Finals Flashcards
Types of Investment
Deposit
Government Securities
The major DEPOSIT INSTRUMENTS include…
Time Deposit Account
Checking Account
Savings Account
It usually requires a minimum amount of deposit with a fixed term to maturity, meaning the depositor cannot withdraw from his/her account before the fixed maturity date.
Time Deposit Account
This type of account provides a higher fixed rate of return compared to a savings account or a checking account.
Time Deposit Account
It allows the depositor to issue checks from his/her account to pay for various expenditures instead of delivering bills or coins as payment.
Checking Account
Checks issued are subject to a clearing float (usually 3 days) when deposited by the payee.
Checking Account
It provides a low fixed rate of return but provides the convenience of availability by allowing the depositor to easily deposit and withdraw from the account at any banking day.
Savings Account
provided by financial institutions, mostly banks
deposit instruments
banks are monitored by:
Bangko Sentral ng Pilipinas (BSP)
bank deposits are insured with:
Philippine Deposit Insurance Corporation (PDIC)
the insured amount is only up to ______ per depositor for every bank.
₱500,000
A comprehensive rating system
CAMELS
CAMELS
Capital adequacy, Asset quality, Management indicators, Earnings quality, Liquidity, and Sensitivity to risk factors.
Rating Range CAMELS
1 as the highest and 5 as the lowest rating
fall under the category of debt securities and most of them are also classified as fixed income instruments.
government securities
government securities list
Treasury Bills (T-bills) Treasury Notes (T-notes) and Treasury Bonds (T-bonds)
They have maturities of one year or less.
Treasury Bills (T-bills)
There are three major types of Treasury bills—91-day, 182-day, and 364-day T-bills.
Treasury Bills (T-bills)
They are considered discount securities because they are issued at a discount relative to their face value.
Treasury Bills (T-bills)
Investors earn from the difference between the face value and the discounted price they paid for upon purchase of the instrument.
Treasury Bills (T-bills)
T-notes and bonds have maturities longer than one year which could be from two to 25 years.
Treasury Notes (T-notes) and Treasury Bonds (T-bonds)
T-notes and bonds pay coupon interest at regular intervals. Fixed rate T-notes, for example, pay coupon interest every semi-annual period. Retail T-bonds denominate every ₱5,000 pay coupon interest quarterly.
Treasury Notes (T-notes) and Treasury Bonds (T-bonds)
The principal is repaid upon maturity of the instrument.
Treasury Notes (T-notes) and Treasury Bonds (T-bonds)
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There are other government securities issued by government agencies aside from the Bureau of Treasury such as bonds issued by local government units (LGUs). The primary difference is that these bonds are not backed unconditionally and are not direct and general obligations of the National Government. Because of this difference, a higher rate of return is required compared to Treasury securities.
Corporate Debt Securities
securities from companies
Corporations issue DEBT INSTRUMENTS in the form of…
Commercial papers
Corporate bonds
These are short-term instruments issued by corporation for their immediate needs.
Commercial papers
These are long-term debt instruments issued by corporations.
Corporate bonds
Most of them provide fixed coupon payments although there are already variable-rate corporate securities. Fixed rate bonds pay coupon payments at regular intervals, usually semi-annually.
Corporate bonds
They are characterized by its maturity, par value, and coupon rate.
Corporate bonds
They may be classified as short-term (1 to 5 years), intermediate (5 to 12 years), and long-term (more than 12 years).
Corporate bonds
Bonds with longer maturities require a higher rate of return. The par value is the amount of principal expected to be repaid upon maturity.
Corporate bonds
Bond prices are also stated relative to its par value
Corporate bonds
Annual coupon payments are determined by multiplying the annual coupon rate as a percentage of par value regardless of the interval. A final tax of 20% is also levied on coupon interest of corporate bonds.
Corporate bonds
Corporate bonds are also traded like government securities using the PDEx platform.
Corporate bonds
are financial instruments that represent ownership in a corporation.
stocks
EQUITY SECURITIES
investment in stock issued by another company.
EQUITY SECURITIES are classified under two MAIN CATEGORIES. These are…
Common stocks
Preferred stocks
Is the return provided by the investment fixed or variable?
Investors earn from an equity investment through dividends and capital gains. Dividends issued by corporations may vary from year to year since the earnings of the company also fluctuate from period to period. Companies are not required to declare annual dividends. Since owners of common shares only have a residual interest in the earnings of the business, dividends are only declared if there are enough available funds after the payment of commitments to creditors. Thus, equity investors are exposed to greater variability of returns. Being exposed to greater variability also means that if the fixed obligations have been settled, then the excess earnings would all go to the common stockholder.
Who is the issuer of the investment?
Only corporations issue common shares. The credit standing of these corporations influences the protection of capital of their shareholders. If corporations default on their debt obligations, more so that they cannot provide sufficient returns or even repay the capital of shareholders since creditors have seniority over claims to the assets of the corporation.
Can the investment be liquidated immediately at a known price?
If the equity investment represents ownership in a listed company, then the instrument is considered liquid since the stock exchange would facilitate the availability of known bid and ask prices for the shares and access to a wide base of buyers and sellers as well. Investors would only need to look for a stock broker in order for the individual to purchase and sell shares in the stock market.
How long is the term to maturity of the investment?
Common shares do not have a term to maturity. The shareholder may hold the stock indefinitely.
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the common stockholders also have voting rights. Also, because of its residual interest, the potential upside of equity returns is essentially limitless.
Preferred stocks differ from common shares in terms of:
PREFERENCE AS TO DIVIDENDS
SENIORITY OVER CLAIMS TO ASSETS
THE ABSENCE OF VOTING RIGHTS
What are the COMMON TYPES of POOLED FUNDS?
An individual may invest in the shares of mutual funds, units in the Unit Investment Trust Funds (UITFs) offered by banks, or in Exchange Traded Funds (ETFs) traded in the stock exchange.
What are the ADVANTAGES in investing in POOLED FUNDS?
Most pooled funds only require a small amount of investment relative to the capital required if the individual would create his/her own portfolio.
Investing in pooled funds avoids the transaction costs incurred in buying individual securities, as well as the required time spent if one was to manage his/her own portfolio.
Investment professionals with the appropriate knowledge and skill manage these pooled funds.
When are GAINS EARNED and LOSSES INCURRED in POOLED FUNDS?
The initial price and the returns derived from mutual funds and UITFs are based on the movement of the net asset value (NAV) per share or per unit. Gains are earned when the NAV per share or per unit increases from the price a share or a unit was bought. Losses are incurred when the NAV per share or per unit decreases.
Investments in ETFs earn gains and incur losses similar to how listed equity investment works.
What are COMMON ALTERNATIVE INVESTMENTS?
Common alternative investments are in the form of tangible assets such as real estate, antiques, art works, horses, etc.
