Semi-Finals Flashcards
A market is a venue where goods and services are exchanged.
Financial market
It is a broad term describing any marketplace where buyers and sellers participates in the trade of assets such as equities, bonds, currencies and derivatives.
Financial market
Benefits of a Financial Market/The operation of financial markets offer advantages which covers the following:
1.Funds are directed to DSUs that can use them most efficiently;
2. Liquidity is provided to savers.
•Financial markets, just like any market, operate in the demand and supply of funds. DSUs that can use borrowed funds in the most productive manner can afford to pay lighter interest rates. Because of this, they have an edge in the bidding for loanable funds
Higher interest rates will then motivate savers to save more so they will have more funds for lending.
•An additional benefits provided by financial markets is liquidity. Without the intervention of financial markets, savers will directly lend to borrowers. This arrangement forces the lenders to wait for maturity date of the loan before he gets his money back.
•The lender will be at a great disadvantage if he happens to need the loaned before maturity. This problem is eliminated when financial markets are lapped. This happens because financial instruments are issued to lenders, which in turn, can be converted to cash even before maturity, by endorsement or sale.
Ways to stimulate savings
Denomination (size) intermediation Maturity intermediation Credit-risk intermediation Interest-rate sensitivity intermediation Foreign currency intermediation Higher interest rates
Secondary securities can be made available in a wide range of denominations from a few hundred peso to many million of peso.
Denomination (size) Intermediation
To open an account with a savings bank for instance, will only require an amount as low as one hundred pesos. Some intermediaries, however, specialize in issuing large denomination securities.
Denomination (size) intermediation
Savers are concerned about the length of time their savings will be invested.
Maturity Intermediation
Dealing with financial intermediaries, however, eliminates the problem because the savers can choose from secondary securities issued by the intermediaries in maturities of from one year to more than a hundred years.
Maturity intermediation
Securities such as stock have no maturity and their life is co-terminus with the life of the issuing DSU. Banks accept deposits that many be withdrawn in one or a few days. Educational plan companies sell contract that mature when the beneficiaries of the SSUs reach college age.
Maturity intermediation
When primary securities are offered for sale, individual SSUs may not be too eager to buy because of their limited access to credit information.
Credit-risk Intermediation
Financial intermediaries, however, have better ways of identifying and later screen out poor credit risk.
Credit-risk Intermediation
These intermediaries will then issue secondary securities that are based on primary securities bought and previously identified at good risk.
Credit-risk Intermediation
This form of intervention minimizes the effects of SSUs in credits screening.
Credit-risk Intermediation
Some types of primary securities are subject to change in market interest rate.
Interest rate sensitivity intermediation
Many SSUs are averse to such interest rate risk. This is remedied by the issuance of secondary security by financial intermediaries.
Interest rate risk intermediation
The SSUs are given a choice of secondary securities of a given maturity with a wide range of interest sensitivities.
Interest rate risk intermediation
When SSUs buy primary securities stated in foreign currencies, they assume the risk that the value of the foreign currency may change through time.
Foreign currency intermediation
This risk is transferred to the financial intermediary Which buys foreign currency denominated primary securities and then sells secondary securities stated in local currency.
Foreign currency intermediation
When SSUs undertake actual search for DSUs issuing primary securities, they do so with higher search and transaction costs.
Higher net interest rate
This is so because of the difficulties involved in identifying DSUs, determining the credits quality of securities offered, and locating the offers where the DSUs are located.
Higher net interest rate
When SSUs buy secondary securities from financial intermediaries, the search and transaction costs are much lower. When deducted from the gross interest rates, the lower costs will yield higher net interest rates
Higher net interest rate
It is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.
Interest rate
The are typically noted on an annual basis, known as the annual percentage rate (APR).
Interest rate
The assets borrowed could include, ___.
cash, consumer goods, large assets, such as a vehicle or building
It is essentially a rental, or leasing charge to the borrower, for the asset’s use.
Interest
In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the “___”.
lease rate
When the borrower is a low-risk party, they will usually be charged a ___; if the borrower is considered high risk, the interest rate that they are charged will be __.
Low interest rate
Higher
It is the charge for the privilege of borrowing money, typically expressed as annual percentage rate.
Interest
It can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage.
Interest
There are two main types of interest that can be applied to loans:
Simple
Compound
It is a set rate on the principle originally lent to the borrower that the borrower has to pay for the ability to use the money.
Simple Interest
It is interest on both the principle and the compounding interest paid on that loan.
Compound interest
A method of calculating interest whereby the interest payable is determined at the beginning of a loan and added onto the principal.
Add-on Interest
It is defined as the cost of borrowing money, and depending on how it is calculated, can be classified as ___
Simple Interest and Compound Interest.
It is calculated only on the principal amount of loan.
Simple Interest
It is determined by multiplying the daily interest rate by the principal by the number of days that elapse between payment
Simple Interest
Formula of Simple Interest
= P x i x n
It is calculated on the principal amount and also on the accumulated interest of previous periods, and can thus be regarded as “___.” This compounding effect can make a big difference in the amount of interest payable on a loan if interest is calculated on a compound rather than simple basis.
Compound Interest
interest on interest
Formula of Compound Interest
= P [(1+i)^ - 1]
It may be subjected to calculation of interest bond on several conditions.
Bonds
Bonds are Formerly
- YIELD MATURITY
* CURRENT YIELD
This term refers to “ The average return on a debt. Security it kept until maturity taking into account the income provided by interest payments as well as capital gains or losses.”
Yield to Maturity
FORMULA of Yield to Maturity
YTM= I+(f-p)/n
• (F-P)/2
WHERE: •YTM = •P = •I = •F = •N =
YIELD TO MATURITY FOR ANNUAL INTEREST RATES
PRICE OF BOND AT TIME
ANNUAL INTEREST PAYMENTS
FACE VALUE OF THE BOND, PAYABLE AT MATURITY
NUMBER OF YEARS TO MATURITY
THIS TERM REFERS TO THE PROMISED ANNUAL INERTEREST PAYMENT FROM A BOND DIVIDED BY THE MARKET VALUE OF THE BOND
Current Yield
Current Yield
PROMISED ANNUAL INTEREST PAYMENTS MARKET VALUE OF BOND
THESE ARE BONDS WHICH CARRY NO INTEREST BUT WHICH ARE ISSUED AT A DEEP DISCOUNT WHICH PROVIDES CAPITALS GAINS WHEN THEY ARE REDEEMED AT FACE VALUE.
ZERO COUPONS BONDS
IT IS THE PRICE AT WHICH IT WILL BE REDEMMED AND WHICH IS WRITTEN ON THE CERTIFICATE. THE DISCOUNT PROVIDED CORRESPONDS TO THE INTEREST PAID TO BE THE BOND.
THE FACE VALUE OF A THE BOND
It is the part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments.
Capital Market
It can be either a primary market or a secondary market.
A capital market
In primary markets, new stock or bond issues are sold to investors, often via a mechanism known as underwriting.
Capital Market
Capital Market
Stock Market
Bond Market
Money Market
It is an asset or item that is purchased with the hope that it will generate income or will appreciate in the future.
Investment
In an economic sense, an _ is the purchase of goods that are not consumed today but are used in the future to create wealth.
investment
In finance, an __ is a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit.
investment
It is the interest rate that does not take inflation into account.
Nominal Interest Rate
It is the interest rate that is quoted on bonds and loans.
Nominal Interest Rate
It is the interest rate that does take inflation into account.
Real Interest Rate
As opposed to the nominal interest rate, the __ adjusts for the inflation and gives the real rate of a bond or a loan.
real interest rate
An approach used in understanding changes in interest levels in the ___
loanable funds theory.
It is a short term in concept.
Loanable Funds Theory
It concentrates in the magnitudes of financial flows from various sectors of the economy.
Loanable Funds Theory
It socks to explain changes in interest rates by examining combined demand for and supply of funds by the business, household, and government sectors.
Loanable Funds Theory
Determinants of the Level of Interest Rate
Production opportunities
Risk
Inflation
Time preferences for Consumption
The main users of borrowed funds are the producers, when a certain producer for instance expects a 100 percent return on a proposed project, he will not mind paying a 20 percent interest or higher on borrowed funds if he expected return is only 20 percent, then 20 percent interest will be too high for him. In this case borrowing will be unlikely.
Production Opportunities
the tendency to spend however depends on their needs. It’s the aggregate savings for the entire country is low, interest rate will be high, conversely if aggregate savings is high interest rate will be low
Time preference for Consumption
If risks is negligible like when the government borrows, lendless would be willing to accept lower interest rate. As risk becomes greater, lender would demand higher rates, if they would be willing to lend at all. The risk of non payment of loans get higher during period of economic crisis.
Risk
It refers to the rate of increase in the prices of commodities.
Inflation
It’s effect is the decrease in the purchasing power of money.
Inflation
It is used to describe funds that are available for borrowing.
Loanable Funds
Because investment in new capital goods is frequently made with loanable funds, the demand and supply of capital is often discussed in terms of the demand and supply of loanable funds.
Loanable Funds
It consist of household savings and/or bank loans.
Loanable Funds
It is a source of loanable funds and investment is the demand for loanable funds.
Savings
The __ is a market where those who have loanable funds sell to those who want loanable funds.
market for loanable funds
The availability of loanable funds is determined by the amount of __, which is the total income in the economy after paying for consumption and government purchases.
national saving
Supply of Loanable Funds:
- (1) Savings,
- (2) Dishoarding,
- (3) Bank money, and
- (4) Disinvestment.
It is done by households and firms out of their incomes are the biggest source of loanable funds.
Savings
The loanable fund theorists considered savings in two senses.
The Swedish economists considered saving in the ex-ante sense which means savings planned out of the anticipated incomes. D.H. Robertson took savings as the difference between the income of the previous period and consumption of the current period.
In both these versions, savings were assumed to be __; that is, the assumption was that the volume of saving increases with incomes and vice versa. It was conceded that savings by households depend on their income but the neoclassical contended that given the level of income, savings vary with the rate of interest.
interest-elastic
It means bringing out hoarded money into use and thus constitutes a source of supply of loanable funds. Individuals are free to dishoard the idle cash balances from a previous period thereby making them active.
Dishoarding
People hoard money to satisfy their desire for __. At a low rate of interest there is not much of an inducement to lend more at high rates of interest and less at lower rates.
Liquidity
It means not providing sufficient funds for depreciation of equipment.
Disinvestment
It takes place when business concerns do not feel inclined to put part of their earnings into the depreciation fund which is used for replacement of existing capital equipment when it wears out. In effect this means a supply of active balances or loanable funds.
Disinvestment
It particularly characterizes declining industries or other industries in a period of high and booming rate of interest. As M.M. Bober has observed,
Disinvestment
It is encouraged somewhat by a high rate of interest on loanable funds. When the market rate is high some of the current capital may not produce a marginal revenue product to match this rate of interest. The firm may decide to let this capital run down and to put the depreciation funds in the loan market.”
Disinvestment
The demand for loanable funds comes from many sides. The __ emphasised only the investment demand but loanable fund theorists consider other sources as well, that is, dissaving and hoarding.
Classical theory
The most important factor responsible for the demand for loanable funds is the ___
demand for investment
It is expenditure of funds on the building up of new capital goods and inventories.
Rate of Interest
It means consuming more than the income in the current period.
Dissaving
It is the excess of expenditure of consumption over income and is thus negative saving.
Dissaving
Some people are anxious to purchase such durable goods as houses, automobiles, refrigerators, television sets and air conditioners when they do not have the saving to pay for them.
•They get it on installment basis and thus spend more than their current income.
Dissaving
Loanable funds are also demanded for ___ purposes that is for the satisfaction of the desire of people to hold money.
Hoarding
People like to hold money in idle cash balances when they feel that the current rate of interest on lending is not sufficiently high to induce them to part with their money and that in the near future they will be able to make better use of their hoarded balances.
•Surely then inducement to hoard is greater at low rates of interest and less at high rates.
Hoarding
They are financial instruments with highly stable marketability
Treasury Bills
T-bills
They are issued by Philippine government on various maturities of up to one year
Treasury Bills
T-bills
The more common period of T-bills consist of 91 days 182 days and 364 dayss
Treasury Bills
T-bills
Short term promissory note issued by a large established business firm with strong credit rating
Commercial paper
They are unsecured and are sold at a discount like T-bills
Commercial paper
It is a short-term, marketable security guranteed by a bank and sold on the open market
Banker’s acceptance
They 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 acceptance
It involves the temporary sale of high quality, easy liquidated assets such as T-Bills, accompanied by an agreement to buy back those assets on a specific future date of a predetermined price
Repurchase Agreements
They are short term debt instruments issued by the government to cover temporary cash shortages
Tax anticipation Bills
They are issued in lieu of expected future tax revenues
Tax anticipation Bills
They are required to maintain a minimum amount of reserves
Interbank call loans
It is a financial instrument issued by a borrower transferring ownership of a batch of promissory notes to the lender
Certificates of assignment
Capital Market Instruments
Stocks Mortgage-backed securities Corporate bonds Treasury bonds Municipal Bonds Treasury notes Long term corporate notes
It is an ownership equity in a corporation allowing the holder to enjoy some of the profits and share some of the risks.
Traded like PSE
Stocks
Philippine Stock Exchange
Purchase for appreciation potential
Stocks
Long term financial instruments issued by corporations with very strong credit ratings
Corporate bonds
They are long term financial instruments issued by the governemt to finance the deficits of national government
Treasury bonds /Government Bonds
These are issued in denominations not lower than 100k
Treasury bonds /Government Bonds
Treasury bonds /Government Bonds are issued in five maturities
2 5 7 10 20
Certificated of long term indebtedness issued by towns, cities or provinces and are secured by the taxing power
Municipal bonds
Two types of Municipal Bonds
General obligation bonds
Revenue bonds
Those which are backed up by the “full faith and credit” of the issuer
General obligation funds
Those which are repaid from the government revenues generated by the project they were sold to the finance
Revenue bonds
It is a negotiable debt obligation issued by the government and backed by its full faith and credit having a maturity of 1 year and 25 years
Treasury notes
Commercial papers issued by corporation finance various requirements. They have maturities longer than one year
Long Term Corporate Notes
