LEARNING MODULE #2

INVESTMENT AND PORTFOLIO MANAGEMENT

Chapter II- Banks Accounts and Credit Securities

It is always advisable for an entity or an individual to adopt defensive investing, that is, and have
part of his funds invested safely and for fixed income. This may be realized by maintaining bank accounts
and acquiring credit securities such as bonds and treasury bills.

Bank Accounts

Bank accounts may be in the form of savings accounts, time deposits and special savings
deposits or premium savings accounts. Upon opening a bank account, one becomes a lender to the
bank. The latter treats the account as a liability and includes it as such in its balance sheet.

When opening a bank account, the following factors are to be considered:

1. Minimum balance required. Some banks charge penalties when the balance goes below the
minimum amount.
2. Interest rate or rates. In some cases, interest rates are tiered. This means that interest rate
changes depending on the balance in the bank account. The bigger is the balance, the higher is
the interest rate.
3. Limitations as to withdrawals. Is the account withdrawable anytime? What penalty is imposed in
case it is not?
4. The bank’s reputation. This refers to the track record of a bank in the handling of its finances
and the integrity of the people comprising its management.
5. Insurance. This refers to the insurance coverage for deposits received by a bank in the
Philippines, bank account are insured with the Philippine Deposit Insurance Corporation (PDIC)
to the extent of 500,000 per borrower per bank.
It is therefore advisable that before one open a banks a bank account, he calls up the different
banks and makes inquiries regarding the first three factors given above. However, if the amount
involved is not significant, choose the bank with which it would be convenient to transact considering its
proximity to the depositor’s place of residence or office and its banking days and hours. Some banks or
some of their branches are open on Saturdays with a day off during the week.
Current Account
A current account is a type of a bank account from which withdrawals are made by issuing
checks. Deposits are made with the use of deposit slips. It is often called a checking account. It is
maintained to separate cash intended for normal operations and to control disbursements.
In general, a current does not earn interest, but there are instances wherein a current account
earns interest depending on the current balances. The required minimum balances ranges from 5,000-
10,000. Most of the banks require a depositor to open a savings account before he is allowed to open a
current account.

Savings Account
A savings account is a type of bank account wherein deposits thereto and withdrawals thereto
can be made any time. Thus, it is preferably maintained to take care of minor emergency requirements,
deposits that are small in amount and those that are intended to be withdrawn anytime during the
month.
Deposits and withdrawals are made with the use of deposit and withdrawal slips, respectively.
However, there are some banks wherein they already used Automated Teller Machine (ATM) in making
deposits and withdrawals. The required minimum balances ranges from 500 to 1,000. Savings accounts
in the Philippines earn interest ranging from .50% to 4.00% per annum less 20% withholding tax.
Savings Account as first step in making investments. For investment purposes, a savings account is used
to accumulate cash with the intension of transferring part thereof to other types of bank accounts with
higher interest rates.
Compounding. This refers to non-withdrawal of income earned on an investment so that it becomes
part of the principal in succeeding periods. In effect, additional income is realized on previous income.
Time as an Advantage. Due to the effects of compounding, the earlier one saves the bigger would be
the future value of his investment.

Time Deposits
A time deposit is a loan to a bank for a fixed term. Time deposits are evidenced by certificates of
time deposits (CTDs). The minimum term in the Philippines is one month so that a depositor may roll
over his account monthly should he intend to keep his money and all its earnings in the account. In the
Philippines, there is no penalty imposed in case the depositor decides to pre-terminate his time deposit.
He merely foregoes the corresponding interest income. The minimum requirements can range between
5,000-10,000 to over a million pesos. For some commercial banks in the Philippines, the interest rate
ranges from .1250% to .2500% per month less 20% withholding tax.
Time deposits as second step in investing. This is so because the required minimum balance is much
bigger than that required for savings account. As stated earlier, savings may be accumulated in savings
account and when investor can afford to do so, a transfer to a time deposit may be effected to enable
him to earn higher rate of interest.

Special Time Deposits

Some banks offer additional time deposits accounts that will earn interest rates higher than
those applied to ordinary time deposits. In some of them, they call the account Special Saving Deposit
(SSD) Special Savings Account (SSA) Mega Savings Account, or Premium Savings Account.

Trust Investments
Trust investment or common trust fund refers to cash entrusted to a trustee bank for
investment in chosen items such as treasury bills, loans, stocks and bonds for the benefit of the
designated beneficiary. The investors are call the trustor or grantor. Banks usually offer two kinds of
trust investment services namely those on retail basis and those for big investors. On the retail basis,
trust investments are accepted from individuals with minimum placement set at 100,000.00. for big
investors (individuals and corporations), the minimum placement ranges from 1,000,000.00 to
4,000,000.00.
Trust investment is not part of normal bank operations so that is not insured with the PDIC.
However, it is also under the supervision of Bangko Sentral ng Pilipinas (BSP) and banks are required to
set up the corresponding reserves from them.

Securities Defined
Securities are written evidences of ownership, interest, or participation, in an enterprise, or
written evidences of indebtedness of a person or enterprise. Securities may be bought from the primary
market or the secondary market

Classifications of Securities Markets

 The markets for securities may be classified as follows:
A. Based on maturity of securities:
Money market. This refers to the trading of short term securities, the most common
among them are treasury bills and commercial papers. These are considered as near
cash securities on the part of the investors and those maturing within three months, as
cash equivalents.
Capital market. This refers to the trading of long term securities such as bonds and
shares of capital stock.
B. Based on who is the seller
Primary market. The seller is the issuing entity. In other words, the proceeds from sale
of securities go to the issuing corporation. This hold true even if the corporation is
issuing promissory notes, bonds, shares of stocks or other securities for the first, second
or even the tenth time.
Secondary market. The seller is a party other than the issuing entity. The proceeds from
sale of securities do not go to the issuing corporation. Examples are sales of bonds and
shares of stock by one security holder to another so that the proceeds go to the former
and not anymore to the corporation that issued the securities.

Credit Securities Defined

Credit Securities are evidences of indebtedness issued by an entity as a vehicle in borrowing
from the public. Upon their issuance, they evidence the transfer of financial resources from a lender to a
borrower. They include commercial papers, commercial bonds and government securities. The latter are
in the form of treasury bills and treasury bonds.

Commercial Papers – are promissory notes issued by big firms unquestionable credit standing
and reputation. They may be short term and long term. in times of rising interest rates, entities issuing
commercial papers prefer to sell them on the long term basis and vice-versa. Commercial papers are
either directly sold by the issuing corporation or through commercial papers dealers.

Bonds- is a certificate of indebtedness with fixed interest rate and maturity date. It is a formal
and unconditional promise, made under seal, to pay a special sum of money at a determinable future
date and to make periodic interest payments at a stated rate until principal amount is paid. The written
agreement on bond issues between issuing part and the bondholder is called indenture or bond
indenture. The indenture give rise to a borrower-lender relationship between the issuing party and the
bondholder.

Classifications of Bonds
A. As to issuing party:
1. Government bonds – issued by a government unit.
2. Commercial bonds – issued by a private corporation.
B. As to security:
1. Mortgage bonds – secured by lien on real property
2. Equipment trust bonds – secured by equipment of the company.
3. Collateral trust bonds – secured by securities invested in by the issuing company.
4. Debenture bonds – secured by all of the free assets of issuing company so that in
effect they are not secured by any specific asset.
C. As to maturity of principal:
1. Straight bonds – the entire principal will mature at one time.
2. Serial bonds – the principal matures in installments.
3. Convertible bonds – they can be exchanged for other securities of the company at
the option of the bondholder.
4. Callable or redeemable bonds – they can be called, redeemed or retired by issuing
company before maturity date.
5. Noncallable or non-redeemable bonds- they are not subject to calls or redemption
or before maturity date.
D. As to transferability:
1. Bearer bonds – they can be transferred to other parties by mere delivery because
bondholders are not registered in the books of issuing entity.
2. Coupon bonds – interest coupons are attached to the bond certificates and interest
is paid to the holder of said coupons.
3. Registered bonds – they are registered in the books of the issuing entity so that they
can be transferred to other parties only upon surrender of the bond certificate to
the issuing entity or its transfer agent. Registered bonds may be further classified
into:
 a. Registered as to principal only. Interest is paid to any party who presents
interest coupons.
b. Registered as to both principal and interest. Interest is paid only to the party
whose name appears as bondholder in the books of the issuing entity or its
transfer agent.
Government Securities
Government securities are debt instrument issued by the government. All government securities
are considered risk-free because they are fully guaranteed by the national government. They are in the
form of treasury bills (GST bills) and treasury bonds (GST-bonds). Government securities are auctioned
off among banks and eligible dealers everyday so that the agreed interest rate is fixed during the entire
terms of those issued during the day.
Treasury Bills
Treasury bills (T-bills) are government securities that mature in less than a year. They are offered
in three terms namely 91, 182, and 364 days to banks and eligible dealers who in turn offer them to
public. The interest applied is slightly lower than the official rate.
Treasury Bonds
Treasury bonds are government securities that mature beyond one year. Treasury bonds are
classified into regular bonds, progress bonds, ERAP bonds and small denominated (SDT) bonds.