54 Pages

■ CHAPTER 5 An Introduction to Derivative Financial Instruments (Freestanding Derivatives)

Financing activities have, for a long time, depended on three fundamental types of securities:

1. Equity Securities consisting mainly of equity shares:

a. Common shares are securities that represent ownership rights to unspecified cash flow (dividends) and control (voting power) proportionate to the capital investment the shareholders have made. These two types of rights place common shareholders at the end of the chain in establishing claims to the enterprise assets if the enterprise were to face financial difficulties; common stock shareholders are therefore referred to as the residual claimants.