MORTGAGE MARKETS

 Long-term loan secured by real estate. (last to 15 to 30 yrs.)

o Collateralized (kapag di nakapagbayad ng loan kukunin yung property nyo)
 Usually house and lot
 Sub category of capital markets pero nagkaiba sa borrowers
 Made of borrowing amounts and maturities depending on the borrower’s needs and features that cause
problems for developing a secondary market. (Maraming variation kasi depende sya sa kung ano yung need ng
borrowerso, magkakaiba yung interest rate, terms kaya nagkakaroon ng problem sa pagdevelop ng secondary
market.)
 Both individuals and businesses obtain mortgages loans to finance real estate purchases.
o Si business for example, yung mga developer ng villages, umuutang din sila thru mortgages for the
construction nung building and also yung iba for the construction of an office.
o Most of the individuals, kumukuha ng mortgage loan, nagaaply sila para ifinance naman yung purchase
ng bahay.
 The loan is amortized.
o Meron kang binabayaran on a monthly basis regularly for 15 to 30 years so, at the end of the term fully
paid na yung loan mo or yung property.
 The borrower pays it off over time in some combination of principal and interest payments that result in full
payment of the debt by maturity.
o Combination ng principal and interest payment.
 It is a subcategory of capital markets because it involves long term funds.

DIFFERENCE NG MORTGAGE MARKET SA CAPITAL MARKET

Capital markets Mortgage markets

borrowers Businesses and

individuals
government entities

HISTORY

The Great Depression

• Happened during later part of 1929 lasted for 10 years. Worldwide effect of Depression.

• It stated with the bonds market in US. Before 1920’s meron ng mga home mortgages.

• Home mortgages were 5- to 10-year loans for only about 50% of the value of the property in the years before
the Great Depression. The principal was due as a balloon payment (a large, single, one-time payment (isang
bagsakang bayad) at the end of the term).

• Then housing prices fell by about 25% during the Depression, and homeowners couldn't afford their balloon
payments. The banks wouldn't allow refinancing (it is an option kapag di mo na kayang bayaran ng gantong
amount monthly so, irereconstruct yung loan mo so, kung magkano lang yung kaya mong bayaran yun nalang
yung babayaran mo pero maeextend yung term kasi nga syempre kung initially 15 years yan more than 50 years
 kasi mas mababa na yung monthly mo). Approximately 1,000 homes were foreclosed upon every day in 1933.
(nagpull out yung 1k homes nung time na yon everyday in 1933.)

PRIMARY AND SECONDARY MORTGAGE MARKET

• The primary lender is the one who deals directly with the public.

o Kumikita sila thru processing fees.

• They are the ones who originate the mortgage loans.

• They do not lend the money themselves.

• They make money from the loan processing fees rather than interest rates (secondary markets).

o Kumikita thru interest rates.

The institution that initially lends the money more than likely will sell your mortgage note to another company on the
secondary market.

o Si banks and other financial institution kung saan tayo nagloloan, yan yung mga secondary markets. So,
incase na di mo mabayaran yung loan mo, ifoforeclose nila yung property mo and then, ibebenta nila
yan ulit sa iba.

CHARACTERISTICS OF THE RESIDENTIAL MORTGAGE

• The modern mortgage lender has continued to refine the long term loan to make it more desirable to
borrowers. In the past 30 years both the nature of lenders and the instruments have undergone substantial
change.

• The biggest change is the development of an active secondary market for mortgage contracts.

o Nagkakaroon ng problem in secorndary market because of many variations of mortgage so, mahirap
magbenta, magtrade, magtransact in retail or wholesale kasi iba iba yung variations nya.

• The mortgage markets became very competitive in recent years.

• 20 years ago in savings and loan institutions and mortgage departments of large banks where mortgage loans
originates but in today’s time there are many loan production offices that compete in real estate financing ,
some of these offices are subsidiaries of banks and others are independently own.

• As a result of the competition for mortgage loans borrowers can choose from a variety of terms and options.

o Mas malawag na yung options or pagpipilian ni borrowers.

3 IMPOTATNT FACTORS THAT AFFECTS THE INTEREST RATES OF LOAN

1. Mortgage Interest Rates

a. Current long-term market rates

 Determined by the law of supply and demand of the long term funds. Hindi sya controlled.
  Affected and determined by the number of global, national and regional factors. Rates tend to stay
above the less risky treasury bonds most of the time but tend to track along with them.
 Treasury bonds rate- most of the time mortgage rate stays above the treasury bonds.

b. Term or Life of the mortgage

• Interest differs base on its term (the longer the term, high risk, high interest rate)
• Yung 30 years na loan mas mataas ang interest non kaysa sa 15 yrs loan. Kapag mas matagal yung
term ng loan, mas mataas yung chances na yung borrower hindi sya makapagbayad kasi andaming
pedeng mangyari sa 30 years. Kaya baka dumating sa point na mabankrupt sya or magka default
kaya mas mataas yung interest rate kapag mas mahaba yung term.

c. Number of Discount Points Paid

• Simple called Points.

• Are interest payments made at the beginning of the loan, a loan with one discount point means that
the borrower pays 1%. (1 discount point = 1% of loan amount).

• The moment the borrower signed the loan paper and received proceeds from its loan and interest
payments are already paid that moment is considered discount points.

• In exchange dun sa points the lender reduces the interest rates of the loan. Advantage is bababaan
ang interest rates.

• Considering whether to pay points the borrower must determine whether the reduced interest rates
over the life of the loan fully compensates for the increase upfront expensed.

• Discounts are not allowed on loans that is less than five years

• It is only allowed to those 6 years loan.

2. Loan Terms

• What is included in the clause, mortgage contract, legal financial terms and usually the terms
protect the lenders form financial loss. (So, incase na si borrower hindi makabayad ano yung pedeng
maging proteksyon ni lender don.)
• Example: Lloyd Cadena, bought a house and lot, nakamortgage yon. So when the time na namatay
sya, considering na sya yung borrower, yung protection nung lender is may insurance yung loan. So
yung insurance yung nagbayad sa lender na nagfully paid nung property na yon. It also protect the
lender kasi kahit nawala yung lender na fully paid parin yung bahay thru insurance.

3. Collateral

4. Down Payment

 To obtain the mortgage loan the lender, also requires the borrower to make a down payment on the
property. Meaning, a portion of the purchase price. And the balance of the purchase price will be loan.
 This is required by banks. Usually the required down payment ng mga banks is 5% to 20% from your own
money or pocket. Then the remaining percentage, yung yung ipapautang sayo.
  The borrowers who does not make a down payment could walk away from the house and the loan and
lose nothing. (kasi yung DP proteksyon din sya sa lender. Kasi if walang DP, pedeng di nya na bayaran
kasi wala naming nawala sa kanya kasi hindi naman sya naglabas ng pera. Pero kapag may DP,
manghihinayang sya dun sa nilabas nyang DP.)
 The DP reduces moral hazard for the borrowers. So, the amount of the DP depends on the type of the
mortgage loan.

5. Private Mortgage Insurance (PMI)

• Insurance policy that guarantees makeup. To make up any discrepancy between the value of the
property and the loan amount should a default occurs.
• Required when down payment is less than 20%
• PMI usually cost between 200 to 300 pesos per 100,000 loan. Monthly payment of 200 to 300 pesos.

6. Borrower Qualifications

• Before granting a mortgage loan the lender will determine whether the borrower qualifies for it.
• May mga qualification si lender and other bankls. and hindi sila agad agad nagpapautang, meron
silang mga tinitignan and chinicheck thru back ground check if you have previous debt kaya
importante na may maganda kang record. Example: Credit cards. (if may hindi ka nabayarang credit
cards) kasi if you hafve bad records hindi kayo maaprove sa loan.
• Maintain the credibility as a buyer.
• Qualifying for a mortgage loan is different for qualifying for a bank loan because most lenders sell
their mortgage loan to one of a few government agencies in the secondary mortgage market. These
agencies established very precise guidelines that must be following before they accept the loans. If
the lender gives a mortgage loan to a borrower who does not fit these guidelines, the lender may
not be able to resell the loan.
• The banks may be more flexible with loans that we kept on the banks own books.

TYPES OF MORTGAGE LOANS

1. Conventional Mortgages
• Most common, originated by banks or other mortgages lenders.
• Not guaranteed by government or government controlled entity.
• Most lenders though now ensure many conventional loan against default or they require the borrower
to obtain private mortgage insurance on loans.
• They required to have an insurance.
• Loan is not guaranteed; usually requires private mortgage insurance; 5% to 20% down payment
2. Insured Mortgages
• Also originated by banks or other mortgage lenders but;
• Loan is guaranteed by either the government or government controlled entities; low or zero down
payment
• Loan is guaranteed by Federal Housing Administrative (FHA) or Veterans Administrative (VA); low or zero
down payment. These are government entities.
3. Fixed rate Mortgages
• Hindi nagvavary ang payment ng borrower over the life of mortgage.
• Kung ano yung payment mo from first month hanggang sa maend yung loan, yun lang yung fix na
babayaran mo over the life of the mortgage.
4. Adjustable Rate Mortgages (ARMs)
• Interest rateon adjustable rate mortgage is tied to some market interest rate (may sinusunod na interest
therefore, it changes overtime) from other security and is adjusted periodically (changes overtime) ; size
of adjustment is subject to annual limits
• Example: treasure bill rate
• Caps- limits (kung gano kataas or kababa yung interest rate.)
• Interest rate is tied to some other security and is adjusted periodically; size of adjustment is subject to
annual limits
5. Graduated-Payment Mortgages (GPMs) (means tumataas)
• Expect to increase their income
• Initial low payment increases each year, loan usually amortizes in 30 years.
• Borrowers in this type usually expects increase in income.
• Early payments may not be sufficient to cover the interest dues in which case the principal balance
increases.
• As time passes, the borrowers expect income to increase so that higher payment will not be too much of
a burden.
6. Growing Equity Mortgages (GEMs)
• The mortgage will initially be the same as on the conventional mortgage but over time the payment will
increase. These increase, mababawasan yung principal than the conventional payment mortgage.
• Initial payment increases each year , mabilis mababawasan yung principal balance
• Loan amortizes in less than 30 years.
7. Shared Application Mortgages (SAMs)
• In exchange for providing a low interest rate, the lender shares in any appreciation in value of the real
estate.
• Si lender yung nakikihati dun sa mismong increase ng value ng property.
• Si lender mayroon syang share dun sa property in case of appreciation of value ng property.
8. Equity Participating Mortgages (EPMs)
• In exchange for paying a portion of the down payment (purchase price) or for supplementing the
monthly payments, an outside investor shares in any appreciation in value of the real estate.
9. Second Mortgages
• Loan is secured by a second lien against the real estate; often used for line of credit or home
improvement loans.
• These are loans that are secured by the same real estate that is used to secure the first mortgage. (isang
mortgage lang yung ginamit as collateral.)
• The second mortgage is a junior to the original loan which means the default occur, the second
mortgage holder will be paid only after the original loan has been paid off if sufficient fund remain.
10. Reverse Annuity Mortgages (RAMs)
• The bank advances funds to the owner on a monthly schedule to enable him to meet needing expenses,
either by increasing the balance of the loan which in secured by the real estate.
• When the borrower dies, the estate sells the property to pay the debt. (so, meaning secured yun ng
property nya)
• Lender disburses a monthly payment to the borrower on an increasing-balance loan; loan comes due
when the real estate is sold.
MORTGAGE LENDING INSTITUTIONS (Players in mortgage market)

The institutions that provide mortgage loans to familiar and business that they share the mortgage market are as
follows:

 Mortgage tools and trusts 49%

 Commercial banks 24%
 Government agencies and others 15%
 Life insurance companies 9%
 Savings and loans associates 9%

SECURITIZATION OF MORTGAGES (protection)

Intermediaries face several problems when trying to sell mortgages to the secondary market, the lenders selling the
loans to another investor. (Pagbenta ulit sa iba pang investor)

Problems that are usually encountered by the intermediaries:

A. Mortgages are usually too small to be wholesale instruments.

B. Mortgages are not standardized.

o No definite term or rate, there are different terms to maturity, interest rate and contract term. It is
difficult to bundle a large mortgages together.

C. Mortgage loans are relatively costly to service.

o Lenders must collect monthly payment often advances payment of property taxes, insurance premium
and service reserve accounts.

D. Mortgages have unknown default risk.

o The investors do not want to spend a lot of time and effort in evaluating the credit of the borrowers.

 Mortgage-backed security
o Created because of the problems.
o A security that is collateralized by a pool of mortgage loans.
o Also known as securitized mortgage. Process of transforming an assets into marketable capital market
instrument.
o In recent years, as institutional investors look for appreciative investment opportunities that compete for funds
with government notes, bonds , corporate bonds and stocks. Can be considered instead of investing in
government bonds.
o Securitized mortgage lower the risk of the securities and have higher than comparable compared to government
bond and attract funds around the world.
 Securitization
o Is the process of transforming illiquid financial assets into marketable capital market instruments.
The most common type of mortgage-backed security is the mortgage pass through, a security that has the borrower’s
mortgages pass through the trustee before being disbursed to the investors in the mortgage-pass through. If borrowers
pre-pay their loans, investors received more principal than expected

What benefits are derives from Securitized Mortgage (SM)

A. SM has reduced the problems and risks caused by regional lending institutions’ sensitivity to local economic
fluctuations.

B. Borrowers now have access to a national capital market.

C. Investors can enjoy the low risk and long term nature of investing in mortgages without having to service the
loan

D. Mortgage rates are now more open to national and international influences. As a consequence, mortgage rates
are more volatile that they were in the past.

INTERNATIONALIZATION OF FINANCIAL MARKETS

FINANCIAL MARKETS AROUND THE WORLD

 New York, US

The New York Stock Exchange (NYSE) is the largest in the world.

Market Capitalization – the market value of its outstanding shares: $21.04 trillion followed by NASDAQ, which is also
based in New York ($20.66 B)
  Toronto, Canada

Established in 1852 and owned and operated as a subsidiary of the TMX Group, the Toronto Stock Exchange (TSX) is the
most significant stock exchange in Canada. Until 2001, the Toronto Stock Exchange was known as the TSE. The TSX is the
third-largest stock exchange in North America by capitalization, after the New York Stock Exchange (NYSE) and
the Nasdaq.

Toronto Stock Exchange (TSE) in Canada is run by the TMX Group ($2.26 Trillion)

 Tokyo, Japan

The Tokyo Stock Exchange was established on May 15, 1878.

The TSE is run by the Japan Exchange Group and is home to the largest and best-known Japanese giants with a global
presence—including Toyota, Honda, and Mitsubishi.

Japan Exchange Group (JPX), based in Tokyo, is the largest exchange in Asia $5.6 trillion (as of June 2020)

 China - Shanghai, Shenzhen, and Hong Kong

There are two exchanges on the mainland. The Shanghai and Shenzhen exchanges were opened by the Chinese
government in 1990 as a way of modernizing China's economy. The Hong Kong stock exchange is being integrated into
the other Chinese exchanges. That makes the HKEx loosely part of China's stock market.
Shanghai Stock Exchange (SSE), ($ $6.09 Trillion); Shenzhen Stock Exchange (SZSE) ($4.53 Trillion); and the Stock
Exchange of Hong Kong (SEHK) ($5.37 Trillion)

1. Shanghai stock exchange

 Most of the companies listed are the large, state-owned companies responsible for China's economic
growth. Most investors are pension funds and banks. The SSE is located in Shanghai, China's financial capital.
2. Shenzhen stock exchange 
 The SZ is in Shenzhen, Guangdong, one of China's most modern cities. It’s a two-hour drive from Hong Kong.
Most investors are individuals. Most investors are individuals.
 The Shenzhen trades the shares of smaller, more entrepreneurial companies. 11 1 Their growth is a critical
component of China's economic reform. These privately-owned businesses are more innovative and more
profitable than the state-owned companies. A lot of tech companies are listed there, making this exchange
similar to the NASDAQ.
3. Hong Kong Exchanges and Clearing Limited or HKEx
 A stock market and derivatives market.

 London, UK

The London Stock Exchange (LSE) is the primary stock exchange in the United Kingdom and the largest in Europe.

The stock exchange is physically located in the city of London. In 2007, the London Stock Exchange merged with
the Milan Stock Exchange, the Borsa Italiana, to form the London Stock Exchange Group.

The "Big Bang" refers to the government's deregulation of the London stock market on Oct. 27, 1986, an event that led
to a modernized electronic trading system and opened up the LSE to capital markets worldwide.

Stock Exchange (LSE) is Europe’s largest ($3.3 Trillion)

 European Union

Euronext is the largest stock exchange in Europe and sixth largest in the world. It was originally created by the mergers
of the Amsterdam, Paris, and Brussels stock exchanges.

Over the years, it merged with several other exchanges, most notably the New York Stock Exchange, before being
acquired itself by the Intercontinental Exchange. In 2014, Euronext was spun off to become an independent entity once
again.

Euronext has headquarters in Amsterdam, Brussels, Lisbon, and Paris

Euronext Amsterdam ($4.43 Trillion)

 Frankfurt, Germany

The Frankfurt Stock Exchange, known in German as FWB Frankfurter Wertpapierbörse, is the largest German stock
exchange based in Frankfurt.

Owned by Deutsche Börse AG, it had a market capitalisation of around $1.99 trillion as of March 2019, making it the
world's 12th largest stock exchange. 

Börse Frankfurt is a trading venue mainly for private investors. It provides access to thousands of securities of German
and international issuers.
Latest Market Cap - $2.1 Trillion

SIZE OF THE MARKETS

Table 11-1 The world’s financial markets

2015 2016 2017 2018

International bank loans 13.6 22.6 20.4 27.0

International debt securities 11.5 18.9 21.9 21.3
Domestic debt securities 44.1 59.8 62.5 68.7
Equities 37.2 32.6 54.6 67.2
Other 5.2 8.0 8.4 8.8
Total value outstanding 111.60 141.9 167.8 193.0

CROSS BOARDING FINANCING

 Also known as import and export financing.

 Helps business to participate in international trade by providing a source of funding that enables them to compete
globally and conduct business beyond their domestic borders.
 Usually used by the companies who has global subsidiaries.
 Example: Canadian based company.

ADVANTAGES

o Opting in for cross-border financing solutions can allow corporations to maximize their borrowing capacity.
o Cross-border factoring (selling off receivables) is a type of cross-border financing that provides businesses
with immediate cash flow that can be used to support growth and operations. 
 The third company collects payments from customers and transfers the payment to original
business owner less the charges in providing the service.
o The advantage to the business owners is that they receive their money upfront rather than waiting
anywhere from 30 to 120-days for payment from their customers.

DISADVANTAGES

o Currency Risk - Refers to the possibility companies may lose money due to changes in currency rates that
occur from conducting international trade.
o Political Risk – Refers to the risk a company faces when doing business in a foreign country that experiences
political instability. It can affect cross boarder financing.

INTERNATIONAL BOND MARKET

 Foreign Bonds
 A bond issued in a domestic market by a foreign entity in the domestic market's currency as a means of raising
capital. For foreign firms doing a large amount of business in the domestic market, issuing foreign bonds, such
as bulldog bonds, Matilda bonds, and samurai bonds, is a common practice.
 Issued by the international company or foreign entity in a country different from their own using that country’s
currency to denominate those bonds. So, domestic investors can diversify internationally by owning foreign bonds
since they are traded on local exchanges they are easier to acquire. Still, the foreign bonds have certain implicit and
explicit risk associated with them including the impact of two interest rates: the currency exchange rate and the geo
political factors.

Example:

Bulldog Bond – this bond is issued in UK, in British Pound by a foreign bank or corporation. Foreign corporation raising
funds in UK, typically issue this bond when interest rate and the UK are lower than those in the corporation’s country.

Matilda Bond – this is a bond issued in Australian market, (issued by the foreign bank using the currency of Austria.)

Samurai Bonds – corporate bond issued in Japan by a non-Japanese company.

 Eurobonds
 A Eurobond is a debt instrument that's denominated in a currency other than the home currency of the country or
market in which it is issued.
 Frequently group together by the currency which they are denominated, such as euro dollar or euro yen bonds.
 Since euro bond issued in an external currency they often called external bond.
 Eurobonds are important because they help organizations raise capital while having the flexibility to issue them in
another currency.
 Issuance of the euro bonds usually handle by an international syndicate of financial institution on behalf of the
borrower. One of which they underwrite the bond does guarantee in the purchase of the entire issue.
 Eurobond refers only to the fact the bond is issued outside of the borders of the currency's home country; it doesn't
mean the bond was issued in Europe.
 Also called external bond. Not necessarily in Europe only.

FACTORS AFFECTING THE LONG-RUN TRENDS OF INCREASED FINANCIAL MARKET ACTIVITY

A. LOWER INFLATION

 The inflation rate around the world had fallen markly since 1990’s.
 Effects: It erodes the value or gradually decreases the value of the financial assets and increases the
value of physical assets (houses and machines) which will cause far more to replace than they are worth.
 When the inflation is high, (like the cases in US in 1970’s also in Latin America during the 1980’s) avoid
raising term capital because investors require a high return on an investment.
 In a long inflation environment, the financial market investors require less on an inflation premium and
they do not expect general increase in prices to revalue their assets.

B. PENSIONS

 There are significant changes in pension policies occurred in many countries starting in the 1990’s.
 Changes in demography working patterns have made pay as you goes, increasing the costly to support,
so pension became very expensive as there are fewer young workers relative to the number of
pensioners.
 This has stimulated interest in the pre funded individual pension. Meaning, each worker may have an
account in which the money will be save and also invested.
  This personal investment account to some extent sa planted firms private pension plans. They have also
led to huge increase in financial assets in countries where private pension where previously uncommon.

C. STOCK AND BOND MARKET PERFORMANCE

 They performed during most of 1990’s and in the period before 2008 (Global financial crisis).
 The global bond market boom, continuing until interest rate begun to rise in 2020.
 Stock markets after several difficulties rouse deeply in many countries in 2012 and 2013 and again in
2016 and 2017.
 The rapid increase in financial wealth paid on itself, so, investors whose portfolio appreciated are willing
to reinvest some of their profit in the financial market and appreciation in the value of their financial
assets gives investors the collateral to borrow additional money which can be invested.

D. RISK MANAGEMENT

 The result of the innovation in financial product. Before, the purpose of the financial product is to raise
fund or capital that’s why you are entering the financial market but because of derivatives and other
securities which the basic purpose is to redistribute the risk or hedging.
 Firms and investors can choose which risk they wish to bare and use financial instrument to shed the risk
they did not want or alternatively to take additional risk in the expectation of earning a higher returns.
 Risk management revolution resulted in an enormous expansion of the financial market activity.
 The credit crisis that begun in 2007 however revealed that the pricy of many these risk management
products did not properly reflect the risk involve.

E. THE INVESTORS

 The driving force of why do we need to invest or entering into financial market.
 The main purpose behind the financial market is the desire to earn profit and the return in assets.
 There are two distinct component in return;
o Yield – this is the income the investor’s receives while owning an investment.
o Capital gains – there are increase in value in the investment itself and often available if you sell
your investment. You’ll only have a capital gain if you sell your investment.
 So, the investor’s preferences vary which type of return they prefer. This will affect their investment
decisions. Some financial market products are deliberately designed to offer only capital gains and no yield
but there are some who are offering yield only without capital gains. These are made to satisfy the
preferences of the investors.

CATEGORIES OF INVESTORS

 INDIVIDUALS
 Collectively, owned a small proportion of the financial assets.
 Most household in the wealthier country, own some financial assets in the form of retirement savings or
shares in the employer of a household member.
 So, many holdings however are quite small, their composition varies greatly from one country to another.

 INSTITUTIONAL INVESTORS
 Have a larger portion of investment.
 Insurance company and other institutional investors including high frequency traders are responsible for
most of the trading in the financial markets.
 The size of the institutional investors varies greatly from country to country depending on the development
of collective investment vehicles.
 Investment practices vary considerably as well.

TYPES

1. Mutual Funds

 Fastest growing institutional investors company. They combined the investment of number of
individuals called pulling of funds.
 Combination of the investment of number of the individuals with the aim of achieving particular
financial goals in an efficient way.
 Typically accepts an unlimited number of an individual investment.
 Then, the funds declare the strategy; it will pursue and as additional money invested in a fund
manager. The fund manager purchase financial instrument appropriate to that strategy.
 In some cases the trusts acquires security as its exemption and never sells them in other cases
the fund changes its portfolio from time to time. So, the investors wishing to enter or leave the
unit trust must buy or sell trust share from stockholder.

2. Hedge Funds

 The opposite of mutual funds.

 They are focusing on an investment on one or another type of asset rather than versifying.
 No diversification.
 Able to employ aggressive investment strategies such as using borrowed money to increase the
amount invested in focusing investment on one or another type of asset. If successful, such
strategy can be too very large returns, but if unsuccessful, they can result in sizable losses and
closure of the fund.
 All investment company earns a profit by charging investors a fee for their services.
 They also take a portion of any gain in a value of the fund.
 Have come under particular criticism because their fee structure may give managers undesirable
incentives to take large risk with investors’ money. As fund managers may share in their funds,
gains, but not its losses.

3. Insurance Companies

 The most important type of the institutional investors.

 1/3 of the financial assets owned by the insurance company.
 In the past, most of these holdings were needed to back life insurance policies. In recent years,
growing shares of insurers business has consisted of annuities which guarantee policy holders as
some of money each years as long as they live rather than merely paying their heirs upon death.
 The growth of free funded individual pension has benefited insurance company because on
retirement many worker used the money on their accounts to purchase annuity.

4. Pension Funds

 Aggregate the retirement savings of large number of workers.

  Sponsored by the employer or labored union.
 There are organization like SSS, GSIS and government organization which represent the large
investors of pension funds. It is automatically deducted in your salary.
 Unlike individual accounts, pension fund do not give individual control over the how their
savings invested. They do typically offer a guaranteed benefit once the individual reaches the
retirement age. Depends on your total contribution in the SSS.

5. Algorithmic traders

 Also known as high frequency trading.

 Expanded in recent years as a result of increase computing power and availability of low cost
high speed communication.
 Investors specializing in this type of trading program computers to enter buy and sell orders
automatically in an effort to exploit tiny price differences in securities and currency markets.
 Control only tiny proportion of the whole financial assets but they account for the large
proportion of the trading in some markets.
 Usually used by the institutional investors. Process of executing order, utilizing automated free
program trading instruction to account for variable such as price, timing and volume.
 Set of directions for solving a problem. Computer algorithm sends small portion of the full order
to the market over time.
 Used in variety of situation in order execution, arbitrage and trend trading strategies.

Disadvantage:

 It can give the market negative tendencies by causing flash trashes in immediate loss of liquidity.

Advantage

 Faster execution and reduced the cost.

 It can exacerbates the market negativity by causing flash trashes in immediate loss of liquidity

INTERNATIONAL CREDIT MARKETS

 Eurocredits
 Market for free floating-rate bank loans whose rates are tied to LIBOR (London Interbank Offer Rate).
 Usually issued for a fixed term with no early repayment.
 Currently, eurocredit exist for major trader currency
 Example: Euro dollar deposit which is US dollar deposited in a bank outside the US.
 Eurobond Market
 International bond underwritten by international syndicate of banks
 Issued in other currency. Kung sino yung issuer ng currency.
 Can be issued under the floating rate depending on the preference on the issuer for long term maturity.
 Not necessarily in Europe.
 External bonds
 Foreign Bond Market
 Issued by the country in whose currency the bond is denominated and they are underwritten by investment
bank in that country.
  Called the bond that is issued in the USA is the Yangki Bonds.
 They can have a floating rate coupon or a fixed rate coupon. They have the same maturity that purely
domestic bond which they must compete for funds.

INTERNATIONAL CREDIT MARKETS

ICMA (International Capital Markets Associations)

 Leading dealers created the ICMA.

 They established standard practices. Followed all over the world.
 Such as in settlement procedure and then, all international bond traders among its member’s money and
securities (can be settle in the 3rd business day after the transaction).
 Based in Switzerland and recognized a self-regulatory organization by British authorities and all major dealers
adhere to its rules.
 Other procedures that they established are; trading transaction, including reporting system so, the firms can
identify and reconcile errors that may have occur in writing down the name and quantity of a security.
 Over the years, the distinctive features of the international market have been eroded. The international
government liberalized their rules for issuing trading securities in east restriction in cross boarder capital flows.
 The advantages of international issue have seen to lun
 Global bond issues in the creation of cross boarder issue have blur the distinction between euro bond and other
international bond issue.
 Some securities traditionally considered to be domestic, so the changes have blurred the difference between the
euro bond and foreign bonds.
 Nung wala pang euro bond and foreign bond, and ang inaapply the international market ay tinatawag na Euro
market.
 But the international bond markets are flourishing and likely to grow rapidly.