Lesson 4: Investment in Capital Market Flashcards
Owned by relatively small number of shareholders
Private Companies
where private companies sell shares directly to a small number of institution or wealthy investors
Private placement
the national government regulatory agency charged with supervision over the corporate sector, the capital market participants, and the securities and investment instruments market, and the protection of the investing public.
Securities and Exchange Commission
provide an organized forum in which suppliers of funds and demanders of funds can transact business directly.
Financial Markets
- publicly owned or public companies
- can raise capital from a wide range of investors
Public Traded Companies
Types of Financial Markets
- Direct Search Markets
- Brokered Markets
- Dealer Markets
- Auction Markets
where buyers and sellers must seek each other out directly
Direct Search Markets
brokers provide search services to buyers and sellers
Brokered Markets
when the dealer purchase asset for their own account with the plan of selling them for a profit
Dealer Markets
all traders converge in one place to buy or sell an asset
Auction Markets
✓ Investors
✓ stock exchange/over-the-counter market
✓ RegulatoryAgencies
Securities and Exchange Commission (SEC) Philippine Stock Exchange (PSE)
Participants in the Secondary Capital Market
✓ Issuers
✓ InvestmentBanks
✓ Investors
✓ RegulatoryAgencies
Securities and Exchange Commission (SEC) Philippine Stock Exchange (PSE)
Participants in the Primary Capital Market
a function wherein an individual or institution undertakes the risk associated with a venture or an investment
Underwriting
determining the risk and price of a particular security
Underwriting
handle the orderly marketing and distribution of the securities to the intended public
Underwriters
guarantees the issuer that a specific amount of bonds shall be sold to investors
Underwriters
registration statement filed with SEC describing the issue and prospects of the issuer
Prospectus
organized to enable an underwriting firm and top executives/management to pitch sales to investors (sales pitch)
Road Shows
is a price discovery process used by investment bankers to determine the demand for an issuer’s initial offering of securities
Bookbuilding
large investors express their interest in purchasing securities
Bookbuilding
Specializes in helping firms raise capital by selling securities (bonds and stocks) Acts as underwriters.
Investment Banks
Certificate of debt issued by an entity
Bonds
Previously in paper/physical form, but now electronic or ___________.
scripless
The amount that is expected to be repaid to the bondholders upon maturity of the bond (can be in different currencies)
Face Value
How much investors are willing to pay/receive to buy/sell an outstanding bond
Price
Length of time of the duration of the obligation (settlement date up to maturity date)
Tenor
Interest rate paid by the bond issuer to the investors, usually quoted on an annual basis. Can be fixed or floating rate
Interest Rate
Date when bond proceeds (cash) gets transferred to the issuer in exchange for the bond holdings of the investors
Settlement Date
Date when the principal amount (face value) is repaid by the borrower to the bondholders
Maturity Date
Frequency of coupon payments (annual, semi-annual, quarterly)
Coupon Frequency
Total returns from holding a bond at any given time
Yield
Who issues the bonds
- Government bonds
- Corporate bonds
- Municipal bonds
A dollar today is worth more than a dollar tomorrow
Time Value of Money
The rate (usually quoted on annual basis) charged for lending money
Interest Rates
Only the principal amount pays interest
Simple Interest
Both the principal and interest amounts pay interest
Compound Interest
Simple interest formula
FV = PV (1+rt)
Compound interest formula
FV = PV (1+r/n)^nxt
Debt security instrument that pays a variable interest rate linked to a financial index and adjusted periodically, typically every 3 to 6 months
Floating Rate Note
Differs from a Fixed-rate Bond; interest rate not fixed at an absolute rate but “floats” with market rates, cannot be predetermined
Floating Rate Note
graphically/visually represents yields on similar bonds across a variety of maturities
Yield Curve
positive yield curve. Longer-term interest rates are higher than shorter-term interest rates
Normal Yield Curve
the difference between long and short term interest rates is large
Steep Curve
a small or negligible difference between short and long-term interest rates
Flat Yield Curve
negative yield curve. Long-term interest rates are less than the short term interest rate
Inverted Curve
Factors influencing yield curve
- Market forecasts and expectations
- Presumable Liquidity
- Market inefficiency
Example: Find the price today of a 10-year bond assuming 1,000 in face amount, a coupon rate of 5% payable semi-annually, and having a current yield of 6%.
From the given details above, is the bond expected to be at a premium or discount?
Methodology:
1. List down all the cash flows of the bond
2. Calculate the appropriate discount factor
3. Add the present values of all the cash flows
Step 1:
FV x coupon rate / frequency 1,000 x 5% / 2 = 25
Step 2 & 3:
PV = Cash Flow / (1 + yield/n)^nxyear
Formula of PH Capital Market
P = C (1-(1+i)^-n / i) + M (1+i)^-n
Compute the price of a 9% coupon bond with 20 years to maturity and a face amount of P1,000 if the current market rate is 12%. Coupon is paid semi-annually.
Found in the ppt
Interest earned on a debt instrument that has not been paid yet
Accrued Interest
Price of a bond that includes accrued interest since last coupon payment
Dirty Price
Price of a bond that does not include the accrued interest
Clean Price
Formula of Accrued Interest
Accrued Interes = Face Value x (Coupon Rate / Coupon Frequency) x (Days since last coupon/Days between coupon payments)
A five-year Php 1,000 par value bond pays a 6.5% annual coupon rate. Given a Yield to maturity of 8%, what is the price of the bond today?
Year1=65/[(1+8%)^1]=60.1852
Year2=65/[(1+8%)^2]=55.7270
Year3=65/[(1+8%)^3]=51.5990
Year4=65/[(1+8%)^4]=47.7769
Year 5 = 1,065 /[ (1 + 8%)^5] = 724.8211
Bond Price = Php 940.11
What is the current yield on a bond that is worth Php 900 with a par value of Php 1,000 and a coupon rate of 10%?
Current yield = annual interest / net proceeds
= (1,000 X 0.10) / 900
= (100) / 900
= 11.11%
A 6-year, Php 1,000 par value bond was issued last August 15, 2018. It pays a 5% semi-annual coupon rate and has Yield to maturity of 8%,
What is the accrued interest October 31, 2023?
Accrued interests = Php 1,000 x (0.05/2) x (days since last Coupon payment / Days between coupon payments)
= 1,000 x 0.025 x 77/180
= 10.7
If a bond’s price increases, the yield decreases.
Premium
If a bond’s price decreases, the yield increases
Discount
For the Philippine government yield curve, the yield curve is called
BVL
serves as the risk-free benchmark rate since government bonds have zero credit risk (direct government obligations)
BVL
allow the issuer to redeem the bonds before maturity
Callable bonds
bond proceeds allocated for green projects
Green Bons
periodic repayment of principal
Amortizing bonds
bonds that pay coupon that changes per repricing date (e.g. 3m, 6m)
Floating Rate Bonds
bonds that pay a fixed rate throughout
Fixed Rate Bonds
bonds that pay zero coupon but issued at a discount
Zero Coupon Bonds
issued outside the country
External Bonds
are measures of the return that can be earned on bonds.
Yield
They may act as “market makers” in relevant markets
Investment Bans
For large investors such as corporate pension funds, charities and private clients.
Investment management
