FIN 0013-4
Module 1: An Overview of the Financial System
• Financial Systems
Financial Institutions- any type of business that’s
involved in financial transactions.
Financial Markets - a place, where creation & trading of
financial assets, such as shares, bonds, derivatives,
currencies, etc. take place. (Forex, Bond, & stock
markets)
Financial Intermediaries - Institutions that borrow funds
from people who have saved & then make loans to others.
(Banks, insurance companies, & mutual & pension
funds.)
Financial Instrument - a contract for trading a financial
asset. (Check, certificates of deposit, stock trades &
contracts. (securities))
Institutions, businesses, systems & regulations working
together are called the Financial System.
• Financial System Participants: Why it needs
to be Regulated
It allows transfer of funds from people or business
without business opportunities to one who has them.
It is a complex, interrelated arrangement of financial
institutions & markets.
Private financial institutions (banks, insurance
companies, mutual funds, etc.) – driven by financial
motives.
Government regulatory agencies – (PDIC, PCHC,
SEC) which overlook these institutions – makes sure that
trading is fair & equitable.
The Central Bank - which decides the monetary policy
& thereby impacts all institutions in the financial market.
• Function of Financial System
1. Allows transfers of funds from person or
business without investment opportunities to one
who has them.
2. Improves Economic Efficiencies
• The Philippine Financial System
“The Philippine Financial System is composed of
banking institutions & nonbank financial intermediaries,
including universal & commercial banks, specialized
government banks, thrift banks & rural banks. It is also
composed of offshore banking units, building & loan
associations, investment & brokerage houses & finance
companies. The Bangko Sentral ng Pilipinas & the
Securities & Exchange Commission maintains the
regulatory & supervisory control.”
It is primarily bank-based rather than capital market-
based.
- Banks are the main source of credit in the
economy.
o 1754 - 1820 - The 1st credit institution in the
Philippines, “The Obras Pias” was started by Fr.
Juan Fernandez de Leon.
o August 1, 1851 - the 1st Philippine Bank was
established, the “Banco Espanol-Filipino de
Isabela II,” named after the mother of then
Spanish King Alfonso XII. It began operations in
1852 & was given the honour of being the 1st to
issue paper money.
o 1906 - “First Agricultural Bank of the
Philippines”
o July 22, 1916 - The Philippine National Bank
(PNB) was created. It is the country’s 1st
universal bank, & functioned as the de facto
Central Bank of the Philippines until 1942.
o 1946 - the Rehabilitation Finance Corporation
was formed. Its primary purpose was to provide
credit facilities for the rehabilitation &
development & expansion of agriculture, &
industry, the reconstruction of property damaged
by the war. This later becomes the “Development
Bank of the Philippines”.
o June 1948 - Pres. Elpidio Quirino signed the RA
No. 265, or the Central Bank Act of 1948.
o January 3, 1949 - the Central Bank of the
Philippines was formally inaugurated with
Miguel Cuaderno, Sr. as the 1st governor.
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o August 8, 1963 - Land Bank of the Philippines
was established. (Agri. Land Reform Code, or
RA No. 3844)
o 1973 - The Philippine Amanah Bank was
established by Pres. Ferdinand Marcos under PD
No. 264 with an initial capital of 100M. It was
sold to DBP on 2008.
o 1980 - The World Bank & the IMF passed
measures that allows banks with a net worth of at
least P500 million could engage in expanded
commercial banking, or “unibanking”
o 1984-85 - the PNB & DBP, became insolvent &
a number of financial institutions failed,
including the 3 largest investment houses, 3
commercial banks, & more than 1,000 rural
banks. (Aquino assassination)
o 1991 – A WB memorandum noted that the extent
of bank profits indicated a “lack of competition”
& a “market structure for financial services
characterized by oligopoly.
o 1997 – Asian Financial Crises.
o 2008 – Global Financial Crises
• Overview of Financial Markets
markets in which funds are transferred from people who
have surplus of available funds to people who have
shortage of available funds.
• a place, where creation & trading of financial
assets, such as stocks, bonds, derivatives,
currencies, etc. take place.
• Structure and Components of Financial
Markets
Financial Markets
facilitates the
smooth operation of
capitalist economies
by allocating
resources &
creating liquidity
for businesses &
entrepreneurs.
• Components of Financial Markets: Nature of
Claim - Debt & Equities
Debt – by borrowing. The borrower would be issued a
debt instrument, (bond or a mortgage)
• Bond - a contractual agreement by the borrower
to pay the holder of the instrument fixed amounts
at regular intervals (interest & principal
payments) until a specified date (the maturity
date), when a final payment is made.
Equities (stocks/ownership) - claims to share in the net
income (inc. after exp. & taxes) & the assets of a business.
Equities often make periodic payments (dividends) to
their holders & are considered long-term securities
• Components of Financial Markets: Maturity
of Claim – Money & Capital Markets
Money Markets – trade in products with highly liquid
short-term maturities (less than 1 year). Less risk but low
return in interest. Eg. Mutual funds, T - bills.
Capital Market – longer term debt (1 year or greater) &
equity instruments are traded. Eg. mortgages, stocks &
long-term bonds.
• Primary market - where securities are initially
issued, such as a bond or a stock, are sold to initial
buyers by the corporation or gov’t agency.
(Initial Public Offering)
• Secondary market - where securities that have
been previously issued can be resold. (NYSE,
PSE)
• Components of Financial Markets: Timing of
Delivery – Cash & Future Markets
Cash Market – the commodities or securities purchased
are paid for & received at the point of sale. A.k.a. as spot
markets because transactions are settled on the spot. (e.g.
PSE – stocks, forex).
Futures Market – buyers pay for the right to receive a
good at a specified date in the future. It sometimes utilizes
clearing houses to settle & confirm trades. (Barrel of oil,
commodities)
• Components of Financial Markets: Org.
Structure – Exchange Traded & OTC
Exchange Traded Market - buyers & sellers of
securities (or their agents or brokers) meet in one central
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location to conduct trades. Organized exchanges. e.g.,

stocks, bonds
Over the Counter Markets – a decentralized market – it
doesn’t have a physical location. Dealers buy & sell
securities buy & sell securities without a broker.
“Directly between 2 parties.” e.g. Forex, Commodities &
agricultural products.

• Philippines
Money Market – savings, demand deposit, T-bills (G),
Commercial Paper (C).
Capital Market – Government Securities; Bonds (Debt)
& Stocks (Equity).
Forex Market - marketplace for exchanging national
currencies.
Derivatives Market - a financial contract between 2
parties for buying or selling a property, assets,
commodity, or other security at a predetermined price
within a specific time period.
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Module 2: Economics & the Financial System
(Economic Theories)
• Economic
Macroeconomics – it deals with the human behavior &
choices as they relate to an entire economy.
• Macro. It studies the performance, structure,
behavior & decision-making of the entire
economy, be that a national, regional, or the
global economy. Aggregate indicators including
inflation, employment, & national income.
• Inflation
A condition of continually rising price level of goods &
services in an economy over a period of time.
When the price level rises, each unit of currency buys
fewer goods & services.
• Theories of Inflation: MONETARISM
Milton Friedman (1912-2006) – Monetarism “Inflation
(π) is always & everywhere a monetary phenomenon.”
They consider fiscal policy, or government spending &
taxation as ineffective in controlling inflation because the
primary driver in the price level is the quantity of money.
Whenever a country’s inflation rate is extremely high for
a sustained period of time, its rate of money supply
growth is also extremely high.
Examples:
• German Hyperinflation 1921-1923
• Zimbabwe Hyperinflation 2008-2009
Why Printing Money cause Inflation?
If the money supply is increased, but the output stays the
same, everything will just become more expensive.
• Theories of Inflation – Keynesian
Keynesian View - John Maynard Keynes - economists
argue inflation results from economic pressures such as
the increased cost of production & look to government
intervention as a solution.
Also known as the demand-side theory, it is built on the
idea that economic growth is stimulated through demand.
• Keynes showed that government spending (fiscal
policy) —would stimulate the economy when
businesses & individuals were tightening
budgets.
Cost-push inflation - results from general increases in
the costs of the factors of production. (capital, land,
labour, & entrepreneurship) —are the necessary inputs
required to produce goods & services. When the cost of
these factors rise, producers wishing to retain their profit
margins must increase the price of their goods & services.
Demand-pull inflation - results from an excess of
aggregate demand relative to aggregate supply. The
theory in demand-pull inflation is if aggregate demand
exceeds aggregate supply, prices will increase economy-
wide.
• Fiscal Policy (F3P638)
- is a means by which a government adjust its
spending levels & tax rates to monitor & influence a
nation’s economy.
- Can Fiscal Policy by Itself produce Inflation?
(SAP, ayuda) No.
• Theory of Inflation – Supply Side
Supply Side Economics - an economic concept whereby
increasing the supply of goods lead to economic growth.
It is used by governments as a premise for targeting
variables that bolster an economy's ability to supply more
goods.
Privatization, Corporate Income Tax cuts, Deregulation,
Removing regulations/red-tape, Free trade agreements,
vocational training
• Unemployment
The state of not having a job.
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- A terrible & a life wrenching experience.
- Financial Stress, painful adjustments.
The human costs of unemployment would justify making
a low level of unemployment an important public policy
priority.
- An economic resource is going unused.
• Unemployment Rate & The Financial Market
The GDP of an economy can be measured either by the
total peso value of what is purchased in the economy, or
by the total peso value of what is produced.
GNP – the total market value of all final goods & services
provided annually by the citizens of a country, whether
physically in that country or not.
- Gawa Dito Pinas
- Gawa Natin Pinoy

The money that people make from their jobs is the key
source of primary income for the majority of workers.
So, if the unemployment rate is higher, the general income
(& therefore, cash to spend) will be limited. With less
cash, people spend less money, & there’s less of a
demand for products.
Less Demand for products means a decline in stock
prices.
• Gross Domestic Product and Financial Market
Having a greater equity shows a sector or business is
doing well. When most businesses present increased
profit & downturn in liabilities, the country’s GDP will
expect a significant growth, indicating that its economy is
in great condition & that business is good within its
sectors. In effect, investors gain confidence in companies,
so they trust in the financial market more.

• Interest Rate
It is the cost of borrowing, or the price paid for the rental
of funds.
E.g. mortgage interest rates, car loan rates, &
interest rates on many different types of bonds.
Interest rates are among the most closely watched
variables in the economy. Its movements are reported
almost daily by the news media because they directly
affect our everyday lives & have important consequences
for the health of the economy.
How Do Interest Rates Affect the Financial Market?
Any impact on the stock market to a change in the interest
rate changes is generally experienced immediately, while
it may take about a year for the rest of the economy.
- Higher interest rates tend to negatively affect
earnings & stock prices (with the exception of the
financial sector - benefit the most when interest
rates move higher.)
- Low interest rates stimulate the economy. It is
seen as a benefit to personal & corporate
borrowing leading to greater profits & robust
economy.
• Gross Domestic Product
GDP is the value of all final goods & services produced
within a country in a given year.
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Module 3: The Time Value of Money Future value of a

single cash flow
Time Value of Money
refers to how much a
Time Value of Money (TVM) is a fundamental financial
single cash flow
concept, stating that the current value of money is higher
today would grow to
than its future value, given its potential to earn in the years
over a period of time
to come. Thus, it suggests that a sum of money in hand is
if put in an investment that pays compound interest.
greater in value than the same sum of money received in
the next couple of years. Timeline- An important tool used in time value analysis;
it is a graphical representation used to show the timing of
cash flows.
Annuity -A series of equal payments at fixed intervals for
a specified number of periods.
Ordinary (Deferred) Annuity - An annuity whose
payments occur at the end of each period.
Annuity Due - An annuity whose payments occur at the
beginning of each period.
Why money has time value? Uneven & Irregular Cash Flows - A series of cash flows
1. Uncertain Failure - One can control their spending, but where the amount varies from one period to the next. In
he has no control over his income or the inflows. A risk order to get an accurate picture of a business, we need to
factor is always attached to the inflows. calculate the present value of uneven cash flows. PV
calculation will even out this variation and timing of the
2. Inflation - Money has a time value because of its cash flows.
purchasing power changes over time.
The idea of present value
3. Attached Interest Factor - Where a certain amount is holds that a sum of money
received and paid at the later date, the values are different. is valued higher today than
it will be tomorrow. This
Cash Flow is the increase or decrease in the amount of
thought process is valid
money a business, institution, or individual has. In
since investments made
finance, the term is used to describe the amount of cash
now might presumably
(currency) that is generated or consumed in a given time
develop to be worth more
period.
later.
Single Cash Flow deals only with a Single amount;
Future value is the
Present amount (P) and its future value worth (F)
amount to which a
Present value of a single cash flow refers to how much cash flow or series of
single a cash flow in the future will be worth today. cash flows will grow
over a given period of
time when
compounded at a
given interest rate.
(Brigham & Houston,
2018)
The interest rate is the amount charged on top of the
principal by a lender to a borrower for the use of assets.
An interest rate also applies to the amount earned at a
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bank or credit union from a deposit account. It is either

the cost of borrowing money or the reward for saving it.
- High-interest rates make loans more expensive.
When interest rates are high, fewer
people and businesses can afford to borrow. On the other
hand, lower interest rates have the opposite effect on the
economy. Low mortgage rates have the same effect as
lower housing prices, stimulating demand for real estate.
Term-The term structure of interest rates is referred to as
a yield curve when it is graphed, and it is extremely
important in determining the state of an economy
currently.
The term of the structure of interest rates can be in three
primary shapes.
- Upward sloping– long-term yields are higher
than short-term yields. This is considered to be
the "normal" slope of the yield curve and signals
that the economy is in an expansionary mode;
- Downward sloping—short-term yields are
higher than long-term yields. Dubbed as an
"inverted" yield curve and signifies that the
economy is in, or about to enter, a recessive
period
- Flat—very little variation between short and
long-term yields. This signals that the market is
unsure about the future direction of the economy.
It reflects expectations of market participants about future
changes in interest rates and their assessment of monetary
policy conditions.
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Module 4: Capital Budgeting business plan outlining: Amount of money

needed
Capital budgeting is the process of identifying,
evaluating, planning, and financing capital investment 6. Implementation (Post- Audit) - this is done after
projects of an organization. the proposal has been executed. In this stage you
are comparing your actual expenditure base on
In Capital Budgeting we are investing in long-term assets
your planned expenditure.
and because it is a long- term this type of investment
involves high risk and uncertainty.

Capital Budgeting is usually used on the following Types of Projects

decisions:
● Replacement and Acquisition of Long-term
Assets. -Long term assets are either you buy new
or you’re going to replace the old one.
● Improvement of Products
● Expansion of Facilities
● Independent Projects
Your decision in accepting one project is independent of
your decision to accept another project. [ You can accept
all]
● Mutually Exclusive Projects

● Trading or Exchanging Assets It means you can only accept one project.

Capital Budgeting Process Time Value of Money

1. Identification and definition - identify if the ● Present Value of 1(PV of 1)

project is necessary.
-used when it deals with UNEVEN ANNUAL
2. Search for potential projects- Projects must be
CASHFLOW, OR LUMP SUM
understood as investments and managed for the
purpose of obtaining a future benefit. ● Present Value of Ordinary Annuity of 1 (PV of
OA of 1)
3. Information gathering- Both qualitative and
quantitative. -used when it deals with EVEN ANNUAL
4. Selection-choosing the investment projects after CASHFLOW.
evaluating their projected cost and benefits.
Elements of Capital Budgeting
Screening- the process of evaluating new product
ideas early in the development process to ensure ● Net Investment
that they meet business objectives and customer
Net investment represents the initial cash outlay that is
expectations.
required to obtain fresh returns, or the net cash outflows
As much as possible the benefits should to support a capital project.
outweigh the cost.

Capital Budgeting committee- the one who

screens the projects.

Board of Directors- the one who approves the

projects.

5. Financing- A financing proposal contains the

details on how you intend to achieve your
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• Cash flow or Net returns
These are the expected returns directly attributed
to the investment project.
Cash flows could be OPERATING CASH
FLOWS AFTER TAS OR END OF LIFE CASH
FLOWS.
● Discount Rate
This is the weighted average cost of capital of
long-term funds obtained from different sources.
A.K.A minimum required rate of return or cut-off
or target rate or desired rate of return or hurdle
rate.
Capital Budgeting Techniques
Net Present Value Definition
Net Present Value is a capital budgeting used as a part of
a Cost Benefit Analysis to determine the profitability of
an investment. NPV allows project stakeholders to
determine if future benefits are more or less than the initial
investment.
Net Present
Value Formula
How to Calculate NPV
1. Determine nominal (undiscounted) cash flows.
2. Apply a discount rate to calculate present values.
3. Calculate NPV by summing the discounted cash
flows.
The word “net” in the “net present value” basically
means deducting the investment amount from the present
values of the future cash flows.
Internal Rate of Return Definition
The internal rate of return (IRR) is a metric used in
financial analysis to estimate the profitability of potential
investments. IRR is a discount rate that makes the net
present value (NPV) of all cash flows equal to zero in a
discounted cash flow analysis.
Internal
Rate of
Return
Formula
How to Calculate IRR
1. Determine nominal (undiscounted) cash flows.
2. Set NPV at 0.
3. Calculate the IRR through trial and error.
The higher an internal rate of return, the more desirable
an investment is to undertake. When comparing
investment options with other similar characteristics, the
investment with the highest IRR probably would be
considered the best.
Modified Internal Rate Definition
It is a financial formula used to measure the return of a
project and compare it with other potential projects.
It refers to the financial metric used to precisely assess
the value and profitability of a potential investment or
project.
Formula
Whereas:
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FVCF(c)=the future value of positive cash flows
at the cost of capital for the company
PVCF (fc)=the present value of negative cash
flows at the financing cost of the company
n=number of periods
Advantages & disadvantages
Advantages
● Cash flows are reinvested at the cost of
capital (or some other explicit rate)
● Relatively quicker to calculate and does
not give the multiple answers that can
sometimes arise
● It is a better and improved method for
project evaluation. It takes into
consideration all the possible
reinvestment rates.
Disadvantages
● May lead to poor decision making when
multiple investment options are being
considered.
● Hard to understand for people belonging
from a non-financial background.
● It asks for two additional decisions.
Difference between MIRR and IRR
Payback Period Definition
This is defined as the number of years required to recover
the funds invested in a project from its cash flows. So, this
method simply calculates the length of time in which
investment pays back its original cost.
Formula
Payback Period = Initial Investment / Cash Flow per
Year
Advantages & Disadvantages
Advantages
● Simplicity
● This method is very simple to calculate
and understand
● it can be suitable for projects of small
investments
Disadvantages
● All dollars received in different years are
given the same weight.
● the time value of money is ignored.
● Cash flows beyond the payback year are
given no consideration regardless of how
large they might be.
● There is no necessary relationship
between a given payback and investor
wealth maximization, so we do not know
what an acceptable payback is.
Payback Period Definition
The discounted payback period is the amount of time
that it takes for the initial cost of a project to equal to
discounted value of expected cash flows, or the time it
takes to break even from an investment. It is the period in
which the cumulative net present value of a project equals
zero.
Formula
Discounted Payback Period = Years before full recovered
+ (Unrecovered Amount of the Start of the Period / Cash
Flow During the Period)
Advantages & Disadvantages
Advantage
● It predicts if the company is worthy to
invest– It helps a company to determine
whether to invest in a project or not. If the
discounted payback period of a project is
longer than its useful life,
Disadvantages:
● Complicated to use.
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● It neglects the cash flows--One of the

disadvantages of discounted payback
period analysis is that it ignores the cash
flows after the payback period. Thus, it
cannot tell a corporate manager or
investor how the investment will perform
afterward and how much value it will add
in total.
● Neglects the total of the return of
investment
● The major problem with using this
payback period is that it does not give the
manager the exact information required
to decide on investing in a project. The
business manager has to assume the
interest rate or the cost of capital to
determine the payback period.
Difference between Payback Period & Discounted
Payback Period
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Module 5: Measuring Risk and Rates of Return
Investors in general are averse to risk, so they will not
buy risky assets unless they are compensated with high
expected returns. Risk-averse investors dislike risk and
require higher rates of return as an inducement to buy
riskier securities.
There are two ways of stock’s risk, it is stand-alone or
single-stock, basis or portfolio context.
- Stand-alone risk is risk when an investor would
face if she/he held only one asset. Stand-alone
basis where the asset is considered by itself.
- Stand-alone portfolio basis where the asset is
held as one of a number of assets in a portfolio (is
a collection of investment securities).
Types of Risk
1. Systematic risk is the overall impact of the market. It
is the type of risk that is not under your control and affects
a large number of assets.
2. Unsystematic risk is asset-specific or company-
specific uncertainty. It affects a very small category of
assets that's why it is called "specific risk".
3. Business risk pertains to the risks of a particular
company or a stock. It is also known as "stock specific
risk". Example, all sugar manufacturing companies will
suffer if the sugarcane output is low in a particular year
due to poor rainfall. The risk is the possibility that the
company may go bankrupt, leading to crashing of the
stock price or an issuer of a bond not being able to pay the
promised interest or principal amount.
4. Currency risk arises with the change in the value of
one currency against other currencies. Let's say you
invest, where 1 USD = 59 peso. If the peso falls due to
some reason, then the value of your investment will also
fall.
5. Inflationary risk refers to the risk that your
investments and cash flow will considerably reduce
purchasing power due to inflation. The best way to avoid
inflation risk is to invest in equities that give higher
returns than inflation over the long-term.
6. Liquidity risk refers to the possibility that you may not
be able to sell and raise money from your investments.
Liquidity refers to the readiness to sell an asset. Example,
houses are highly illiquid. The risk with illiquid assets like
real estate or fixed term deposits is that they are not easy
to sell at the desired moment of time.
7. Regulatory/legislative risk is when the lawmakers or
regulators of a country pass new laws or announce
regulations that may hurt your investments or the sector
that you have invested in. Example, if the government
takes out a law to limit the production and usage of non-
renewable energy like thermal energy, it will adversely
affect your investments in the stocks of all coal and
thermal power companies.
Return is the total gain or loss experienced on an
investment over a given period of time.
The expected rate of return is the rate of return expected
to be realized from an investment. Also, it is the weighted
average of the probability distribution of possible results.
"No investment should be undertaken unless the expected
rate of return is high enough to compensate for the
perceived risk."
Importance of Measuring Risks & Rate of Returns
Market risk premium, RPm is the additional return over
the risk-free rate needed to compensate investors for
assuming an average amount of risk. The return
associated with the riskiness of a portfolio that contains
all the investments available in the market.
Formula:
The risk and return analysis aim to help investors find the
best investments. Hence, investors use many methods to
analyze and evaluate the market, industry, and company.
It can reduce the risk and amplify returns.
The correlation between financial risk and return is simple
to comprehend. Selecting a high-risk investment can give
higher profits, while a low-risk investment will minimize
the returns. However, it is necessary to remember that the
high risk can mean potential loss, and there might not be
any revenue at all in some cases.
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This concept is necessary to optimize returns, rather than
just investing randomly. This is because the main
objective of investors is to make profits. Risk and Return
of Investment (ROI) are the two important factors that
affect profits, hence the importance of the concept.
Holding period return (yield) refers to the total return
one receives by holding either an asset or a portfolio of
assets. The period these assets are held is known as the
holding period. A holding period return is the total return
you receive by holding assets over a period of time
referred to as the holding period.
Typically, this return is expressed as a percentage. That
percentage is calculated on the assets or portfolio’s basis
of total returns.
Holding Period Return Formula:
Where:
● Income – the distributions or cash flows from
the investment
● Vn – the ending value of the investment
● V0 – the beginning value of the investment
Arithmetic Mean Holding Period Yield
An arithmetic mean or arithmetic average is the sum
of a series of numbers divided by the count of that series
of numbers. Arithmetic average return is the return on
investment calculated by simply adding the returns for all
sub-periods and then dividing it by total number of
periods. It overstates the true return and is only
appropriate for shorter time periods.
“The arithmetic average return is always higher than the
geometric average return.”
The arithmetic return ignores the compounding effect
and order of returns, and it is misleading when the
investment returns are volatile.
Arithmetic Mean Return Formula:
Where:
● R is the return
during a year or period
● N is the total number of years or periods
Geometric Mean Holding Period Yield
The geometric mean is the average rate of return of a set
of values calculated using the products of the terms.
Geometric mean is most appropriate for series that exhibit
serial correlation—this is especially true for investment
portfolios. Most returns in finance are correlated,
including yields on bonds, stock returns, and market risk
premiums. For volatile numbers, the geometric average
provides a far more accurate measurement of the true
return by taking into account year-over-year
compounding that smooths the average.
Where:
R1…n are the returns of an
asset (or other observations
for averaging).
r = rate of return
n = number of periods
The geometric mean, sometimes referred to as
compounded annual growth rate or time-weighted rate of
return, is the average rate of return of a set of values
calculated using the products of the terms
The main benefit of using the geometric mean is the actual
amounts invested do not need to be known; the calculation
focuses entirely on the return figures themselves and
presents an "apples-to-apples" comparison when looking
at two investment options over more than one time period.
Geometric means will always be slightly smaller than the
arithmetic mean, which is a simple average
Variance
The variance is a measure of
variability. It is calculated by
taking the average of
squared deviations from the
mean. Variance tells you the
degree of spread in your data set. The more spread the
data, the larger the variance is in relation to the mean.
Standard Deviation
Standard deviation is a statistic that measures the
dispersion of a dataset relative to its mean and is
calculated as the square root of the variance. The standard
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deviation is calculated as the square root of variance by

determining each data point's deviation relative to the
mean. In finance, Standard deviation is often used as a
measure of the relative riskiness of an asset.
Standard deviation is a measure of how much an asset's
return varies from its average return over a set period of
time. It is a commonly used gauge of volatility in
securities, funds, and markets. In investing, the standard
deviation is used as an indicator of market volatility and
thus of risk. The wider the range and more unpredictable
the prices are, the greater the risk. In other words,
investments with a larger trading range and a
tendency to spike, reverse suddenly, or gap are
much riskier, which can mean a larger loss.
Formula:

Coefficient of Variance
The coefficient of variation (COV) is the ratio of the
standard deviation of a data set to the expected mean.
Investors use it to determine whether the expected return
of the investment is worth the degree of volatility, or the
downside risk, that it may experience over time.
When you evaluate the CV, you can represent the value
with a percentage, where a lower percentage can indicate
a lower CV and a higher percentage can mean a higher
CV. In financial and investment analysis where volatility
and risk can influence potential returns, a lower CV means
a lower risk-to-return ratio, indicating a better trade-off
between the potential returns and the inherent risk of a
particular investment instrument.
 FIN 0013-4
Module 6: The Philippine Securities Regulations Code
and Other Regulatory Bodies
The Securities & Exchange Commission (SEC)
• The Securities and Exchange Commission is the
agency of the Government of the Philippines charged with
the registration and supervision of corporations and
securities, as well as capital market institutions and
participants, in the Philippines
• Local and foreign investors who plan to establish
corporations’ partnerships, or associations in the
Philippines are required to register their business entities
with the securities and exchange commission (SEC)
HISTORY
• The SEC was established on 26 Oct 1936 by virtue of
the Commonwealth Act No. 83 or the Securities Act
- Its establishment was motivated by the necessity to
protect public interest in light of the local stock market's
growth at the time and it was created just two years after
the United States Congress created the United States
Securities and Exchange Commission.
• Operations began on 11 Nov 1936 under the
leadership of Commissioner Ricardo Nepomuceno.
- The majority of its responsibilities at the time included
the registration of securities, and business practices of
applicants for the issuance of securities, screening of
applications for broker or dealer licenses, and oversight of
stock and bond brokers as well as stock exchanges.
• It was reactivated in 1947 With the restoration of the
Commonwealth Government
• Due to the changes in the business environment
under Pres. Ferdinand Marcos, the agency was
reorganized on 29 Sept 1975 as a collegial body with 3
commissioners
- All corporations, partnerships, or associations
that are the grantees of principal franchises,
licenses, or permits given by the government to
operate in the Philippines are subject to the
Commission's sole authority, supervision, and
control.
• In 1981, the Commission was expanded to include
two (2) additional commissioners and two (2)
departments
- one for prosecution and enforcement and the
other for supervision and monitoring
• Then on 01 December 2000, the SEC was reorganized
as mandated by R. A. 8799 also known as the
Securities Regulation Code
IMPORTANCE
• Mandated to register and oversee corporations as
well as the securities markets
- SEC is a Crucial component of the Philippine
economy and Philippine financial system.
Because this Securities and Exchange
Commission. it supervises more than 600,000
active corporations and evaluates the financial
statements (FS) filed by all corporations
registered with it.
• SEC make sure that entrepreneurs can start their
own businesses and that investors can support the
growth of our industries With that, they make sure
that Filipinos can get decent job and provide for their
families
- Furthermore, SEC keeps expanding its influence
by cooperating with other governments to further
open the capital market to more investors,
empowering Filipinos both domestically and
internationally by providing them with investor
education and providing them with more
investment opportunities.
• INVESTOR PROTECTION is at the core of what sec
does. It releases regular investor alerts and - closure
orders as well pursues individuals and shuts down
entities with abusive practices
- One of its examples is the investor alert.
• The SEC advances corporate governance reforms
through the adoption of corporate governance codes,
sustainability reporting guidelines, rules empowering
minority investors, constant stakeholder engagement
and various other initiatives.
- The honors sec has earned on a global scale attest
to its unwavering dedication to leading important
changes that keep investors and companies
competitive.
 FIN 0013-4

Roles & Functions (RA 8799 Sec. 5) seizure of all documents, papers, files and records, tax
returns and books of accounts of any entity or person
• Republic Act No. 8799: THE SECURITIES
under investigation as may be necessary for the proper
REGULATION CODE, Chapter 2: SECURITIES AND
disposition of the cases before it, subject to the provisions
EXCHANGE COMMISSION, Section 5: Powers and
of existing laws;
Functions of the Commission
(m) Suspend, or revoke, after proper notice and hearing
(a) Have jurisdiction and supervision over all
the franchise or certificate of registration of corporations,
corporations, partnership or associations who are the
partnership, or associations, upon any of the grounds
grantees of primary franchises and/or a license or a permit
provided by law; and
issued by the Government.
(n) Exercise such other powers as may be provided by law
(b) Formulate policies and recommendations on issues
as well as those which may be implied from, or which are
concerning the securities market, advise Congress and
necessary or incidental to the carrying out of, the express
other government agencies on all aspect of the securities
powers granted the Commission to achieve the objectives
market and propose legislation and amendments thereto;
and purposes of these laws.
(c) Approve, reject, suspend, revoke or require
Capital Market Institutions (CMIs)
amendments to registration statements, and registration
and licensing applications; • Broker/Dealer in Securities - acting as a broker or
agent when it executes orders on behalf of its clients, and
(d) Regulate, investigate or supervise the activities of
as a dealer or principal when it trades for its own account.
persons to ensure compliance;
• Broker in Securities - bring sellers and buyers together
(e) Supervise, monitor, suspend or take over the activities
and thus a broker is the third person facilitator between a
of exchanges, clearing agencies and other SROs;
buyer and a seller.
(f) Impose sanctions for the violation of laws and rules,
• Dealer in Securities - buy and sell securities for their
regulations and orders, and issued pursuant thereto;
own account, whether through a broker or otherwise. A
(g) Prepare, approve, amend, or repeal rules, regulations dealer is a firm or individual who acts as a counterparty
and orders, and issue opinions and provide guidance on for both buyers and sellers. They set bid and ask prices for
and supervise compliance with such rules, regulation and the given security, and trade with any investor who is
orders; ready to accept these terms. Dealers typically set bid
prices lower and ask for prices higher than the market,
(h) Enlist the aid and support of and/or deputized any and seeking to buy assets cheap and sell them for more.
all enforcement agencies of the Government, civil or
military as well as any private institution, corporation, • Brokers in Proprietary Shares
firm, association or person in the implementation of its
• Voice Brokers in Securities
powers and function under its Code;
• Investment Houses - any enterprise which primarily
(i) Issue cease and desist orders to prevent fraud or injury
engages, whether regularly or on an isolated basis, in the
to the investing public;
underwriting of securities of another person or enterprise,
(j) Punish for the contempt of the Commission, both direct including securities of the Government or its
and indirect, in accordance with the pertinent provisions instrumentalities.
of and penalties prescribed by the Rules of Court;
• Investment Houses Engaged in Dealing Government
(k) Compel the officers of any registered corporation or Securities
association to call meetings of stockholders or members
• Underwriters of Securities Engaged in Dealing
thereof under its supervision;
Government Securities
(l) Issue subpoena duces tecum and summon witnesses to
• Government Securities Eligible Dealers - SEC-
appear in any proceedings of the Commission and in
licensed securities dealer belonging to a service industry
appropriate cases, order the examination, search and
 FIN 0013-4
supervised/regulated by the Government (SEC, BSP,
Insurance Commission)
• Investment Company Advisers - referred to as
stockbrokers. These are the individuals or groups of
individuals that offer investment recommendations by
analyzing the recent performance of securities.
Investment advisors provide their services in exchange for
a fee.
• Mutual Fund Distributors - individual or entity that
helps investors to buy and sell mutual funds. They earn
income in the form of commission from mutual funds
investment. They should understand the investor's
situation, risk tolerance levels and financial goals to
suggest a suitable plan for them.
Capital Market Professionals
• Associated Persons (AP) - We refer to those who work
with a registered broker-dealer as "associated persons,"
regardless of whether they are brokers-dealer employees,
independent contractors, or in some other capacity.
Although connected persons typically do not have to
register separately with the SEC, they must be adequately
overseen by a currently registered broker-dealer. These
people may also be referred to as "stockbrokers" or
"registered representatives." They might also need to sign
up with the self regulatory bodies that their employer
belongs to.
- For instance, a national securities exchange or the
Financial Industry Regulatory Authority, Inc.
("FINRA"), also known as the National
Association of Securities Dealers, Inc. If linked
persons engage in securities activities without
their broker-authorization, dealer's they must
register separately as broker dealers.
• Compliance Officer (CO) - An employee of a
corporation who ensures the organization complies with
corporate policies and bylaws as well as external legal and
regulatory requirements is known as a compliance officer.
- An employee of a corporation that assists that
organization in maintaining policies and
procedures to adhere to an industry's regulatory
framework is known as a compliance officer. A
compliance officer's responsibilities may also
involve analyzing and establishing guidelines for
effective communication, such as mandating
disclaimers in emails or inspecting locations to
make sure they are accessible and secure. In order
to reduce the likelihood that the business would
break laws and regulations, compliance officers
may also create or update internal policies and
oversee procedure audits.
- Compliance officers actively manage risk for a
company and lessen financial crime.
• Salesmen/Fixed Income Market Salesman (S/FIMS)
- play a crucial part in the banking and investment sectors.
For themselves or, if they work for an investment
business, for their clients, they are often responsible for
carrying out buy and sell orders and transactions. They
typically contribute a significant amount of the market's
liquidity because they frequently deal with huge volumes
when they trade.
• Certified Investment Solicitors (CIS) - For any
investment-related matters, an investment solicitor serves
as a certified representative or agent.
The Capital Market Participants Registry System
(CMPRS)
• The Securities and Exchange Commission (SEC) will be
launching the Online Capital Market Participants Registry
System (CMPRS) on November 21, 2017. Aside from the
manual filing of applications, the Capital Market
Participants can now lodge their transactions using the
system (CMPRS) as an option. The system is intended for
the following:
Capital Market Institutions (CMIs)
• Broker/Dealer in Securities
• Broker in Securities
• Dealer in Securities
• Brokers in Proprietary Shares
• Voice Brokers in Securities
• Investment Houses
• Investment Houses Engaged in Dealing
Government Securities
• Underwriters of Securities Engaged in Dealing
Government Securities
Government Securities Eligible Dealers
• Investment Company Advisers
 FIN 0013-4
• Mutual Fund Distributors
The CMPRS is a web-enabled system designed to:
• Manage online submission of applications;
• Manage online evaluation/processing of applications of
Capital Market Participants;
• Automatic generation of Certificate of Registration (CR)
and Confirmation of Payment (COP) of Annual Fees;
• Facilitate tagging/clearing of infractions as results of
monitoring activities; and
• Real-time searching of registered Capital Market
Participants.
• The system is expected to lessen face-to-face
transactions, thus, it helps reduce the number of clients
who will come personally to the CRMD Office in
response to the Commission’ initiatives of ease of doing
business.
The Philippine Stock Exchange (PSE)
• The Philippine Stock Exchange (PSE) is the only stock
exchange in the Philippines.
• The PSE continues to serve and regulate the Philippine
equities market with the objective of maintaining
efficiency, fairness, and transparency. At present, the PSE
offers a comprehensive end-to-end roster of services
which include listing, trading, market data, clearing, and
settlement.
History & Importance
• The Philippine Stock Exchange was formed from the
country’s two former stock exchanges, the Manila Stock
Exchange (MSE), established on August 8, 1927, and the
Makati Stock Exchange (MkSE), which was established
on May 27, 1963.
• Although both the MSE and the MkSE traded the same
stocks of the same companies, the bourses were separate
stock exchanges for nearly 30 years until December 23,
1992, when both exchanges were unified to become the
present day Philippine Stock Exchange.
Roles & Functions
• The Philippine Stock Exchange, Inc. (PSE or Exchange)
bring together companies
which aim to raise capital through the issue of new
securities. It plays a role in the financing of productive
enterprises that use the funds for growth and expansion of
new jobs. It facilitates the selling and buying of the issued
stocks and warrants.
• Apart from these functions, the PSE has committed itself
to (a) protecting the interest of the investing public; and
(b) developing and maintaining an efficient, fair, orderly
and transparent market.
The Bureau of Treasury (BOT)
HISTORY
1897 - The Filipino nation had its first national Treasurer
in the person of Baldomero Aguinaldo who was appointed
by President Emilio Aguinaldo as Secretary of the
Treasury.
1990 - The Philippine commission headed by William H.
Taft created the Bureau of Insular Treasury which was
tasked to receive and disburse public funds and account
for the same.
1901- The Bureau of Insular Treasury was placed under
executive control of the Department of Finance and
Justice by Section 3 of Act No. 22.
1905 - The Bureau of Insular Treasury was renamed to
Bureau of the Treasury by Act No. 1679 and given the
additional task of coinage and currency supervision.
1929 - The Bureau of Banking assumed the supervision
of the country's banks from the Bureau of the Treasury.
The bonding law was passed based on a provision of the
Administrative Code in 1917.
1949 - Republic Act No. 265 transferred the functions of
coinage and currency printing from the Bureau to the
newly organized Central Bank of the Philippines.
1965 - Treasury Branches were opened throughout the
country
1971 - The implementation of the Integrated
Reorganization Plan of the government under RA 6130
reorganized the Bureau into three major services:
Financial and Administrative Service, Cash
Operations Service, and Public Debt Management.
1976 - The Bureau's Regional Offices were established.
 FIN 0013-4
1986 - Executive Order 127 reorganized the Bureau with
mandates
1995 - The Bureau assumed the fiscal functions which RA
7563 mandates to be transferred from Bangko Sentral ng
Pilipinas (BSP) to the Department of Finance
1997 - The assumption of the management of the Special
Guaranty Fund by the BTr as fiscal agent.
1998 - The democratization of government securities and
empowerment of small savers through the offering the
Small Investors program (SIP)
1999 - Offering of the Small-Denominated Treasury
Bonds as part of the Small Investors Program.
Implemented Executive Order No. 449 which reorganized
the BTr
2000 - Start of the listing and trading of small-
denominated treasury bonds at the Philippine Stock
Exchange on January 15, 2001
IMPORTANCE
• Responsible for ensuring the sufficiency of Government
financial resources including the active management and
investment of excess funds.
• The Treasury undertakes liability management
alongside its financing operations to manage the
underlying risks in the debt portfolio
Roles & Functions mission statement = to efficiently and
effectively manage the financial resources of
the government by maximizing revenues from
VISION STATEMENT available funds and minimizing costs of
financing whenever possible
“To be a pro-active manager of the public funds
characterized by active duration management,
minimization of interest rate risk and hedging of financial
risk”
Under Executive Order No. 449
- Assist in the formulation of policies on borrowing,
investment and capital market development;
- Formulate adequate operations guidelines for fiscal and
financial policies;
- Assist in the preparation by government agencies
concerned of an annual program
- Administer the Securities Stabilization Fund (SSF) by
purchase and sale in the open market of government bills
and bonds to increase the liquidity and stabilize the value
of said securities in order to promote private investment
in government securities.
• Under Republic Act No. 245 as amended by
Presidential Decree No. 142; Republic Act No. 1000
- Certify allowable debt and guarantee.
• Under Republic Act No. 38944:
- Manage the Agrarian Reform Fund.
• Under Republic Act No. 38944:
- Offset from the budgetary support to GOCCs their
corporate cash dividend under R.A. 7656, guarantee fees,
advances for loans relent to GOCCs as well as for
obligations which are guaranteed by the NG and other
valid receivables of NG.
• Under Act No. 3936 as amended by Presidential
Decree No. 679
- Initiate legal proceedings for escheat of unclaimed
balances in favor of the government
The Securities Clearing Corporation of the
Philippines (SCCP)
What is a Clearing Corporation?
- A clearing corporation is an organization associated with
an exchange to handle the confirmation, settlement, and
delivery of transactions. Clearing corporations fulfill the
main obligation of ensuring transactions are made in a
prompt and efficient manner. Clearing corporations are
also referred to as “clearing firms” or “clearing houses.”
What do Clearing Corporations do?
- In order to make certain that transactions run smoothly,
clearing corporations become the buyer to every seller and
the seller to every buyer. In other words, they take the
offsetting position with a client in every transaction. For
example, if two investors agree to the terms of a financial
transaction, such as the purchase or sale of a corporate
security, a clearing corporation will act as a middleman,
facilitating the purchase on one end and the sale on the
other end of the transaction.
History & Importance
• The Securities Clearing Corporation of the Philippines
(SCCP) is a wholly-owned subsidiary of The Philippine
Stock Exchange, Inc. (PSE) and is under the regulatory
supervision of the Securities and Exchange Commission
 FIN 0013-4
(SEC). It was incorporated on January 23, 1996 to operate
as a central securities clearing institution in the
Philippines and thereby manage and support the clearance
of trades in securities listed and executed on the PSE or
other official securities market in the Philippines. It acts
as a Central Counterparty to trades executed at the PSE.
• SCCP started its commercial operations on January 3,
2000 and was granted its permanent license to operate on
January 17, 2002. SCCP is authorized by the SEC to
impose fines and penalties and other sanctions as
approved by the SCCP Board of Directors to ensure
compliance of its Clearing Members.
Roles & Functions
SCCP is responsible for establishing the cash and
securities liabilities and entitlements of its Clearing
Members, synchronizing the settlement of funds and the
transfer of securities based on the Delivery-versus-
Payment Model 3 or Multilateral Net Settlement;
guaranteeing the settlement of trades in the event of a
trading participant's trade default in order to ensure the
finality and irrevocability of all Exchange trades through
its Fails Management procedures; and implementing
appropriate risk management measures to mitigate risks
in the clearing and settlement of Exchange trades and the
maintenance and administration of the Clearing and Trade
Guarantee Fund ("CTGF")
• Clearing and Settlement of Exchange Trades
- SCCP would be the buyer to every seller and
seller to every buyer
- main buyer and main seller
• Performance of Fails Management
What is Fails Management? an important component of
operational risk management. Participants will explore
the many risks, including operational, market and credit
risk associated with failed trades and why fail rates have
been growing in recent years, as markets and exchanges
proliferate.
- late payment or delivery beyond 12nn of the settlement
date
• Risk Monitoring and Management
Adopting DVP -not credit cash acct unless complete
delivery has been made.
What is DVP? Securities industry settlement method that
guarantees the transfer of securities only happens after
payment has been made (buyer’s cash payment for
securities must be made prior to or at the same time as the
delivery of the security) CTGF
Regular monitoring - capital of each clearing member or
broker
- linkages with CMIC (capital market integrity
corporation) where we get data as to the capital adequacy
of each broker on a daily basis
- Highly unusual trades in the market = give rise to highly
unusual settlement obligations
- Monitor slide stocks
- Take note of recurring fails of clearing members
- appropriate penalties according to scale fines
Daily market - e.g. buy on Monday PLDT shares at 100
peso each, next day it would be 80 pesos = difference 20
sasabihin sa broker na ibalik as collateral (why? There is
a risk that the buyer will not pay the whole amount on the
settlement day)
• Maintenance and administration of the Clearing and
Trade Guaranty Fund (CTGF)
What is CTGF? the fund established, maintained, and
administered by SCCP for the purpose of covering failed
trades due to a member's illiquidity and/or insolvency of
a member
- assures that there would be complete payment all the
time
- last resort if money runs out
- Role of SCCP is not to extend loans to its clearing
members nor it manages the cash or security deposit or
accts of the clearing members
cash - managed by banks
security deposits - managed by the depository
 FIN 0013-4

The Philippine Dealing & Exchange System (PDEX)

History & Importance
• In order to provide trading infrastructure for the fixed-
income (FI) market, the Philippine Dealing & Exchange
Corp. (PDEx) was established in 2003.
• It began its trading operations in government securities
in March 2005. The Supreme Court has heard arguments
challenging PDEx's participation in the market for
government securities. A "monopoly" has allegedly been
created and the government's authority over the trading of
Treasury bills and bonds has been usurped by a private
enterprise. Additionally, it has been claimed that trading
participants, including banks, brokers, and traders, are
being charged "exorbitant" costs.
• The Philippine Dealing System Treasury Reference
Rates are among the items that PDEx is in charge of
calculating (PDST Rates). The SEC has awarded PDEx
recognition as a self-regulatory body.
• In addition to other things, PDEx is in charge of
calculating the PDEx has the Automated Debt Auction
Processing Systems (ADAPS), which enables the
government to sell securities to approved dealers for
government securities.

Roles & Functions

• In this function, PDEx offers a centralized & efficient
infrastructure for trading securities that ensures price
discovery, transparency, and investor protection. It serves
as an electronic trading platform for the Philippine Peso
and US Dollars.
• It acts as the single and exclusive electronic trading
platform for the nation's foreign exchange and fixed-
income securities markets. In other terms, it is a
"exchange of bonds" or "exchange of fixed-income [FI]".
• Its electronic technology, known as X-Stream, has been
hailed as cutting-edge and highly effective.
Computershare Markets Technology created it.