In its essence a financial contract is an agreement between a buyer and a seller which promises the buyer a stream of future cash flows over a period of time. Because the future is uncertain, the buyer becomes exposed to a certain level of risk. The buyer attaches a risk premium to the deal and based on that she demands a required return of k and is therefore willing to pay up to PV for the contract where PV is the present value of the cash flows discounted at k%.

This simple model holds across all kinds of financial contracts including stocks, bonds, hybrids, innovative bond contracts, options, futures, swaps, credit derivatives, structured notes, and other synthetic and exotic instruments. Unfortunately, the subject of financial contracting has turned into a confused mess because of an arcane vocabulary and attempts at computational simplicity that are relevant only in historical terms. Par value, coupon rate, discount, premium, current yield, and discount yield are examples.

There are two additional considerations that buyers and sellers consider before they enter financial contracts and these are transaction costs and tax consequences. Some contracts are designed to lower transaction costs while others may exist to take advantage of tax laws or to exchange complementary tax exposures. These effects may be included in the cash flow projections.

When faced with a financial contract, first deduce the future cash flows that it implies and the uncertainty of the cash flow projections. Compute the present value net of transaction costs and tax effects. That is all there is to financial contracting. The rest of it is just so many words.