1.2 Flashcards
Channels for funds and securities in the financial market
Direct planning Surplus Spending Deficit Spending Indirect Financing Intermediaries market
are the sources of funds as the one giving the primary securities in terms of financial aspects.
Direct planning
they are the one spending or using the money which comes from the DIRECT PLANNING.
Surplus spending
also get their funds in DIRECT PLANNING
Deficit spending
w/c get their secondary securities from the SURPLUS SPENDING.
Indirect financing
as we can see now there are many lending firms like CARD, Prime Alliance, ASA, PAG-ASA, Multipurpose Cooperatives and others.
INTERMEDIARIES MARKET
they are offering many kinds of loans and benefits for each member.
CARD, prime alliance, ASA, PAG-ASA, multipurpose cooperatives
➢people trade things for other things directly.
Barter
mode of trading during ancient times.
Barter
It is always a cycle from __to __ then to __and ___ back again to DIRECT PLANNING.
DIRECT PLANNING
SURPLUS SPENDING
INDIRECT FINANCING
DEFICIT SPENDING
It is the process whereby small investors are able to purchase pieces of assets that normally are sold only in large denominations.
Denomination Intermediation
Individual savers often invest small amounts in mutual funds.
Denomination Intermediation
The mutual funds pool these small amounts and purchase a well diversified portfolio of assets.
Denomination Intermediation
Small investors buy portions of a mutual fund that will be used by the intermediaries to buy securities
Denomination Intermediation
It is to make profits off the differences in interest rates.
Maturity Intermediation
Banks transform short-term debt into long-term credit using ___.
Maturity Intermediation
Banks borrow money from depositors and pay those customers interest. Banks, in turn, take that money and lend it to people who need funds to pay for vehicles, houses and other large items. The short-term interest paid out to depositors is less than the long-term interest gained over a 30-year mortgage, so the financial institution profits.
Maturity Intermediation
Borrowing at short-term interest rates, but loaning funds long-term. Bank is in a vulnerable position.
Maturity Intermediation
It is a measure of how much the price of a fixed-income asset will fluctuate as a result of changes in the interest rate environment.
Interest rate risk Intermediation
Securities that are more sensitive have greater price fluctuations than those with less sensitivity.
Interest rate risk Intermediation
This type of sensitivity must be taken into account when selecting a bond or other fixed-income instrument the investor may sell in the secondary market.
Interest rate risk Intermediation
Degree of change in the price of an asset (such as a security) in response to the fluctuations in the market interest rates.
Interest rate risk Intermediation
When DSUs sell primary securities in foreign currency denomination, it is difficult to find an SSU that will accommodate the sale.
Foreign currency Intermediation
When DSUs deal directly with SSUs, the search and transaction costs are higher, because financial intermediaries are easier to locate, the denomination and maturity of securities they issued can be tailored to need, and their credit evaluation is quick and efficient, DSUs are more attracted to deal with them.
Lower Net Interest Cost
Financial intermediaries provide information, experts assistance and other services in addition to financing. This is especially important when DSUs are dealing with foreign markets since they provided with information on legal, tax and financial requirements in those areas.
Information and Assistance Services
Classifications of Financial Market
Primary market Secondary Market Money market Capital market Bond market Mortgage Market Stock market Consumer credit market Negotiation market Organized market Option market Foreign exchange market Over the counter market Spot market Futures market
It issues new securities on an exchange.
Primary market
Companies, government and other groups obtain financing through debt or equity based securities.
Primary market
also known as “new issue markets”
Primary markets
are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors.
Primary markets
Also known as “previously issued markets”
Secondary markets
A financial market through which existing financial securities are traded.
Secondary markets
It is where investors purchase securities or assets from other investors, rather than from issuing companies themselves.
Secondary markets
It is a market for dealing with financial assets, and securities which have a maturity period of up to one year.
Money market
In other words, it’s a market for purely short term funds.
Money market
It is used by participating as a mean for borrowing and lending in the short term, from several days to just under a year.
Money market
Money market investment are also called “___” because of their short maturities.
cash investment
___ perform Money Market function.
Land Bank of the Philippines
It is a market for financial assets which have a long or indefinite maturity.
Capital Market
Generally it deals with long term period of above one year. To do this, a company raises money through the sale of securities-stock and bond in the company’s name. These are bought and sold in the capital markets.
Capital Market
➢The capital market is subdivided into three parts:
- The Bond Market
- The Mortgage Market
- The Stock Market
The market for debt instrument in any kind.
Bond market
Operates through a system of dealers using a telecommunications network, rather than in a single physical location trading.
Bond market
Dealers include giant banking firm located around the world.
Bond market
Portion of financial market which deals with loans on residential, commercial, and industrial real estate, and on farmland.
Mortgage market
It is that financial market where the common and preferred stocks issued by corporations are traded.
Stock market
The stock markets has 2 components:
(1) the organized exchange, and (2) the less formal over the-counter markets.
The companies whose stocks are traded in the Philippines Stock Exchange and classified into the following:
- Banks
- Financial services
- Communication
- Power and energy
- Transportation services
- Construction and other related products
- Food, beverages, and tobacco
- Holding firms
- Manufacturing, distribution and trading
- Hotel, recreation, and other services
- bonds, preferred and warrants
- Others
Market involved in loans on autos, appliances, education, travel is referred to as the consumers credit market.
Consumer credit market
It is one where trading is conducted by an independent third party according to a matching of prices on ordered received to buy and sell particular security. Stocks are sold to the highest bidder out the reading floors.
Auction market
At the Philippines exchange stock market, buyers of securities make their bids and prospective seller make their offer. Bids and offers stipulate both price and volume and are handled by the __, an agent of the auction market.
Trader
Auction market
Also known as “stock exchanges”
Auction market
Offers are ranked from the lowest price to up; bids from the highest price down. Bids and offers are matched with one another. If there is a match, trade is consummated. Buyers and sellers do not directly trade with one another, but through the trader.
Auction market
When buyers and sellers of securities negotiate with each other regarding price and volume, either directly or through a broker or dealer, they are engage in the financial marketing called negotiation market.
Negotiation market
Once in a while , the Philippine government negotiates with institution like the WORLD BANK for loans intended for various project.
Negotiation market
It is that financial market with fixed trading rules, it is situated at a central location in the financial district in which trading is generally conducted by auction.
Organized market
Another name for organized markets are ___ like the Philippines stock exchange and Australian stock exchange. Common and preferred stocks, bonds, and warrants are sold at the Philippines stock exchange.
exchange
Stock exchange have specially designed members, and have an elected governing body-hand board.
Organized market
Members have seats in the exchange, which are bought and sold. The seat gives the holder the right to trade on the exchange.
The board of governors of the Philippines stock exchange is composed of __ members.
Organized market
15
It is where is one where stock option are traded. A stock option is a contract giving owner the right to either buy or sell a fixed number of share of a stock (usually 100) at any time before the expiration date at a price specified in the option.
Option market
One purpose of the option markets is to make possible for investors who wish to educe the risk of losing money due to price changes in the futures.
For instance, an importer purchasing goods to be paid in foreign currency may avoid the risk of a sharp rise in the foreign exchange rate by buying an option contract.
It is the market where people buy and sell foreign currencies. This market is composed of the following:
Foreign exchange market
Bank located throughout the world buying and selling foreign monies, in the form of foreign currencies and deposits in foreign banks Foreign exchange dealers;
Foreign exchange market
Currency exchange catering mostly to tourist and are found in the downtown areas, airports, and railroads stations in major tourist centers.
Foreign exchange market
It is that consisting of a large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities.
Over-the-counter market
All securities not traded in the stock, exchange, for one reason or another, are traded over the counter.
Over-the-counter market
When securities are traded for intermediate delivery and payment the market referred to as the spot market.
Spot market
__ is the feature of the spot market and within is actually the price for security that will be delivered on the spot or immediately.
It is the feature
The term “__” may actually mean one or two days to one week depending on he facilities used or the tradition in the area.
Immediately
Spot market
It is an alternative to the future market.
Spot market
It is that where contract are originated and traded that gives the holder the right to buy something in the future at a price specified by the contract.
Future markets
They are monetary contracts between parties.
Financial Instruments
They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver cash (bond).
Financial Instruments
Differences among financial Instruments
Denomination Maturity Claims against issuer Collateral Terms to Repricing Marketability Forms of Interest Payment Options Currency
Financial Instruments vary in ___ from the 100 peso opening amount for a savings account to the billion of pesos of a single debt contract made by the government.
Denomination
Financial Instruments also differ in terms of ___, as some like demand deposits are accepted by commercial banks for as short a period as one day, while some, like bonds, may be issued with a maturity term of more than 100 years.
Maturity
Financial instruments may be categorized into two types:
1)ownership claims, and 2) debt claims.
the claim of a right or a claim of title to enter lands with the intent of claiming and holding it.
Ownership claims
It is a claim that a lender makes asserting that a borrower in the process of bankruptcy owes it money.
Debt claims
The credit quality of any financial instruments is dependent on the type of collateral backing it up.
Collateral
Interest rates paid by DSUs on borrowed funds may change before maturity as well as the securities be priced.
Terms to repricing
Fixed throughout their maturities.
Fixed-coupun (rate) bonds
Rates may change before maturity.
Variable or floating coupon (rate) bonds
The following are factors that can lower the costs of trading a financial instrument and subsequently its marketability:
a) when the issuer of the instrument is well-known, information costs tends to be lower;
b) b) when the amount of issue is large, economy is effected resulting to lower search and transaction costs;
c) c) when instrument has few unique characteristics,…
Financial instruments may also differ in terms of whether they are highly marketable or not.
Marketability
Forms of Interest Payment
Two forms of Interest Payment:
a) by coupons
b) by a periodic addition to the principal amount
The instruments will be different from one another according to the type of option adapted.
Options
Options consist of the following types:
a) call options - these permit the issuer to redeem the instrument before maturity;
b) put options - these permit the investor to sell back to the issuer before maturity;
c) convertibility options - these permit the investor to convert from one instrument to
Financial instruments may also differ in terms of their, currency denomination. Most are denominated in peso, while a few are in dollars and other currencies.
Currency
It is the arena in which financial institutions make available to a broad range of borrowers and investors the opportunity to buy and sell various forms of short-term securities.
Money market instruments
There is no physical “money market.” Instead it is an informal network of banks and traders linked by telephones, fax machines, and computers. Money markets exist both in the United States and abroad.
Money market
Types of money market instruments
Treasury bills
Commercial paper
Banker’s acceptance
They are the most actively traded in the money market which makes them the most liquid
Treasury bills
Since it is the government that issues __, redemption is always assured making the instrument the safest in terms of risk-bearing. This is so because the government is always able to meet its financial obligations because it can raise taxes and/or issue paper money or coins to pay its debts.
Treasury bills
They are the main holders of treasury bills, while small amounts are held by households businesses, and other financial intermediaries.
Banks
For instance, ___treasury bills a minimum transaction of Php 100,000.
Rizal Commercial Banking Corporation(RCB)
It refers to short-term promissory notes issued by a large, established business firms with a strong credit rating.
Commercial paper
The issuing firm may either be ____
financially or non-financially oriented enterprise.
They are unsecured and are sold at a discount like Treasury bills.
Commercial paper notes
They are usually issued on 60-DAY, 90-DAY, OR 180-DAY basis.
Promissory notes
The use of __ offers advantages for both borrower and lenders of funds. To the borrower(or the firm issuing the paper),it is cheaper to finance short-term cash needs with commercial paper than borrowing from a commercial bank.
commercial paper
To the lender(or the buyer of the commercial paper) the advantages are as follows:
- Commercial paper carries, higher yield than treasury bills, although this also reflects higher and reduced liquidity;
- The maturity of commercial papers may be tailored to the needs of the investor, in contrast to Treasury bills which come in fixed maturities that may be less convenient to the lender.
It is a short-term, marketable security guaranteed by a bank and sold on the open market.
A banker’s acceptance
___ are used principally in financing international trade where the seller of the goods may not know the buyer and may have no easy way of checking his credit standing.
Banker’s acceptances are used principally in financing international trade where the seller of the goods may not know the buyer and may have no easy way of checking his credit standing.
Financial Instruments Highly stable marketability and issued by the Philippine Government
Treasury bills
Short term marketability guaranteed by bank
Banker’s Acceptance
Short term debt
Tax anticipation
Long term financial instruments issued by the government
Government bonds
A long term financial instruments issued by the corporation
Corporate bonds
Borrowing
Final Instruments
Also known as Securities
Financial Instruments
Checks
Pay to the order of (Complete, company) Signature Date Amount in figure Amount in words
Erasures- not accepted
Penalties- Php 1,000
Commercial (Companies) Big companies- Evidence Payment
Manager (Bank) (Buy a car, big transactions, requirement of the Car camping to issue a downpayment: Contract to Sell (30% should be a manager’s check, go to bank and issue a manager’s check)
Personal (Owner, treasurer, cashier, teller)
For security reasons- evidence (Why there’s checks)
Stocks Invest you See if it's earning the corporation Tumaas ang value ng investment- palitan mo Baba-Bili ka
Huh
When you lend money- Promissory note
For business expansion Terms and Conditions Hindi magpapautang kapag walang collateral 40% Cash Value HDMF PAGIBIG
IN EXCESS OF THE EXPENSES, Proceeds go to the bank
Organization, Corporation, business- particlesarticles of corporation or by laws
Unpaid/Unsettled obligations in credit card
Financial policy- bawas automatically from the Savings
