. It represents a promise to pay bondholders a fixed sum of
money (called the bonds principal, or par or face value) at a future maturity date, along with
periodic payments of interest (called coupons). They are basically of two types, Debt Securities and
Equity Securities.
a) Debt Securities:
Debt securities may be called debentures, bonds, deposits, notes or commercial paper depending on
their maturity and certain other characteristics. The holder of a debt security is typically entitled to
the payment of principal and interest, together with other contractual rights under the terms of the
issue, such as the right to receive certain information. Debt securities are generally issued for a
fixed term and redeemable by the issuer at the end of that term
Corporate bonds
These represent the debt of commercial or industrial entities. Debentures have a long maturity,
typically at least ten years, whereas notes have a shorter maturity. Commercial paper is a simple
form of debt security that essentially represents a post-dated cheque with a maturity of not more
than 270 days.
Money market instruments
These are short term debt instruments that may have characteristics of deposit accounts, such as
certificates of deposit, Accelerated Return Notes (ARN), and certain bills of exchange. They are
highly liquid and are sometimes referred to as "near cash". Commercial paper is also often highly
liquid.

 Euro debt securities

These are securities issued internationally outside their domestic market in a denomination
different from that of the issuer's domicile. They include eurobonds and euronotes. Eurobonds
are characteristically underwritten, and not secured, and interest is paid gross. A euronote may
take the form of euro-commercial paper (ECP) or euro-certificates of deposit.
Government bonds
These are medium or long term debt securities issued by sovereign governments or their
agencies. Typically they carry a lower rate of interest than corporate bonds, and serve as a source
of finance for governments. Government securities carry practically no risk of default and,
hence, are called risk-free gilt-edged instruments. Government of India also issues savings
instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (oil
bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.). They are, usually
not fully tradable and are, therefore, not eligible to be SLR securities.
Supranational bonds
These represent the debt of international organizations such as the World Bank, the International
Monetary Fund, regional multilateral development banks and others.
b) Equity Securities:
An equity security is a share of equity interest in an entity such as the capital stock of a company,
trust or partnership. The most common form of equity interest is common stock, although preferred
equity is also a form of capital stock. The holder of an equity is a shareholder, owning a share, or
fractional part of the issuer. Unlike debt securities, which typically require regular payments
(interest) to the holder, equity securities are not entitled to any payment.
c) Hybrid Securities:
Hybrid securities combine some of the characteristics of both debt and equity securities.
Preference shares
These form an intermediate class of security between equities and debt. If the issuer is liquidated,
they carry the right to receive interest and/or a return of capital in priority to ordinary
shareholders. However, from a legal perspective, they are capital stock and therefore may entitle
holders to some degree of control depending on whether they contain voting rights.
Convertibles
These are bonds or preferred stock that can be converted, at the election of the holder of the
convertibles, into the common stock of the issuing company.

 Equity warrants
These are options issued by the company that allow the holder of the warrant to purchase a
specific number of shares at a specified price within a specified time. They are often issued
together with bonds or existing equities, and are, sometimes, detachable from them and
separately tradable. When the holder of the warrant exercises it, he pays the money directly to
the company, and the company issues new shares to the holder.