FB: The College of Maasin

THE COLLEGE OF MAASIN Website: www.cm.edu.ph

“Nisi Dominus Frusta” Email: bsba@cm.edu.ph
Tunga-Tunga, Maasin City, So, Leyte Contact No. 09202854954

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CAPITAL MARKETS

COURSE ORIENTATION

I. Course Content Guide in FM 49: CAPITAL MARKETS

II. Course Overview

This course is an introduction to asset pricing, designed to help students understand the economic
concepts and financial theory necessary for analyzing investments. The subject will place heavier
emphasis on fixed income investment analysis. Focus will be on debt securities, risks associated with
investing in bonds, understanding yield spreads and valuation of debt securities.

III. Course Study and Assessment Schedule from August 24-December 17, 2020

WEEK TOPIC ASSESSMENT TASKS DUE DATE

Week 1-3 Financial Markets and Financial Assets Written Quiz Sept 1, 2020
8/17-9/4
Week 4-6 Fixed Income Securities
9/7-9/25
Week 7-8
9/28-10/9 Valuation
Week 9-10 Portfolio Theory
10/12-10/23
Week11-12 Asset Pricing Model
9/14-9/19
Week13-15 Market Efficiency
9/21-9/26
Week16-18 Derivatives (Options and Futures)
9/28-10/3

IV. Academic Policies

1. The school/ department will adopt different learning modes depending on the needs of the students.
a. Online Learning (through the CM Moodle and synchronous discussion using the Zoom App)

b. Modular Learning the instructor will provide the printed module through the office of the program
heads. Students or any representative will pick-up the printed modules once a week.

2. Please take note of the deadlines set for the learning tasks. Failure to submit during the specified due
date, is not credited.

3. As future educators/ teachers always remember that: True intelligence can only be measured with
the amount of knowledge, not the marks of an academic test. A student who works hard can actually get
fewer marks than a student who studies selectively if he or she gets common questions in the paper. In
fact, marks can be earned easily by doing some last-minute study but intelligence, that’s special (Suvojit
Mitra).

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 V. Technical Support

(For ODL modality)

➢ Log-in to the school website www.cm.edu.ph Click E – Learning

Enroll in Assessment in Learning 1 Course for College Department

➢ Inform the instructor through text of FB messenger or in GC if not able to access the CM Moodle
(do not forget your password)

(Support for MDL)

➢ Printing of Module is already charge to your miscellaneous fees

➢ Pick – up the module to the office of your respective program heads once a week and return it
the next week for checking.

VI. Netiquette Guide

1. Modules and other Learning Materials in the CM Moodle are constructed for Learning Purposes only
and exclusive for the students enrolled in the course at The College of Maasin. Printing and
duplication of the Learning Materials is prohibited.

2. Taking screenshots while the discussion is going on and post it in social media is not allowed.

3. Wear proper attire during the class discussion (through Zoom App).

MODULE 1:
FINANCIAL MARKETS

Learning Outcomes:
At the end of this module, the students should be able to:
 Explain the meaning of Financial Markets
 Differentiate primary market from secondary market, primary security from secondary
security
INTRODUCTION

At the forefront of secondary securities transactions in the Philippines is the Philippine Stock
Exchange(PSE). PSE was formed from the country’s two former stock exchanges, Manila Stock Exchange(MSE),
established on August 8, 1927 and the Makati Stock Exchange(MKSE), established on May 27, 1963. Although
both MSE and MKSE traded the same stocks of the same companies, the bourses were separate stock exchanges
for nearly 30 years until December 23, 1992 when both exchange were unified to become the present-day PSE.

FINANCIAL MARKETS: DEFINITION

Are structures through which funds flow. They are the institutions and systems that facilitate
transactions in all types of financial claim. A financial claim entitles a creditor to receive payment from a debtor
in circumstances specified In a contract between them, oral or written.

Financial Markets are classified as either (1) primary or secondary market (2) money or capital market.

Primary Markets
Financial claims are initially sold by deficit units in primary markets. Primary markets are markets in which users
Of funds (e.g. corporations) raise funds through new issues of financial instruments such as stocks and bonds.

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 Most primary market transactions are done through Investment banks, also called merchant banks
which help the corporations issuing the stocks or bonds sell these stocks or bonds to interested investors.

Investment banks provide the following services:

1. Provide funds in advance

2. Give advice to issuing corporations as to price and number of securities to issue
3. Attract the initial public purchases of the securities
4. Act as a market analyst and advisor to the issuing company
5. Absorb the risk and cost of creating a market for the securities
Primary markets issues are generally for public offerings or publicly traded securities like stocks of companies
already selling stocks in the stock market or stock exchanges.

SECONDARY MARKETS
Once financial instruments are issued in primary markets, they are then traded in secondary markets.
Secondary markets are like used car markets. Secondary markets are markets for currently outstanding
securities, referred to as secondary securities. These securities were previously bought and owned and now
being resold either by the initial investors or those who have purchased securities in the secondary markets.
Secondary markets provide liquidity for investors as they sell their securities when they need cash.

Secondary markets exist for the purpose of marketability or easy selling/transfer of ownership and liquidity or
easy convertibility to cash of securities. Marketable securities are classified in the balance sheet as cash
equivalents because of these characteristics. The role of the secondary market is to assure that a holder can sell
and convert to cash his security at any time.

Commercial banks have trust departments and treasury departments that are major players in the secondary
market. Trust departments recommend money market and capital market securities for their clients. Treasury
department carry inventories of market securities as part of the bank’s trading portfolio. Investment houses,
finance companies, insurance companies and other financial institutions are also leading participants in the
secondary market.

The security exchange serves the following purposes:

1. Provides marketability by allowing savers to sell their securities immediately
2. Provides liquidity by raising cash any time
3. Provides valuation by serving as a means for determining current values of shares and ultimately of
companies
The value of the companies’ shares reflects the companies’ own value or worth. It generally reflects the value of
stockholders’ wealth.

MONEY MARKETS
Cover markets for short-term debt instruments, usually issued by companies with high credit standing.
They consist of a network of institutions and facilities for trading debt securities with a maturity of one year or
less. They are markets in which commercial banks and other businesses adjust their liquidity position by
borrowing, lending, or investing for short periods of time. The government treasury uses money markets to
finance its day-to-day operations. Business and households also use money markets to borrow and lend. Money
market instruments that generally have short maturities are highly liquid and have low default risk.

Money markets are also distinct from other financial markets because they are wholesale markets and
because there are large transactions involved. Although some small transactions do take place. Most money
market transactions are referred to as open market transactions due to their impersonal and competitive nature.
Open market transaction is an order placed by an insider after all appropriate documentation has been filed, to
buy or sell restricted securities openly in an exchange.

In the Philippine money market, trading of government securities is regularly observed. The following
discussion relative to government securities is from the Bureau of the Treasury’s official website.

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 The Philippine Government issues two kinds of government securities: Treasury bills (T-bills) and
Treasury bonds (T-bonds) so called because it is the Bureau of the Treasury which originates their sale to the
investing public through a network of licensed dealers.

T-bills are government securities which mature in less than a year. There are three tenors of T-bills: 91-
day, 182-day and 364-day bills. The number of days is based on the universal practice around the world of
ensuring

To determine the discount yield of a T-bill, the following formula is used from Saunders and Cornett 2011

Where dy = discount yield

Pf = Face value of the T-bill
Pp= Purchase price of the T-bill
T = term of the T-bill

Assume a 182-day P10,000 T-bill maturing on October 5, 2020 purchased for P9,846.67.

=(10,000-9846.67 /10,000)x(360/182)
= .01533x1.978
=3.032% or .03032

To determine the semi-annual coupon payments on T-bonds, the following formula is used:

Where K=coupon
Pf=Face value of the T-bill
i=coupon rate
m=Number of conversions per year

Assume a 100,000 bond with a coupon rate of 4.69% paying interest semi-annually (m=2). The semi-annual
coupon amount on the T-bond will be:

K=

=P100,000x(4.69%)/2
=P100,000x.02345
=P2.345

Take note that the computation of the coupon on a bond is simply the formula for computing interest which is
l=prt, hence the coupon payment on the above bond will be

l-prt
i=100,000x4.96%x180/360
=100,000x4.96x1/2
=P2,345

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 To determine the amount of tax on the discount or coupon, the formula is as follows:

Where T=tax
d=discount
K=coupon
R=tax rate

Using our forgoing examples, the 10,000 182 – day T-bill bought ar P9,846.67 and the 100,000 T-bond that
earned P2,345 semi-annual coupon payment, the tax on the discount or coupon considering a withholding tax of
20% on the discount will be

T=d(r) or K(r)
=(10,000-9,846.67)(20%)+(2,345)(20%)
=30.67+469
=P499.67

Bond market is the market where bonds are issued and traded. It is generally classified into
1. Treasury notes and bonds market
2. Municipal bonds market
3. Corporate bonds market

EXERCISES:

I. True or False . Write T in the blank if the statement is correct; otherwise, write F.

1. The original or new issues of securities are sold in the primary markets. _______
2. The outstanding shares or securities are sold in the secondary markets. _______
3. T-bills are traded in the money markets. ________
4. Stocks, bonds and T-bills are long term. _______
5. Stocks and bonds are traded in the capital market. ________

II. 1. Assume a 364-day P120,000 T-bill maturing on January 5, 2021 purchased for P109,000, Compute the
discount yield?
2. Assume a P200,000 bond with a coupon rate of 2.75% paying interest quarterly. The quarterly coupon
amount on the T-bond will be:

Assessment:
1. What are financial markets?
2. What is the difference between primary market and secondary market?

FEEDBACK:

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 MODULE 2
FIXED INCOME SECURITIES

Assessment:

1. Explain the basic investment attributes of bonds and their use as investments.
2. Describe the essential features of a bond, note the role that bond ratings play in the market, and distinguish
among different types of call, refunding, and sinking-fund provisions.
3. Explain how bonds are priced in the market and why some bonds are more volatile than others
4. Identify the different types of bonds and the kinds of investment objectives these securities can fulfill.
5. Discuss the global nature of the bond market and the difference between dollar-denominated and
nondollar-denominated foreign bonds.
6. Describe the basic features and characteristics of convertible securities, and measure the value of a
convertible.

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