Lesson 2 Flashcards
are the main vehicle used for transactions in the
financial market.
Financial instruments
allows transfer of funds from entities with excess
funds (investors) to entities who need funds (issuer) for business
purposes.
Financial instruments
is the party that issues the financial instrument and
agrees to make future cash payments to the investor.
The issuer
is the party that receives and owns the financial
instrument and bears the right to receive payments to be made by
the issuer. From an accounting perspective, investors recognize
financial instruments as an asset.
The investor
the type of financial market where these financial
instruments with less than one year’s tenor are traded.
money market
The money market have three fundamental characteristics
• Usually sold in large denomination;
• Mature in one year or less from the original issue date.
• Low default risk
▪ Government securities issued by the Bureau of _ which
mature in less than a year
▪ _have virtually zero default risk. They are the safest
investment instrument in the market because they are backed by the
full taxing power of the government.
▪ Risk of inflationary changes is also lower since the maturity term is
shorter.
▪ These are also marketable and highly liquid.
▪ Sold at a discount (lower purchase price than the maturity value)
TREASURY BILLS
▪ These are securities issued by banks which record a deposit made
indicating the interest rate and the maturity date.
▪ This can’t be easily withdrawn since this is different from a demand
deposit.
▪ The CD restricts the holder from withdrawing the fund until maturity
date for a promise of higher return than a regular demand deposit.
NEGOTIABLE CERTIFICATES OF DEPOSITS
▪ Unsecured promissory notes that are only issued by large and credit
worthy enterprises
▪ Directly issued to the buyer, no secondary market
COMMERCIAL PAPER
▪ is a form of short-term borrowing for
dealers in government securities. In the case of a repo, a dealer sells
government securities to investors, usually on an overnight basis, and
buys them back the following day.
▪ For the party selling the security and agreeing to repurchase it in the
future, it is a repo; for the party on the other end of the transaction,
buying the security and agreeing to sell in the future, it is a reverse
repurchase agreement.
▪ Repos are typically used to raise short-term capital.
▪ Think of a repurchase agreement as a loan with securities as collateral.
For example, a bank sells bonds (collateral) to another bank and agrees to
buy the bonds back later at a higher price.
REPURCHASE AGREEMENT
▪ is an order to pay a specified amount of
money to the bearer on a given date.
▪ They are used to finance goods that have not yet been transferred
from the seller to the buyer. A bank can intervene in this standoff by
issuing a banker’s acceptance where the bank in essence substitutes
its creditworthiness for that of the purchaser.
▪ This type of instrument is used by importers and exporters of goods
where buyer and seller have no established credit with each other.
BANKER’S ACCEPTANCE
The bureau sells government securities to raise
funds. Short-term issuances of government securities allow the
government to obtain cash until tax revenues are collected.
Bureau of Treasury
Banks are the primary issuer negotiable certificates
of deposits, banker’s acceptances and repurchase agreements.
Commercial banks
These companies raise
money market instruments i.e. commercial paper to lend funds to
individual borrowers
Finance / commercial leasing companies
These entities buy and sells
money market securities to manage their cash i.e. to temporarily store
excess funds in exchange of somewhat higher return and obtain short-
term funds
Commercial Non-Financial Institutions
