Financial Markets Common underlying instruments include

Module 1
bonds, commodities, currencies, interest
rates, markets indexes, and stocks.

Lesson 1:
Role of Financial Markets and Institutions Lesson 4:
1. To facilitate savings by businesses and Role of Financial Institutions
households.
2. To lend to businesses and individuals. Holding cash deposits
3. To allocate funds to productive uses. - Individuals and businesses with more cash
than they need at a given time can use
4. To facilitate the final exchange of goods and financial institutions like banks to store the
services. extra cash.
5. To provide a market for equities. The provision of credit facilities
Lesson 2: - Availment of loan facilities of banks
Types of Financial Markets Offering investment advice
Stock Market - Investment desk providing advice on best
ways to invest excess cash.
- Trades shares of ownership of public
companies. Each share comes with a price,
and investors make money with the stocks
when they perform well in the market.
Bond Market
- Offers opportunities for companies and
government to secure money to finance a
project or investment. In a bond market,
investors buy bonds from a company, and the
company returns the amount of the bonds
within an agreed period plus interest.
Commodities Market
- Where traders and investors buy and sell
natural resources or commodities such as
corn, oil, meat and gold. A specific market is
created for such resources because their
prices are unpredictable.
Derivatives Market
- Facilitates the trading in financial
instruments such as future contracts and
options used to help control financial risk.
The instruments derive their value mostly
from the value of an underlying asset that
can come in any forms - stocks, bonds,
commodities, currencies or mortgages.

Lesson 3:
Securities Traded in Financial Markets
Equity Securities
-
is an investment in stock issued by another
company.
Debt Securities
-Refer to debt instruments such as
government bond, corporate bond, certificate
of deposit (CD), municipal bond or preferred
stock, that can be bought or sold between
two parties and has basic terms defined, such
as notional amount (amount borrowed),
interest rate, and maturity and renewal date.
Also include collateralized securities, such as
collateralized debt obligations (CDOs), etc.
Derivatives
- Refer to contracts between two or more
parties whose value is based on an agreed-
upon underlying financial asset (like a
security) or set of assets (like an index).
Financial Markets
Module 2

LESSON 1:

Essence of Money and its Importance

- To facilitate the exchange of goods and services, to
lessen the time and effort required to carry on trade.
- To enable trade to be carried on as cheaply as possible
in order to make feasible the optimum degree of
specialization.
Traditional Characteristics of Money
• Utility
• General Acceptability
• Portability
• Uniformity
• Malleability
• Durability

LESSON 2:
Three Financial System Components and the Financial
Functions used to Carry Out their Roles

LESSON 3:
Monetary Policy
- The process by which the monetary authority of
a country, typically the central bank or currency
board, controls either the cost of very short-
term borrowing or the money supply, often
targeting inflation or the interest rate to ensure
price stability and general trust in the currency.
Monetary Policy Goals
- To promote a low and stable inflation conducive
to balanced and sustainable growth (RA 7653).
The adoption of inflation targeting framework
for monetary policy in January 2002 is aimed at
achieving this objective.
Inflation Targeting
- Focused mainly on achieving low and stable
inflation, supportive of the economy’s growth
objective. This approach entails the
announcement of an explicit inflation target that
the BSP promises to achieve over a given time
period.
How to achieve inflation target?
- The BSP uses a suite of monetary policy
instruments in implementing the desired
monetary policy stance. The reverse repurchases
(RRP) or borrowing rate is the primary monetary
policy instrument of the BSP.
Other Goals of Monetary Policy
1. High employment
2. Economic Growth
3. Stability of financial markets
4. Interest-rate stability
5. Foreign exchange market stability
Module 3
Money Markets and Bond Markets
Money Markets
- are debt securities with a maturity of one year or less.
- they are issued in the primary market through a
telecommunication network by the Treasury corporations, and
financial intermediaries that wish to obtain short-term
financing.
- are commonly purchased by households, corporations
(including financial institutions), and government agencies
that have funds available for short-term period.
The Role of Money Markets
The purpose of money markets is to facilitate the transfer of
short-term funds from agents with excess funds
(corporations, financial institutions, individuals and
government) to those markets participants who lack funds for
short-term needs.
• Fundraising
• Cash Management
• Risk Management
• Speculation Management
• Signaling
• Providing access to information on prices
Money Market Segments
Interbank Market- Banks and non-deposit financial institutions
settle contracts with each other and with central bank,
involving temporary liquidity surpluses and deficits.
Primary Market- Absorbing the issues and enabling borrowers
to raise new funds.
Secondary market- for different short-term securities which
redistributes the ownership, ensures liquidity and as a result,
increases the supply of lending and reduces its price.
Derivatives Market- Market for financial contracts whose
values are derived from the underlying money market
instruments.
Money Market Instrument
• TREASURY BILLS
- One of the safest money market instruments
- Issued by the central government
- Zero-risk instruments = returns are not that attractive
- Circulated in both primary and secondar markets
- Maturities of 3-month, 6-month and 1-year.
- Investors in treasury bills includes:
>Depository Institutions
>other financial institutions
>Individuals
Pricing of Treasury Bills:
T- B ills do not pay interest but are priced at discount from
their par value. That the price is determined as the present
value of the future cash flows to be received.
Estimating the yield of T-Bills
YT= SP-PPx365
PP n interest regularly.
SP=selling price
PP=purchase price
N=number of days of the investment (holding period)
• Commercial Paper
- Short-term unsecured promissory note
- Issued at a discounted value of face value
- Comes with fixed maturity ranging from 1 day to 270
days.
- Issued for the purpose of financing account receivables
inventories and meeting short-term liabilities.
Estimating the yield of CPs
Ycp= Par-PP x 360
PP n
• Certificate of Deposits
- Promissory notes issued by the bank in form of
certificate entitling the bearer to receive interest
- The certificate bears the maturity date, fixed rate of
interest and the value.
- Certificate is available in the tenure of 3 months to 5
years.
- The returns are higher that T-bills because they carry
higher level of risk.
Estimating the Yield of CDs
YNCD = SP-PP+interest
PP
• Repurchase Agreement
- Also known as Repo or Reverse Repo
- Short-term loans that buyers and sellers agree upon for
selling and repurchasing.
- Transactions can be done only between the parties
approved by Centra l Bank and allowed only between
central bank - approved securities such as state and
central government securities, T-Bill s, PSU Bonds and
corporate bonds
Estimating the yield Repo
Repo rate= SP-PPx365
PP n
• Federal fund
- Enables depository institutions to lend or borrow short-
term from each other are the so-called federal funds
rate.
- Rates in federal funds transaction and it is influenced
by the supply and demand for funds in the federal
funds market.
- Commercial banks are the most activate participant in
the federal funds market.
- Federal funds brokers serve as financial intermediaries
in the market, matching up institutions that wish to sell
(funds) with those that which to purchase (borrow)
them.
• Banker’s Acceptance
- The banks accepts responsibility for a future payment.
- Commonly used for international trade transaction
- The banks facilitates the transaction by stamping
accepted on a draft, which obligates payment at a
specified point in time.
Valuation of money market securities
• The market price of money market securities (Pm)
should equal the present value of their future cashflows
. Since money market securities normally do not make
periodic interest payments, their cash flow are in the
form of one lumpsum payment of principal.
pm= par
(1+k) n
Bond markets
- Markets in which bonds are issued and traded
Type of Bond Markets
• Treasury notes and bonds
- Considered the safest
- Commonly called fixed rate treasury notes or retail
treasury bonds
- Medium to long government securities that pays
- Relatively risk free investments as these are direct
obligation of the republic of the Philippines
denominated in the local currency.
Treasury Bills vs. Notes vs. Bonds
 Mortgage Bonds Features:
- considered a safe investment because they are secured by
real property.
- the ability to sell property in exchange for cash makes
mortgage bonds a
low-risk investment.
• International Bond
- is an investment in debt that is issued by a foreign
country.
- as with any bond, it pays interest at specified intervals
and repay the principal amount back to bondholders at
the maturity date.
Treasury Notes and Bonds Features:
Features of International Bonds:
- These are direct obligations of the Philippine government and - an international bond is generally a debt obligation
are issued through its Bureau of the Treasury. that is issued by a non-domesticated entity in it's native
- Original Tenors: 2,3,4,5,7,10,15,20 and 25 years. currency.
- Quoted in terms of Yield-to-Maturity, its values depend on - most international bonds are corporate bonds but
prevailing market rates. some government bonds are investable assets.
- Computation of selling price is based on number of - international bonds offer portfolio diversification but
years/days remaining till the maturity of a series using a 360- are subject to currency risk.
day count.
- Interest is paid regularly and its subject to withholding tax Types of International Bond
(currently at 20%). Interest is based on the coupon rate
which is determined at the time the security was initially 1. Eurobonds - are issued in a currency other than the native
auctioned. Coupons for FTXNs are paid semiannually. Coupons currency of the corporation or other issuer.
for RTBs are paid quarterly. 2. Global bonds - are similar to Eurobonds, but they can also be
- Minimum placement: P 500,000.00 face value. Subject to traded and issued in the country whose currency is used to
availability of the security. value the bond.
- The Bank charges a Broker's commission for every done 3. Brady bonds - are sovereign debt securities denominated in
trade. US dollars and backed by US Treasury bonds, but they are
issued by other nations. Part of a program developed in 1989
and named after then-Treasury Secretary Nicholas Brady, the
• Municipal Bonds bonds are meant to help emerging nations restructure their
- Debts issued by a state or municipality to fund public debts and reach financial stability.
works
- Investors lends monet to the issuer for a predetermined International Bond vs Foreign Bond
period of time. the issuer promises to pay the investors
interest over the term of the bond and then return the Foreign Bonds - are issued in one market and
principal to the investors when the bond matures. denominated in its currency but issued by a foreign company.
Types of Municipal Bonds Example: a US company that does business in Canada might
 General Obligation Bonds - are used to finance public issue a bond in Canada that is valued in Canadian dollars.
projects that are not linked to a particular revenue Types: Samurai bonds (Japanese yen)
stream such as building a park or improving a school Yankee bonds (US Dollars)
system. Matilda bonds (Australian Dollars)
 Revenue Bonds - are used to finance public projects with Bulldog bonds (British Pounds Sterling)
the potential to generate revenue such as toll road or
concert hall.
Municipal Bonds features:
- Issued by state and local government.
- Used to finance public projects such as roads, schools,
airports and seaports, and infrastructure-related repairs.
- Bond's interest income is tax-exempt.
- The risk is a measure of how likely the issuer to make all
payments, on time and in full, as promised in the agreement
between the issuer and bondholder (the "bond documents")
- Had very low rates of default as they are backed either by
revenue from public utilities or state and local government.
• Corporate bonds
- Debt instrument that is issued by a company and sold
to investors
- Bond contract is called bond indenture
- Subject to default risk and are rated by credit rating
agencies.
Corporate Bonds Features:
- Issuer: SEC-Registered Philippine Corporation
- Tenor: 5, 7, 10 years
- Redemption Price: At par (or 100% of face value)
- Corporate Bond Interest Rate: prevailing market rate
(subject to 20% final
withholding tax except for tax-exempt institutions)
- Interest Payment: Quarterly (in arrears)
- Minimum Investment: P 50,000.00 to P 500,000.00
• Mortgage Bonds
- is finance borrowed against immovable property,
using that property as security for the loan.
- the Mortgagor (or Borrowers) is the person, company,
trust or other entity that borrows money to finance the
purchase of immovable property and mortgages their property
as security for the loan.