MODULE #1
4. Unit of account – issued by a recognized authority which trust is vested
Financial markets refer broadly to any marketplace where the trading of
securities occurs, including the stock market, bond market, forex market, and
derivatives market, among others. Financial markets are vital to the smooth
operation of capitalist economies.
A financial market is a market where buyers and sellers trade commodities,
financial securities, foreign exchange, and other freely exchangeable items
(fungible items) and derivatives of value at low transaction costs and at prices
that are determined by market forces.
Basically, financial markets (bank and other financial institutions) are
all about bringing investors (lenders) and
borrowers (governments and companies) together.
LESSON 1: ROLE OF MONEY
Money is any item or commodity that is generally accepted as a means of
payment for goods and services or for repayment of debt, and that serves as an
asset to its holder. Money is composed of bills and coins which have been
printed or minted by the National Government. Money includes also funds
stores as electronic entries in one’s checking and savings account.
Money is any object that is generally accepted as payment for goods and
services and repayment of debts in a given country or socio-economic
context. The main functions of money are distinguished as: a medium of
exchange; a unit of account; a store of value; and, occasionally, a
standard of deferred payment.
Since its invention, money is used to measure the value of any commodity
(goods and services) for easy exchange. It is said, money makes the world go
round, which means the motive to increase possession of more money occur.
Money is the energy that allow all business transactions and events be
measured and translated into meaningful information.
a. Characteristics and key function of money:
1. Store of value - money acts as a means by which people can store their
wealth for future use.
2. Item of worth - money has intrinsic value
3. Means of exchange–accepted in exchange for goods or services.
in thee.
5. Standard of deferred payment – money can facilitate exchange at any
point by providing a medium of exchange
b. Evolution of Money
 Money was developed according to needs and requirements.
 Man aim was to remove the short coming of the barter system.
Different Stages of Evolution of Money
1. Commodity Money - When different commodities were used as a
medium of exchange (Barter System).
2. Metalic Money - Discovery of precious metal like gold, copper
and silver. Metals were not used as coins but Bullions.
3. Paper Money - Refers to notes issued by Central Bank
4. Credit Money - Includes different instruments issued by banks like
cheques, drafts.
5. Electronic Money - Also known as e-money, electronic cash, e-
currency, digital cash, digital currency.
c. Highlights in the History of Money in the Philippines
EVOLUTION OF PHILIPPINE MONEY
History of Philippine Money
Philippine Money – Multi-colored threads woven into the fabric of our
social, political and economic life. From its early bead- like form to the paper
notes and coins that we know today, our money has been a constant reminder
of our journey through centuries as a people relating with one another and
with other peoples of the world.
PRE-HISPANIC ERA
 Trade among the early Filipinos and with traders from the neighboring
islands was conducted through barter.
 The inconvenience of barter later led to the use of some objects as
medium of exchange. Gold, which was plentiful in many parts of the
islands, invariably found its way into these objects that included the
 piloncitos, small bead-liked gold bits considered by the local
numismatists as the earliest coin of the ancient Filipinos, and gold
barter rings.
SPANISH ERA (1521-1897)
 Three hundred years of Spanish rule left many indelible imprints on
Philippine numismatics. At the end of the Spanish regime, Philippine
money was a multiplicity of currencies that included mexican pesos,
alfonsino pesos and copper coins of other currencies.
 The first Spanish coin used in our country bore the face of Queen
Isabela of Spain. The bronze coin with little known value was known
hilis kamay.
 The barilla, a crude bronze or copper coin worth about one centavo,
was the first coin struck in the country.
 The silver dos mundos or pillar dollar is considered one of the world’s
most beautiful coins.
 The cobs or macuquinas of colonial mints were the earliest coins
brought in by the galleons from Mexico and other Spanish colonies.
 Coins from other Spanish colonies also reached the Philippines and
were counterstamped. Gold coins with the portrait of Queen Isabela
were minted in manila.
 Silver pesos with the profile of young Alfonso XIII were the last
coins minted in Spain. The pesos fuertes, issued by the country’s first
bank, the El Banco Espanol Filipino De Isabel II, were the first paper
money circulated in the country.
REVOLUTIONARY PERIOD (1898-1899)
 Asserting its independence, the Philippine republic of 1898 under
general Emilio Aguinaldo issued its own coins and paper currency
backed by the country’s natural resources.
 One peso and five peso notes printed as Republika Filipina Papel
Moneda De un Peso and cinco pesos were freely circulated. 2
centimos de peso copper were also issued in 1899.
THE AMERICAN PERIOD (1900-1941)
 The Americans instituted a monetary system for the Philippine based
on gold and pegged the Philippine peso to the American dollar at the
ratio of 2:1. The US Congress approved the coinage act for the
Philippines in 1903.
 The coins issued under the system bore the designs of Filipino
engraver and artist, Melecio Figueroa.
 Coins in denomination of one-half centavo to one peso were minted.
the renaming of El Banco Espanol Filipino to Bank Of The
Philippine Islands in 1912 paved the way for the use of English
from Spanish in all notes and coins issued up to 1933.
 Beginning May 1918, treasury certificates replaced the silver
certificates series, and a one-peso note was added.
THE JAPANESE OCCUPATION (1942-1945)
 The outbreak of World War II caused serious disturbances in the
Philippine monetary system. Two kinds of notes circulated in the
country during this period.
 The Japanese occupation forces issued war notes in big
denominations. Provinces and municipalities, on the other hand,
issued their own guerrilla notes or resistance currencies, most of
which were sanctioned by the Philippine government in-exile, and
partially redeemed after the war.
THE PHILIPPINE REPUBLIC
 A nation in command of its destiny is the message reflected in the
evolution of Philippine money under the Philippine republic. Having
gained independence from the United States following the end of
World War II, the country used as currency old treasury certificates
overprinted with the word “victory”.
 With the establishment of the central bank of the Philippines in 1949,
the first currencies issued were the English series notes printed by the
Thomas de La Rue & Co., Ltd. in England and the coins minted at the
US bureau of mint.
 The Filipinazation of the republic coins and paper money began in
the late 60’s and is carried through to the present. In the 70’s, the Ang
Bagong Lipunan (ABL) series notes were circulated, which were
printed at the security printing plant starting 1978.
 A new wave of change swept through the Philippine coinage system
with the flora and fauna coins initially issued in 1983. These series
 featured national heroes and species of flora and fauna. the new
design series of banknotes issued in 1985 replaced the ABL series.
Ten years later, a new set of coins and notes were issued carrying the
logo of the Bangko Sentral Ng Pilipinas.
1. Victory series
2. English series (quirino era)
3. Bagong lipunan series (marcos era)
4. New design series (cory aquino era)
5. New generation series
Explanation of New Generation Series (Php 20-1000)
 Malacañang palace can be seen at the front side of ₱20 bill,
together with Manuel L. Quezon (the second president of the
philippines) and the declaration of Filipino as the national language.
 The Banaue Rice Terraces can be seen at the back of ₱20 bill,
together with Paradoxurus Hermaphroditus Philippinensis or palm
civet (musang or alamid in the philippines) and cordilleras weave
design.
 The Leyte landing memorial park can be seen at the face of ₱50 bill,
together with Sergio Osmeña (the fourth president of the philippines)
and the first Philippine assembly.
 Taal lake and Taal volcano can be seen at the reverse side of ₱50 bill
along with caranx ignobilis or maliputo (a large type of fishes
inhabiting taal lake), and batangas embroidery design.
 Although the independence grandstand does not already exist in its
original location, the declaration of the Philippine independence in
1946 as shown in the front side of ₱100 will be remembered as held
in Luneta. Along with the declaration of the Philippine independence,
are Manuel A. Roxas (the fifth president of the philippines) and the
old BSP building in Intramuros.
 Mayon volcano can be seen at the back of ₱100 bill, along with a
rhincodon typus (whale shark or butanding), and bicol textile design.
 The images of Aguinaldo Shrine in Cavite and Barasoain Church in
Bulacan are both shown at the face of ₱200 bill, along with Diosdado
P. Macapagal (the ninth president of the philippines) and the EDSA
People Power in 2001.
 The chocolate hills in Bohol can be seen at the reverse side of ₱200
bill, along with the Philippine tarsier, and Visayas weave design.
o The monument of Ninoy can be seen at the front side of ₱500 bill,
together with his wife and former president Corazon C. Aquino, and
the EDSA People Power of 1986.
o The Puerto Princesa subterranean underground river can be seen at
the back side of ₱500 bill, along with the blue- naped parrot
(tanygnathus lucionensis) and the cloth design in southern
Philippines.
¤ Philippine 1,000 peso bill: war heroes: Josefa Llanes Escoda, Jose Abad
Santos And Vicente Lim * Centennial Of Philippine Independence
1998 * medal of honor * seal of the republic of the philippines
¤ Tubbataha reefs natural park can be seen at the reverse side of
₱1,000 bill, along with the south sea pearl (pinctada maxima) and
the mindanao design for tinalak or ikat-dyed abaca.
d. The Supply and Demand of Money- Money facilitate the flow of
resources in the circular model of macroeconomy. Not enough money will
slow down the economy, and too much money can cause inflation because of
higher price levels. Monitoring the supply and demand for money is vital for
the economy’s central bank policy, which aims to stabilize price levels and to
support economic growth.
Money supply refers to the amount of money which is in circulation in an
economy at any given time. Money supply plays a crucial role in the
determination of price level and interest rate. Growth of money supply helps
in acceleration of Economic development and price stability. There must be a
controlled expansion of money supply i.e. no inflation or deflation in the
economy.
The Bangko Sentral ng Pilipinas (BSP) is responsible for determining the
supply of money. It uses daily open market operations to influence the
creation of money by banks and to guide the availability of money in the
economy. BSP also has impact on the creation of money by banks through
reserve requirements and the discount rate, the interest rate at which banks
can borrow from the BSP as a lender of last resort. Changes in the supply of
money will affect the interest rate and therefore the cost of borrowing money.
This will have an impact on consumption and investment levels in the
economy.
 Key measures for the Money Supply are: Formula: M x V = P x T Where:
M = quantity of money
 M1 - Includes money in circulation held by the nonbank public,
demand deposits, other checkable deposits, and travelers’ checks. V = velocity of money
Primarily refers to money used as a medium of exchange. P = price level
 M2 - In addition to M1, this measure includes money held in savings Y or T = real GDP
deposits, money market deposit accounts, noninstitutional money
market, mutual funds and other short-term money market assets. M@
refers primarily to money used as a store value. M = Money Supply - All the money in the economy
 M3 - In addition to M2, this measure includes the financial V = Velocity of Circulation - How many times a dollar, euro, etc. is spent
institutions, refers primarily to money used as a unit of account. purchasing finished goods and services
 L - In addition to M3, this measure includes liquid and near-liquid P = Price Level - The price level of all goods and services in an economy
assets (e.g., short-term Treasury notes, high- grade commercial paper
T = All Transactions - All the goods and services sold within an economy
and bank acceptance notes)

Demand of Money - money is demanded because money serves these In monetary economics, the quantity theory of money states that the general
purposes: medium of exchange and store value. There are sources of demand price level of goods and services is directly proportional to the amount of
for money, these are as follows: money in circulation, or money supply.

 Transaction demand – Money demanded for day-to-day payments e. Time Value of Money- Interest is defined as the cost of using money
through balances held by households and firms (instead of stocks, over time. Economists prefer to say that interest represents the time value of
bonds or other assets). This demand varies with GSP, it does not money.
depend on the rate of interest. Gross Domestic Product, abbreviated
as GDP, is the total value of goods and services produced in a
country. GDP in economics: GDP is measured over specific time
frames, such as a quarter or a year. GDP as an economic indicator is
used worldwide to show the economic health of a country.
 Precautionary demand – Money demanded as a result of
unanticipated payments. This kind of demand varies with GDP.
 Speculative demand – Money demanded because of expectations
about interest rates in the future. This means that people will decide
to expand their money balance and hold off on bond purchases if they TVM help us in knowing the value of money invested. As time changes value
expect interest rates to rise. This kind of demand has a negative of money invested on any project/ firm also changes. And its present value is
relationship with the interest rate. calculated by using "mathematical formula", which tell us the value of money
The Quantity Theory of Money holds that changes in the money supply MS with respect of time.
directly influences the economy’s price level. This theory follows from the
equation of exchange.
f. Interest Rates - An interest rate is the amount of interest due per period, as
a proportion of the amount lent, deposited or borrowed. The total interest on
an amount lent or borrowed depends on the principal sum, the interest rate,
the compounding frequency, and the length of time over which it is lent,
deposited or borrowed.
LESSON 2: Overview of the Payment System – A payment system is any
system used to settle financial transactions through the transfer of monetary
value. This includes the institutions, instruments, people, rules, procedures,
standards, and technologies that make its exchange possible. A payment
system is a mechanism composed of rules, institutions, people, markets and
organizations that make exchanges of payments possible. It facilitates the
transfer of money from a payor to a payee in order to effect a payment
transaction. BSP Commodity money involves the use of an actual good in
place of money (gold coin, tobacco). Fiat money has no other value than as a
medium for exchange; value comes from government (paper money).
The value of fiat money is based largely on public faith in the issuer.
Commodity money's value, on the other hand, is based on the material it was
manufactured with, such as gold or silver. Fiat money, therefore, does not
have intrinsic value, while commodity money often does.
Commodity money is money whose value comes from a commodity of
which it is made. Commodity money consists of objects having value or use
in themselves (intrinsic value) as well as their value in buying goods. This is
in contrast to representative money, which has little or no intrinsic value but
represents something of value, and fiat money, which has value only because
it has been established as money by government regulation. Examples of
commodities that have been used as media of exchange include gold,
silver, copper, salt, peppercorns, tea, decorated belts, shells, alcohol,
cigarettes, silk, candy, nails, cocoa beans, cowries and barley.
Importance of checks - Use of checks in payment or settlement of a specific
transaction is a convenient way. A major innovation in the payment system.
Checks are promises to pay on demand money deposited with a bank or other
financial institutions. Settling transactions with checks require more steps
than settling transactions with currency. There are information costs in using
checks – the time and effort required by the seller to verify whether the issuer
has sufficient amount of money the checking account.
BSP supervises the payment system and had come up with desirable outcomes
for a payment system: Security; Efficiency; Speed; Smooth international
transaction and Effective collaboration among participants in the system.
Among other payment system that are currently in use of technologies are:
1.Debit cards
2.Credit Cards
3.Proximity mobile payments
4.Automated Clearing House (ACH)
5.Automated Teller Machine.
LESSON 3: FINANCIAL INSTRUMENTS – A financial instrument is
any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity. Financial instruments include
primary instruments and derivative financial instruments. Financial asset
includes cash, equity instrument, receivables.
a. Financial Assets that are considered financial instruments.
1.Cash on Hand and in Banks: Petty Cash Fund, Demand, savings and
time deposits; Undeposited checks; Foreign currencies; Money
orders; Bank drafts
2.Accounts, notes and loans receivable and investment in bonds and other
debt instrument issued by other entities
3.Interest in shares or other equity instruments issued by other entities:
Stock Certificates; Publicly listed securities
4.Derivative Financial Assets: Future Contracts; Forward; Call
options; Foreign Currency Futures; Interest Rate Swaps
b. Financial Liabilities – a) A contractual obligation; b) A contract that will
or may be settled in the entity’s own equity instruments.
Examples:
1.Accounts and notes payable, loans from other entities and
bonds and other debt Instruments issued by the entity.
2.Derivative financial liabilities
3.Obligations to deliver own shares worth a fixed amount of cash.
 4.Some derivative on own equity instruments. Financial System consist of a variety of institutions, markets and instruments
c. Equity Instruments – is any contract that evidence a residual interest in related in a systematic manner and provide the principal means by which
the assets of an entity after deducting all of its liabilities. savings are transformed into investment, this is according to Prasanna
Examples are: Chandra. A system that allows the transfer of money between savers and
1. Ordinary Share 2. Preference Share 3. Warrants borrowers.
or written call option
The financial system plays a critical role in the economy. It enables the
d. Derivative Financial Instruments – that “derive” their value on financial intermediation process which facilitates the flow of funds between
contractually required cash flows from other security or index. savers and borrowers, thus ensuring that financial resources are allocated
Examples are: efficiently towards promoting economic growth and development.
1) Future Contract 3. Call Option 5. Interest
Rate Swaps
2) Forward Contracts 4. Foreign Currency Futures
A FINANCIAL INSTRUMENT could be any document that represents an
asset to one party and liability to another. It can be a contract or a document
like a bond, share, bill of exchange, futures or options contract, cheque,
currency swaps, draft, or more.

Types of Financial Instruments

1. Derivatives (indexes, shares, etc.)

2. Cash (bonds, cheques, etc.)
3. Asset Class
 Debt Based (Short & Long)
 Equity-Based
 FOREX
Why "so many" Financial Instruments? All the instruments serve different
purposes. Hence, the investors according to their requirement prefer the
instruments.
MODULE #2
Financial System - It is a system that makes or channels funds from people
who save to people who have productive investment opportunities? The
financial system is complex in structure and functions throughout the world.
The financial system is composed of the products and services provided by
financial institutions which includes banks, insurance companies, pension
funds, organized exchanges, and the many other companies that serve to
facilitate economic transactions. Virtually all economic transactions are
The financial system plays a vital role in the economic development of a
country. It encourages both savings and investment and also creates links
between savers and investors and also facilitates the expansion of financial
markets and aids financial deepening and broadening.
Hence, a major objective of a financial system is to institutionalize and
standardize many common financial transactions, such as the buying and
selling of stocks, and to provide common financial instruments with similar
characteristics, such as options and futures.
effected by one or more of these financial institutions. They create financial
instruments, such as stocks and bonds, pay interest on deposits, lend money
to creditworthy borrowers, and create and maintain the payment systems of
modern economies.
 Three key services (functions) that the financial systems provide:

a) Risk sharing- Here are a few examples of how you regularly share risk:
Auto, home, or life insurance, shares risk with other people who do the same.
Taxes share risk with others so that all can enjoy police, fire, and military
protection. Retirement funds and Social Security share risk by spreading out
investments.

b) Liquidity - Liquidity risk is the risk that a business will have insufficient
funds to meet its financial commitments in a timely manner. The two key
elements of liquidity risk are short-term cash flow risk and long-term funding
risk.

c) Information – other function of financial system is the collection of data or

These financial products and services are based on the following fundamental
objectives of any modern financial system:
 to provide a payment system
 to give money time value,
 to offer products and services to reduce financial risk or to compensate
risk-taking for desirable objectives,
 to collect and disperse information that allows the most efficient
allocation of economic resources,
 to create and maintain financial markets that provide prices,
which indicates how well investments are performing, which also
determines the subsequent allocation of resources, and to maintain
economic stability.
information of borrowers as well lenders. Sometimes Asymmetric
Information occurs thus, adverse selection and moral hazard exists.
Philippine Financial System – the basic function of the financial system is
the moving of funds from those who has surplus to those who have shortage.
Structure of the Philippine Financial System
Bangko Sentral Ng Pilipinas – principal regulatory agency which regulate
all depository institutions. The BSP examines the book of commercial banks
that are members of the system, sets reserve requirements for all banks. Other
regulatory agencies are; Securities and Exchange Commission (SEC),
Insurance Commission (IC) and Philippine Deposit Insurance Companies
(PDIC).
 Banking Institutions

Key Components of Financial System A. Private Banking Institutions:

1. Universal Bank (UB) or Expanded Commercial Bank (EKB)
a. Financial Instruments 2. Commercial Bank or Domestic Bank (KB)
b. Financial Markets and Financial 3. Thrift Banks (TB)
Institutions a. Stock Savings and Mortgage Bank (SSMB)
c. The Central Bank and Other Financial b. Private Development Bank (PDB)
Regulators
c. Stock Savings and Loan Association (SLA)
4. Rural Bank (RB)
5. Cooperative Bank

B. Government Banks or Specialized Government Banking Institutions
1. Development Bank of the Philippines (DBP)
2. Land Bank of the Philippines (LBP)
3. Al-Amanah Islamic Investment Bank
 Non-Bank Financial Institutions
A. Private non-bank financial Institutions
1. Investment houses 6. Mutual Funds
2. Investment banks 7. Pawnshops
3. Financing companies 8. Lending investors
4. Securities dealers/brokers 9. Pension funds
5. Savings and loans association 10. Insurance companies
B. Government Non-bank financial institutions
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Pag-ibig
Philippine Financial System continue to evolve, and shows sign of growth in
the domestic market. The Philippine banking system consistently posting
double-digit asset growth since January 2016. While total asset of the
insurance industry more than doubled from 2008 to 2016 and the securities
market has also exhibited growth. Through the continues effort of monitoring
and controls of the regulatory bodies the above goals were achieved.
Regulatory Landscape:
A. Alignment with global standards – BSP released several circulars
governing the issuance of bonds and liberalizing the foreign exchange (FX)
regulatory framework. The Insurance Commission adopts the implementation
of the Philippine Financial Reporting Standards in congruence with the
Financial Reporting Standards Council. The SEC approved amendments to
Securities Regulation Code and Corporation Code, supporting the bills on
regulating Collective Investment schemes to enhance local regulations and
conform to international best practices. PDIC has entered into a cross- border
partnership by way of a Memorandum of Understanding with eight deposit
insurance agencies from Asia, the UK and the US.
B. Deepening capital markets – Several financial products have been
introduced aimed to provide alternative options for raising funds or for
investing money. Includes: 1) dollar-denominated securities, 2) exchange
traded funds, 3) green bonds, 4) Personal Equity and Retirement Account, 5)
PHP government fund forward, 6) public-private shares, and 7) real estate
11. Credit trust.
investment union
C. Strengthening surveillance - PHL is Now a BIS-Reporting Country,
01.15.2018 The Philippines will join an elite group of less than 50
jurisdictions worldwide which report cross-border banking statistics to the
Bank for International Settlements (BIS) as part of the global database.
Financial Stability Assessment of the Philippine Financial System – (study
the report on this by the PDIC, SEC, Dept. of Finance, Insurance Commission
and BSP. Provide a summary of your understanding with the given report…
you may access the given link below:
Current risks in the Philippine financial System
A. Repricing, refinancing and repayments risks (3rs)
B. Developments in the credit market
C. Continuous demand for credit by corporate enterprises and
households is evident in the domestic
MODULE #3
• Financial Markets are the meeting place for people, corporations and
institutions that either need money or have money to lend or invest. In a broad
context, the financial market exists as a vat global network of individuals and
financial institutions that may be lenders, borrowers or owners of public
companies worldwide. (Elenita Cabrera, Financial Market and Institutions,
2020 edition)
- Stock markets are places where individual investors and corporations
can trade currencies, invest in companies, and arrange loans. Without global
financial markets, governments would not be able to borrow money,
companies would not have access to the capital they need to expand and
individuals and investors would not be to buy and sell foreign currencies.
 Functions of Financial Market – The basic function of financial
markets (bond and stock markets) and financial intermediaries (banks,
insurance companies) is getting people together by moving funds from
those who have a surplus of funds to those who have a shortage of
funds. A healthy economy requires a well-functioning financial
markets and intermediaries.
The chart below schematically shows the function that financial market
performs:
Activities of financial market:
A. Raising Capital - corporations/ firms needs funds to expand its business,
thus they can achieve this through issuance of shares and bonds
B. Commercial transactions. Financial Market facilitates commercial
transactions including arranging payment for sale of products abroad
and providing working capital to supplement operating expenditure.
C. Price setting. The market determines the price or values of different
items based upon at which an individual’s willingness to buy or sell.
D. Asset Valuation. A firms’ asset or property prices are best determined
by the market.
E. Arbitrage. The simultaneous buying and selling of securities, currency,
or commodities in different markets or in derivative forms in order to
take advantage of differing prices for the same asset.
F. Investing. Stock, bond and money markets provide opportunity to earn a
return on funds that are not needed immediately, and to accumulate
income generating assets in the future.
G. Risk Management. Derivative contracts provide protection against many
types of risk, such as changes in foreign currency against local currency
might result to losses.
Structure of Financial Markets – when we say structure, we are referring to
what composed of financial market of what is it in a financial market. There are
different financial markets in a developed economy each dealing with a different
type of security serving a different set of customers, or operating in a different
part of the economy.
 Debt and Equity markets – an entity or an individual may
obtain fund in the said ways. The following were retrieved
from…
1. Debt market- The debt market, or bond market, is the arena in which
investment in loans are bought and sold. There is no single physical exchange
for bonds. Transactions are mostly made between brokers or large institutions,
or by individual investors. Iinvestments in debt securities typically involve less
risk than equity investments and offer a lower potential return on investment.
Debt investments by nature fluctuate less in price than stocks. Even if a
company is liquidated, bondholders are the first to be paid. Bonds are the most
common form of debt investment. These are issued by corporations or by the
government to raise capital for their operations and generally carry a fixed
interest rate.
2. Equity market - Equity, or stock, represents a share of ownership of a
company. The owner of an equity stake may profit from dividends. Dividends
are the percentage of company profits returned to shareholders. The equity
holder may also profit from the sale of the stock if the market price should
increase in the marketplace. The owner of an equity stake can also lose money.
In the case of bankruptcy, they may lose the entire stake. The equity market is
volatile by nature. Shares of equity can experience substantial price swings,
sometimes having little to do with the stability and good name of the
corporation that issued them.
 Primary and Secondary Market – debt and equity securities are
marketed both in primary and secondary markets.
1. Primary market is where securities are created. It's in this
market that firms sell (float) new stocks and bonds to the public for
the first time. An initial public offering, or IPO, is an example of a
primary market. These trades provide an opportunity for investors to
 buy securities from the bank that did the initial underwriting for a
particular stock. An IPO occurs when a private company issues stock
to the public for the first time. For example, company ABCWXYZ
Inc. hires five underwriting firms to determine the financial details of
its IPO. The underwriters’ detail that the issue price of the stock will
be $15. Investors can then buy the IPO at this price directly from the
issuing company.
The important thing to understand about the primary market is that
securities are purchased directly from an issuer.
2. Secondary Market For buying equities, the secondary market is
commonly referred to as the "stock market." This includes the New
York Stock Exchange (NYSE), Nasdaq, and all major exchanges
around the world. The defining characteristic of the secondary
market is that investors trade among themselves. That is, in the
secondary market, investors trade previously issued securities
without the issuing companies' involvement. For example, if you go
to buy Amazon (AMZN) stock, you are dealing only with another
investor who owns shares in Amazon. Amazon is not directly
involved with the transaction.
Remember: a) The primary market is where securities are created,
while the secondary market is where those securities are traded by
investors.
b) In the primary market, companies sell new stocks
and bonds to the public for the first time, such as with an initial
public offering (IPO).
c) The secondary market is basically the stock
market and refers to the New York Stock Exchange, the
Nasdaq, and other exchanges worldwide.
Two broad segments of the Stock Markets:
1. Organized Stock Exchange. – stock exchanges will have a physical
location where stocks buying and selling transactions take place in the stock
exchange floor. (PSE. NYSE, …
Stock Exchange – is an organized secondary market whose securities like
shares, debentures of public companies, government securities and bonds
issued by municipalities, public corporations, utility undertakings, port trusts
and such other local authorities are purchased and sold. Stocks that trade in an
organized exchange are said to be listed on the stock exchange. To be listed,
firms must meet certain minimum criteria concerning their number of
shareholders and asset size
2. Over-the-Counter (OTC) Exchange – Where shares, bonds and
money market instruments are traded using a system of computer screens and
telephones. Manny common stocks are traded over the counter although the
majority of the largest corporations have their shares traded at organized stock
exchange. OTC requires a brokerage firm to match a prospective buyer and a
prospective seller at a price acceptable to both.
Two important functions of Secondary market:
1. They make it easier to sell these financial instruments to raise cash, that
is they make financial instruments more liquid.
2. They determine the price of the security that the issuing firm sells in the
primary market.
Attributes that Investors and creditors are looking for in a financial market:
A. Liquidity
B. Reliability
C. Investors protections and regulations
D. Transparency
E. Adequate legal procedures
F. Low transaction costs
Change in trading in the markets are brought about by certain forces:
a. Technology d. Consolidation
b. Deregulation e. glocalization.
c. Liberalizatio
 Money Markets and Capital Markets
 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.
 Money market instruments are securities that provide businesses,
banks, and the government with large amounts of low-cost capital
for a short time. The period is overnight, a few days, weeks, or even
months, but always less than a year.
 Types of Money – Market Instruments:
1. Commercial paper – a short-term debt obligation of a private-sector firm
or a government- sponsored corporation. For a company to be able to issue
commercial paper, it needs to have the highest credit rating. Investors purchase
CP based on the credit ratings of the company. This is because the understanding
is that the company will buy the paper back, with interest, by the maturity date.
Only companies that have the highest credit ratings will be able to do this.
A company will only have access to the commercial paper market and have
investors who are willing to buy its paper if its excellent credit rating is
maintained. If the credit rating of the issuing company is downgraded the
interest rate for its paper will increase and the company may no longer be able to
issue commercial paper.
2. Banker’s Acceptance - A banker's acceptance is a financial instrument that
most commonly occurs in international trade transactions. It provides a bridge
between an importer and an exporter when they do not have an established
relationship. A banker's acceptance can be used by an importer to finance his
purchases or can be created through a letter of credit transaction.
3. Treasury Bills - The treasury bills or T-bills are a way for the government to
borrow money in the short term. Just like bonds, they are debt instruments that
allow the public to lend their money to the state. They’re called with that name
because they’re issued by the Bureau of the Treasury. The Philippine
government issues them to raise funds. These funds are used in many different
purposes. They may be allocated to pay for the ballooning national debts or
sustain social services such as education, healthcare, agriculture, and anti-
poverty efforts. The money that’s collected may also be used towards
construction of roads, bridges, and other infrastructure projects or it might be
used to fund law enforcement and national defense.
These bills are sold on a discount. Meaning, they are not sold on their face
amount. Instead, they’re sold less than its price. A M1,000 treasury bill may be
sold for M990. The investor earns with the spread, which is just another name
for the difference between the face amount and the price paid. In this case, you
get M10 or 1% in exchange return for letting the government borrow your
money.
4. Government-agency notes – National government agencies and
government- sponsored corporations are heavy borrowers in the money markets
in many countries, These include entities such as development banks, housing
finance corporations, education lending agencies and agricultural finance
agencies. (Cabrera, Financial Market, 2020 ed)
5. Local Government notes – Local government notes are issued by, provincial
or local governments, and by agencies of these governments such as schools’
authorities and transport commissions. (Cabrera, Financial Market, 2020 ed)
6. Interbank loans – Loans extended from one bank to another with which it
has no affiliation are called interbank loans. Many of these loans are across
international boundaries and are used by the borrowing institutions to re-lend to
its own customers.
7. Time deposits - A certificate of deposit (CD) is a product offered by banks
and credit unions that provides an interest rate premium in exchange for the
customer agreeing to leave a lump-sum deposit untouched for a predetermined
period of time. Almost all consumer financial institutions offer them, although
it’s up to each bank which CD terms it wants to offer, how much higher the rate
will be compared to the bank’s savings and money market products, and what
penalties it applies for early withdrawal.
8. Repos – Repurchase Agreement or repos is a combination of two transactions.
In the first, securities dealer, such as a bank, sells securities it owns to an
investor, agreeing to repurchase the securities at a specified higher price at a
future date. In the second transaction, days or months later, the repo is unwound
as the dealer buys back the securities from the investor.
 Capital Market - Capital market is a market where buyers and
sellers engage in trade of financial securities like bonds, stocks, etc.
The buying/selling is undertaken by participants such as individuals
and institutions.
Description: Capital markets help channelize surplus funds from savers to
institutions which then invest them into productive use. Generally, this market
trades mostly in long-term securities. Capital market consists of primary
markets and secondary markets. Primary markets deal with trade of new issues
of stocks and other securities, whereas secondary market deals with the exchange
of existing or previously- issued securities. Another important division in the
capital market is made on the basis of the nature of security traded, i.e. stock
market and bond market.
a.) National and local government one of the two primary
issuers of capital market securities. Long-term notes and bonds are
issued by the national government to fund the national debt. Notes
and bonds are issued by the local governments to finance capital
projects.
b.) To finance its capital investment expenditures and find
other investment opportunities Corporations issue bonds
and stocks, the latter being another primary issuer of capital
market security.
Capital Market Trading - occurs in either the primary
market or the secondary market. (look on discussion on
Primary and Secondary market under Equity Market)
Trading on different type of securities:
A. BONDS - A bond is a fixed income instrument that
represents a loan made by an investor to a borrower
(typically corporate or governmental). A bond could
be thought of as an I.O.U. between the lender and
borrower that includes the details of the loan and its
payments. Bonds are used by companies, municipalities,
states, and sovereign governments to finance projects and
operations. Owners of bonds are debtholders, or creditors,
of the issuer. Bond details include the end date when the
principal of the loan is due to be paid to the bond owner
and usually includes the terms for variable or fixed
interest payments made by the borrower.
Trading of corporate bond. The initial or primary sale of
corporate bond issues occurs either through a public
offering, using an investment bank serving as a security
underwriter or through a private placement to a small group
of investors.
Bond Features and Prices- terminologies associated with
bond:
Par value – face value of the bond that is returned to the
bondholder at maturity.
Coupon Interest Rate- The percentage of the par value of
the bond that will be paid out. annually in the forms of
interest.
Maturity- the length of time until the bond issuer returns
the par value to the bondholder and terminates the bonds.
Indenture – the agreement between the firm issuing the
bonds and the bond trustee who represents the bondholders.
It provides the specific terms of the loan agreement,
including the description of the bonds, the rights of the
bondholders, the right of the issuing firm and the
responsibilities of the trustees.
Current yield – refers to the ration of the annual interest
payment to the bond’s market price.
Yield to maturity – refers to the bond’s internal rate of
return. It is the discount rate that equates the present value
of the interest and principal payments with the current
market price of the bond.
Credit Quality Risk – the chance that the bond issuer will
not be able to make timely payments.
Bond Ratings – involve a judgement about the future risk
potential of the bond provided by rating agencies such as
Moody’s Standard and Poor’s and Fitch IBCA, Inc.,
Dominion Bond Rating Services. These are bond ratings are
affected by:
a. a low utilization of financial leverage
b. profitable operations
c. a low variability of past earnings
d. large firm size
e. little use of subordinated debt.
Credit Ratings - Bond ratings are important, these
provide an indicator of default risk that in turn affect the
rate of return that must be paid on borrowed funds.
Investment Grades: AAA, AA, A, BBB while Below
Investment Grades are BB, B, CCC, CC, C, D
Types of Bonds:
A. Unsecured Long -Term Bonds –Includes: Debentures,
Subordinated Debentures, and Income Bonds
B. Secured Long-Term Bonds – Mortgage Bonds which
also be subclassified as: First Mortgage Bonds, Second
Mortgage Bond, Blanket or General Mortgage Bonds, Close
– end Mortgage Bonds, Open-end Mortgage Bonds and
 Limited Open-end Mortgage Bonds. issued. If the company enters bankruptcy, preferred stockholders are
entitled to be paid from company assets before common stockholders.
Other Types of Bonds: Preference shares, more commonly referred to as preferred stock, are
1. Floating Rate or Variable Rate Bonds shares of a company’s stock with dividends that are paid out to
2. Eurobonds shareholders before common stock dividends are issued. If the
3. Junk or Low-Rated Bonds company enters bankruptcy, preferred stockholders are entitled to be
4. Treasury Bonds paid from company assets before common stockholders. Most
preference shares have a fixed dividend, while common stocks
generally do not. Preferred stock shareholders also typically do not
hold any voting rights, but common shareholders
 Par value
 Dividends
B. ORDINARY (COMMON) EQUITY SHARES  Cumulative and Noncumulative dividends
- Are shares in a company that are owned by people who  No definite maturity dates
have a right to vote at the company's meetings and to  Convertible preferred shares
receive part of the company's profits after the holders of  Voting rights (special voting procedure)
preference shares have been paid. Features of Ordinary  Participating features
Equity Shares:  Protective features
 Par value/No par value  Call provisions
 Authorized, issued and outstanding  Maturity
 No maturity
 Voting rights = Majority or Cumulative
 Book value per share
 Numerous rights of shareholders: right to
vote on specific issues as prescribed by the
corporate charter, right to receive dividends,
right to share in the residual assets in the
vent of liquidation, right to transfer their
ownership in the firm to another party, right
to examine corporate books and right to
share proportionally in the purchase of new
issuance of equity
shares. (pre-emptive right)
C. PREFERRED SHARE - more commonly referred to as
3

preferred stock, are shares of a company's stock with dividends that

are paid out to shareholders before common stock dividends are