MODULE 2: FINANCIAL MARKETS

AND INSTRUMENTS

Group 1 Members:
Abello, Jella P. (Leader)
Aguilar, Reah D. (Assistant)
Anorico, Shairene Mae D.C
Aramil, Angelica A.
Babaran, Rojean C.
Bagui, Jhane Carla Z.
Baltero, Jhoana Marie S.
Banuelos, Anne Jella R.
Abello FINANCIAL MARKET AND INSTRUMENTS
Financial Markets
- These are structure through which funds flow.
- It include any institutions or system that provides buyers and sellers the means to trade financial
instruments, including bonds, equities, the various international currencies, and derivatives.

Types of Financial Markets

THERE ARE 4 TYPES OF FINANCIAL MARKET:

1. Stock market

- Stock markets are venues where buyers and sellers meet to exchange equity shares of public
corporations.

- It creates efficient price discovery and efficient dealing.

2. Bond market
A bond is simply a loan taken out by a company.

- The bond market offers opportunities for companies and the government to secure money to
finance a project or investment.
3. Commodities market
Commodities are basic goods and materials.

- The commodities market is where traders and investors buy and sell natural resources or
commodities such as corn, oil, meat, and gold.

4. Derivatives market
Derivatives is a financial contracts who’s value dependent on underlying asset or group of asset.

- It is a market that involves derivatives or contracts whose value is based on the market value of
the asset being traded.

Importance of Financial Markets

There are many things that financial markets make possible, including the following:

 Financial markets provide a place where participants like investors and debtors, regardless of
their size, will receive fair and proper treatment.
 They provide individuals, companies, and government organizations with access to capital.
 Financial markets help lower the unemployment rate because of the many job opportunities it
offers

- Most primary market transactions are done through investment banks, also called merchant
banks.
Investment Banks provide the following services:

1. Provide funds in advance (giving cash to the issuer based on the agreed price of the
security, usually a certain percentage of the total agreed price).

2. Give advice to issuing corporations as to the price and number of securities to issue.

3. Attract the initial public purchasers of the securities.

4. Act as a market analyst and advisor to the issuing company.

5. Absorb the risk and cost creating a market for the securities.
Aguilar
Secondary Market

The secondary market is where investors buy and sell securities they already own. It is what
most people typically think of as the "stock market," though stocks are also sold on the
primary market when they are first issued.

Money Markets

• The money market refers to trading in very short-term debt investments.

• They consists of network of institutions and facilities for trading debt securities with a
maturity of one year or less (Saldana 1997)

• The Philippine money market started in 1965 primarily as a facility for trading excess
funds among commercial banks (Saldana 1997)

• The International Money Market (IMM) was opened in May 1962 by the Chicago
Mercantile Exchange (CME) pioneering the trading of international financial derivatives,
most notably futures.
Libor

• LIBOR is the benchmark interest rate that banks in the London money market are
prepared to lend to one another for overnight, 1-mont, 3-month, 6-month and 1-year
loans.

The Philippine Government issues two kinds of government securities: Treasury Bills (T-Bills)
and Treasury Bonds (T-Bonds)

• T-Bills are government securities which mature in less than a year. There are three tenors
of T-Bills: (1) 91-day, (2) 182-day, and (3) 364-day bills.

• T-Bonds are government securities which mature beyond one year. At present, there are
five maturities of bonds: (1) 2-year. (2) 5-year, (3) 7-year, (4) 10-year, and (5) 20-year.

The Automated Debt Auction Processing System (ADAPS) is an electronic mode by which
the national government sells government securities to a network of government securities
eligible dealers
Anorico
Capital Markets
Markets for long-term securities.
• Debt securities or;
• Equity securities

The capital market consists of:

1. Securities market; and
2. Negotiated (or non-securities) market

Securities Market
Companies issue common stocks or bonds, which are marketable/negotiable, to obtain long-
term funds. An instrument that is transferable by endorsement or delivery is negotiable.

It is composed of the following:

1. Stock market for equity or stock securities;
2. Bond market for debt securities; and
3. Derivative securities market for securities deriving their value from another
security.
Stock Market
Serves as the medium or agent of exchange transactions dealing with equity securities. A
stock index is a measure of the price level of the shares listed in the exchange by the
indicated category.

Saldana (1997) listed the following prices in a trading day:

1. Open
2. Low
3. High
4. Close
Aramil
BOND MARKET

•The bond market broadly describes a marketplace where investors buy debt securities that are
brought to the market by either governmental entities or corporations.

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

Treasury notes and bonds

• Issued by the government’s treasury. Like T-bills, T-notes and T-bonds are backed by the full faith
and credit of the government and are therefore free from risks.

Municipal bonds market

• Municipal bond or known as "Muni" is a debt security used to fund capital expenditures for a
country, municipality or state.

Two types of municipal bonds

 General obligation bonds
 Revenue bonds
Corporate bonds market

• Long term bonds issued by Private corporations.

• A bond indenture is the legal contract that specifies the rights and obligations of bond issuer
and bondholders (investors), term of the bond, interest rate, and the interest payment dates

Derivative securities market

• Refers to the market where derivatives securities are traded. Derivative securities are
financial instruments which payoffs are linked to another, previously issued securities.
• It is a contract representing a group of underlying asset.

Negotiated/Non-Securities Market

• Does not involved securities. It is called negotiated because it results from negotiation
between a borrower and a lender.
Other Markets

1. Consumer Credit Market

• Involves parties and transaction related to loans granted to households who desire to
buy properties.
• Consumer credit is money that consumers can borrow to pay for goods or services. Access
to credit allows consumers to make purchases today and then pay for them over a period of
time.

2. Organized Market

• Exchanges, whether stock markets or derivatives exchanges, started as physical places

where trading took place. Some of the best-known organized markets are NYSE, which was
formed in1972, and the Chicago Board of Trade (now part of the CME Group), which has
been trading futures contracts since 1851
• Organized Market is a formal market in a specific place in which buyers and sellers meet to
trade according to agreed rules and procedures
Babaran
3. Over-the-Counter (OTC) Market

It is the trading of securities between two counterparties executed outside of formal exchanges
and without the supervision of an exchange regulator. OTC trading is done in over-the-counter
markets (a decentralized place with no physical location), through dealer networks. Dealers act as
market makers by quoting prices at which they will sell or buy to other dealers and to their clients
or customers.

4. Auction Market

It is where the trading is done by an independent third party matching prices on orders received to
buy and sell a particular security.

5. Foreign Exchange Markets

Provides physical and institutional structure through which the money of one country is exchanged
for that of another country, the rate of exchange between currencies is determined, and foreign
transactions are physically completed.

Foreign Exchange Transaction is an agreement between a buyer and a seller that a given amount
of one currency is to be delivered at a specified rate for some other currency.
6. Spot Market

Buying and selling is done “on the spot” that is, for immediate delivery and payment. The buyer
pays immediately and the seller delivers immediately.

7. Futures Market

A futures market is an auction market in which participants buy and sell commodity and futures
contracts for delivery on a specified future date.

Two participants in the futures markets:

• Speculators
• Hedgers
Bagui
FORWARD MARKET
- Both the futures market and the forward market involve trading contracts calling for the future
delivery of financial instruments, commodities, or currencies.

OPTIONS MARKET
- It is where stocks options are traded. This is the formal market where the options are bought
and sold, and not when a stockholder is given the option or preemptive right to buy additional
shares of stock to maintain his proportionate share or ownership in a corporation.

Options are called warrants if they are issued by corporations, and calls if they are issued by
individuals (Brown and Mayo 2015).

Warrants and calls are the rights to buy, while put is the right to sell an underlying asset at a
pre-specified price, called exercise or a strike price for a specified period of time.

SWAP MARKET
- Swaps are arrangements between two parties (counterparties) in exchanging specified
periodic cash flows in a future based on an underlying instruments or price (e. g., a fixed or
floating rste on a bond or a note). Like forward, futures, and options, swaps allow to better
manage their interests rate, foreign exchange, and credit risks.
There are five general types of swaps:
a. Interest rate swaps
b. Currency swaps
c. Credit risk swaps
d. Commodity swaps
e. Equity swaps

THIRD AND FOURTH MARKETS

- Third market refers to transaction between broker-dealers and large institutions.
- Fourth Market refers to transactions that take place between securities firms and large institutional
investors like pension funds and investments companies.

TYPES OF INVESTORS
1. RISK AVERSE INVESTORS ( bulls and chicken) - They are the type investors who, when faced
with two investments alternatives with equal returns but one is riskier than the other, will choose the
less risky environment.

2. RISK TAKER INVESTORS (bears and pigs) - They are the investors who are ready to pay a
higher price for an investment regardless of the risks involved.

3. RISK-NEUTRAL INVESTORS - They are the investors who do not take into account the risks
involved in the investment and who are focused only on the expected returns.
Baltero
Financial Instruments
Classified as to their term or maturity date. They can either be short term (with maturity of one year
or less) or long-term (with maturity of more than one year). Short term securities belong to the money
market, while long-term instruments belong to the capital markets.

Money Market Instruments

Short-term securities. They are paper or electronic evidences of debt dealt in the money markets.
Only debt securities are short-term. Equity securities are long-term and belong to the capital market.

Cash Management Bills

Government issued securities with maturities of less than 91 days, specifically 35 days or 42 days.
They have shorter maturities than T-bills. Government securities (GS) are unconditional obligations of
the government issuing them, backed up by the full taxing power of the issuing government. As such,
they are theoretically, default-free. Investing in these bills affords security and liquidity to investors.

Treasury Bills (T-Bills)

These are issued by the Bureau of the Treasury with 91-day, 182-day, and 364-day maturities. The
odd number of days is to generally ensure that they mature on a business day. Like treasury bond (T-
bonds), they are sold only through government securities eligible dealers (GSEDs), dealers
authorized by the government to sell T-bills. Transactions are done through bidding online. The yield
is the increment or interest in the investment.
Figure 6: Treasury Bills Offered by Bureau of Treasury

Banker’s Acceptances
A time draft issued by a bank payable to a seller of goods. It is drawn on and accepted by the
bank. Before acceptance, the draft is not an obligation of the bank; it is merely an order by the
drawer to the bank to pay a specified sum of money on a specified date to a named person or to
the bearer of the draft just like an ordinary check.

Letter of Credit
Banker’s acceptances are generally used with the purchase of goods or services either
domestically or internationally. In these cases, the buyer has its bank issue a letter of credit (L/C)
on its behalf in favor of the seller. For imports, an international letter of credit is opened; for local
purchase, a domestic letter of credit is opened.

A commercial letter of credit is a contractual agreement between bank, known as the issuing bank
on behalf of the buyer (drawer), authorizing another bank, the correspondent bank known as the
advising or confirming bank, to make payment to the beneficiary, the seller.
Banuelos
NEGOTIABLE CERTIFICATES OF DEPOSIT
A negotiable certificate of deposit (NCD) refers to a certificate of deposit with a minimum par
value of $100,000, although typically, NCDs will carry a much higher face value. They are also
known as jumbo CDs. NCDs are guaranteed by a bank and can be traded in a highly-liquid
secondary market.

REPURCHASE AGREEMENTS
Legal contracts that involve the actual sale of securities by a borrower to a lender with a
commitment on the part of the borrower to repurchase the securities at the contract price plus
a stated interest charge at a later date.

MONEY MARKET MUTUAL FUNDS

Investment funds that pool funds from numerous investors and invest in money market
instruments offered by investment companies. A mutual fund is an investment company that
pulls the funds of many individual and institutional investors to from a massive asset base.
Mutual funds can be classified as:
1. Growth funds - Invest in assets that are expected to reap the large capital gains.
2. Income funds - Invest in stocks that regularly pay dividends and in notes and bonds.
3. Balance funds - Combine the future of both growth funds and income funds.
4. Sector funds - Invest in specific industries as healthcare, financial services, utilities and
extractive industries.
5. Index funds - Invest in a basket of securities that make up some market index as the S&P
500 index of stocks.
6. Global funds - Invest in securities issued in many countries providing diversification.

CERTIFICATE OF ASSIGNMENT
An agreement that transfers the right of the seller over a security in favor of the buyer. The
underlying security carries a promise to pay a certain sum of money on a fixed date like a
promissory note.

CERTIFICATE OF PARTICIPATION
An instrument that entitles the holder to a proportionate equitable interest in the securities held
by the issuing firm or an entitlement to a prorated share in a pledge revenue stream, usually
lease payments.

EURODOLLAR CERTIFICATE OF DEPOSIT

Eurodollar certificates of deposit are CDs that are issued in U.S. dollars by banks outside of the
United States. These CDs are offered at either fixed or variable rates, and interest and principal
are paid in dollars.
Abello
Capital Market Instruments
- These are long-term instruments that are basically either equity securities or debt
securities.

Capital Market Instruments Classification:

1. Non-negotiable/non-marketable instruments
Example:
1. Loans- Direct borrowings of deficit units from surplus units like banks.
2. Leases- These are rent agreements.
3. Mortgages - Agreements where property owner borrows money form a financial institutions
using the property as a security or collateral for the loan.
4. Lines of credit - A bank’s commitment to make loans to regular depositors up to a specific
amount.
Aguilar
2. Negotiable/marketable instruments

• Stocks
Example: Corporate Stocks

• Bonds
Example: Corporate Bonds, Treasury Bonds, and Municipal Bonds

• Long Term negotiate Certificate of deposit

Is a bank product offered to investors looking for a relatively safe investment, but with higher
interest rates than a regular savings account or short-term time deposit.

• Mortgage back securities

A mortgage-backed security (MBS) is an investment similar to a bond that is made up of a
bundle of home loans bought from the banks that issued them.
References:
https://www.investopedia.com/terms/s/secondarymarket.asp
https://www.investopedia.com/terms/m/moneymarket.asp
https://www.investopedia.com/terms/m/municipalbond.asp
https://www.investopedia.com/terms/n/non-security.asp#:~:text=A%20non%2Dsecurity%
20is%20an,definition%20are%20not%20liquid%20assets
.
https://www.thebalance.com/what-is-consumer-credit-5188270
Thank You!