mgt1109 - Corporate Finance
Chapter 2
FINANCIAL MARKETS
● Money Market
● A Market Where Investors Trade Highly
Liquid Securities With Maturities Of One
Year Or Less
● Most Money Market Transactions Are Made
In Marketable Securities Which Are Short
Term Debt Instruments, Such As
○ U.S Treasury Bills Issued By The
Federal Government
○ Commercial Paper Issued By
Businesses
○ Negotiable Certificates Of Deposit
Issued By Financial Institutions.
● Investors Generally Consider Marketable
Securities To Be Among The Least Risky
Investments available.
SECURITIES TRADED IN FINANCIAL MARKETS
Securities can be classified as money
market securities, capital market securities, or
derivative securities.
MONEY MARKET IN THE PHILIPPINES
● The Money Market Association Of The
Philippines Or (Mart)
● The Association Has A Total Member Of 60
Financial Institutions, Consisting Of Banks
And Non Banks Financial Institutions That
Actively Trade Fixed Income Securities In
The Market.
[ example ]
THE PNB PRIME PESO/ DOLLAR MONEY
MARKET FUNDS (MMF)
are invested in a diversified portfolio of bank
deposits and fixed income instruments issued by
the Philippine government with a minimum
weighted average duration of one year. These
funds are best suited for conservative clients
MONEY MARKET FUNDS
➢ Money market funds are a good option, if
you are looking for a short term investment
with higher interest or higher returns
compared to a regular savings account.
This is for investors who have low moderate
risk tolerance and prefer to keep the liquidity
of their funds.
Why is the money market the best?
● Money market funds offer higher liquidity
than certificates of deposits (CDs) and
treasury bills, while also offering ultra low
risk. Unlike CDs, which you generally need
to hold to maturity to cash out without
penalty, money market funds don't have
maturities and can be liquidated on
demand.
TREASURY BILLS IN THE PHILIPPINES
● treasury bills - these are government bonds
or debt securities with maturity of less than
a year
● treasury bills are money market instruments
issued by the government.
● and you can buy it at a discount price.
● The issuing company creates these
instruments for the express purpose of
raising funds to further finance business
activities and expansion.
TREASURY BILL YIELD CALCULATION
Yield = (PAR value - purchase price)
PAR value x 360 / Term to maturity x 100
[ example ]
PAR value id $1,000 and the
purchase price is $998,
Maturity is 28 days
➔ $1,000 - $998 = $2
➔ $2 / $1,000 = 0.002
➔ 360 / 28 days = 12.86
➔ 0.002 x 12.86 x 100 = 2.572%
Types Of Financial Market
1. PRIMARY MARKET - the financial market in
which securities are initially issued the only
market in which issuer is directly involved in
the transactions
 2. SECONDARY MARKETS - are financial
markets in which preowned securities are
traded. ( securities that are not new)
Most firms however raise money through public
offering of securities, which is the sale of either
bonds or stocks to the general public.
FINANCIAL MARKET
❖ Capital Market
❖ The capital market is the forum in which
savers and borrowers interact on a long
term basis.
❖ capital market - a market that enables
suppliers and demanders of long term funds
to make transactions.
❖ key securities traded;
❖ - long term debt instruments used by
businesses and government to raise large
sums of money generally from a diverse
group of lenders
The Role of Capital Market
1. From a firm's perspective, the role of the
capital market is to be a liquid market where
firms can interact with investors in order to
obtain valuable external financing
resources.
2. From an investor's perspective, the role of
the capital market is to be an efficient
market that allocates funds to their most
productive uses.
[ examples ]
- of highly organized capital markets are the
new york stock exchange, american stock
exchange, london stock exchange and
nasdaq stock market(american stock
exchange based in new york city) securities
can also be traded over the counter rather
than on an organized exchange.
Types of Capital Market Instruments
1. EQUITY INSTRUMENTS. An equity
instrument offers ownership rights in a firm
like a share certificate.
2. COMMON STOCKS
3. PREFERENCE SHARES/PREFERRED
STOCKS
4. CUMULATIVE PREFERRED STOCKS
5. NON CUMULATIVE PREFERRED
STOCKS
6. PARTICIPATING PREFERRED STOCKS
7. CONVERTIBLE PREFERRED STOCKS
8. DEBT INSTRUMENTS/BONDS
Types of Financial Institutions
1. Investment banks
2. Commercial banks
3. Financial services corporations
4. Credit unions
5. Pension funds
6. Life insurance companies
7. Mutual funds
8. Exchange traded funds
9. Hedge funds
10. Private equity company
PRIMARY MARKETS facilitate the issuance of new
securities
SECONDARY MARKETS - facilitate the trading of
existing securities, which allows for a change in the
ownership of the securities
Role of Financial Markets
➢ Surplus units: participants who receive more
money than they spend, has investors
➢ Deficit units: participants who spend more
money than they receive, such as
borrowers.
➢ Securities: represent a claim on the issuers
➢ Debt securities-debt (also called credit or
borrowed funds) incurred by the issuer.
➢ Equity securities-(also called stocks)
represent equity or ownership in the firm.
➢ Accommodating Corporate Finance Needs:
The financial markets serves as the
mechanism whereby corporations (acting as
deficit units) can obtain funds from investors
(acting as surplus Units)
➢ Accommodating Investment Needs:
Financial institutions serve as intermediaries
to connect the investment management
activity with the corporate finance activity
Role of Financial Institutions
 Financial institutions are needed to resolve
the limitations caused by market
imperfections such as limited information
regarding the creditworthiness of borrowers.
Role of Non-depository Institutions
● Finance companies - obtain funds by
issuing securities and lend the funds to
individuals and small businesses.
● Mutual funds -sell shares to surplus units
and use the funds received to purchase a
portfolio of securities.
● Securities firms -provide a wide variety of
functions in financial markets. (Broker
Underwriter, Dealer, Advisory)
● Insurance companies - provide insurance
policies that reduce the financial burden
associated with death, illness, and damage
to property Charge premiums and invest in
financial markets
● Pension funds - manage funds until they
are withdrawn for retirement
Relative Importance of Financial Institutions
● Households with savings are served by
depository institution
● Households with deficient funds are served
by depository institutions and finance
companies.
● Several agencies regulate the various types
of financial institutions, and the various
regulations may give some financial
Institutions a comparative advantage over
others.
Money Market in the Bank
- Money market accounts in the bank work
much the same as other bank deposit
accounts, like savings or checking
accounts. The idea is pretty straight
forward: you put your money in the account
and the bank pays interest on your balance
periodically according to the terms of the
account.
What is INTEREST?
Interest is the charge for the privilege of
borrowing money, typically expressed as
annual percentage rate (APR). Interest can
also refer to the amount of ownership a
stockholder has, in a company, usually
expressed as a percentage.
Money Market
➢ The money market refers to trading in very
short term debt investments. At the
wholesale level, it involves large volume
trades between institutions and traders, at
the retail level, it includes money market
mutual funds bought by individual investors
and money market accounts opened by
bank customers.
➢ The money market consists of financial
institutions and dealers in money or credit
who wish to either borrow or lend.
EXAMPLES OF ELIGIBLE ASSETS INCLUDE;
➢ auto loans
➢ credit card receivables
➢ residential, commercial mortgage loans
➢ mortgage backed securities and similar
financial assets.
Financial Institutions and Markets
Financial Institutions and Mar Firms that require
funds from external sources can obtain them in 3
ways.
1. Through a Financial Institutions a company
engaged in the business of dealing with
financial and monetary transactions such as
deposits, loans and investments.
Examples:
- COMMERCIAL BANKS
- SAVINGS BANKS
- CREDIT UNIONS
Financial Institutions
● Financial institutions are intermediaries that
channel the savings of individuals,
businesses, individuals and governments
into loans or investments.
● The key suppliers and demanders of funds
are individuals, businesses and
governments.
 ● In general, individuals are suppliers of (and divest in noh allied enterprises, a
funds, while businesses and governments universal banking is the type of banking that
are net demanders of funds. provides facilities of more than one kind of
banking.
Heavy users of Loans - an ordinary commercial bank does not have
1. Individuals that authority.
2. Banks
3. Business Organizations Role of Commercial Bank
4. Government - The role of a commercial bank is to provide
financial services to the general public and
Non Depository Institutions business, ensuring economic and social
1. finance companies - companies which are stability and sustainable growth of the
primarily concerned with providing money economy.
for short term loans. - Credit creation is the most significant
2. short term loan - a loan payable within one function of commercial banks.
year.
3. insurance companies a company engaged Role of Corporate Finance
in the business of providing life - Corporate finance is important for Planning
endowments, annuities, or insurance, finances, capital Raising, investments, and
including accidental, burial casualty credit risk management (FINANCIAL RISK) and
life, contract performance, fire, health etc. financial monitoring.
4. brokerage firms & company's main duty is - Financial Planning - the task of determining
to act as middleman that connects buyers how business will afford to achieve its
and sellers to facilitate a transaction. In this strategic goals and objectives. The financial
case both brokerage companies divide the plan describes each activities, resources,
commission. equipment and materials that are needed to
achieve these objectives, as well as the
TYPE OF BANKS time frames involved.
1. Universal Bank
2. Commercial Bank Business Ethics
3. Thrift Bank ● Business ethics are the standards of
4. Rural Bank conduct or moral judgment that apply to
5. Cooperative Banks persons engaged in commerce.
6. Islamic Banks ● violations of these standards in finance
involve a variety of actions; creative
TOP SAVINGS BANKS accounting. earnings management,
1. PH Savings Bank misleading financial forecasts, insider
2. PH Business Bank trading, fraud, excessive executive
3. Chinabank Savings compensation, options backdating, bribery
4. BPI Direct and kickbacks..
5. CityBank ● negative publicity often leads to negative
impacts on a firm.
Difference between Universal Bank and
Commercial Bank Thrifts Specialize in Mortgages and Real Estate
- Under the general banking law of 2000, a Lending
universal bank is defined as a commercial thrifts tend to retain their loan portfolio
bank with the additional authority to rather than securitize loans so members
exercise the powers of an investment house with a atypical profiles that don't fit into
 agency mortgage standards may stand a
better chance of securing a loan through a
local thrift than a national commercial bank
3 types of Thrift Banks
the three primary thrift institutions are;
credit union - a non profit making money
cooperatives whose members can borrow from
pooled deposits at low interest rates.
savings and loan associations - an institution that
accepts savings at interest and lends money to
savers chiefly for home mortgage loans and may
offer checking accounts and other services.
mutual savings banks - a financial institution
chartered by a central or regional government,
without capital stock that is owned by its members
who subscribe to a customers fund. from this fund
claims, loan, etc. are paid after deduction are
shared among the members
Types of Savings Accounts
1. traditional or regular savings account
2. high yield savings account
3. money market accounts
4. certificate of deposit account
5. cash management account
6. specialty savings account
Types of Commercial Banks
1. Public Sector Banks
2. Private Sectors Banks
3. Foreign Banks
fixed income instruments issued by the
Philippine government with a minimum
weighted average duration of one year.
These funds are best suited for
conservative clients.
Money Markets Funds
Money market funds are a good option, if
you a Looking for a short term investment
with higher interest or higher returns
compared to a regular savings account.
This is perfect for investors who have low
moderate risk tolerance and prefer to keep
the liquidity of their funds
Treasury Bills in the Philippines
treasury bills - these are government bonds
or debt securities with maturity of less than
a year
treasury bills - are money market
instruments issued by the government.
and you can buy it at a discount price.
The issuing company creates these
instruments for the express purpose of
raising funds to further finance business
activities and expansion.

Products offered by Commercial Banks

1. Checking Account
2. Savings Account
3. Certificates of Deposit
4. Personal Loan
5. Mortgage Loan
6. Credit Cards
7. Business Banking Accounts

Example of Money Market in the Philippines

THE PNB PRIME PESO/ DOLLAR MONEY
MARKET FUNDS (MMF) are invested in a
diversified portfolio of bank deposits and