CHAPTER 8: [‘yung financial instruments na tinutukoy rito
MONEY MARKETS AND CAPITAL ay ‘yung mga money market instruments to
MARKETS
Explain the phrase “money market”.
[as defined by the book, money market is
the network of corporations, financial
institutions, investors, and governments
which deal with the flow of short-term
capital.]
[so, based on my own interpretation, kapag
sinabi kasing network diba, in the business
field, it’s a connection na kapag mayroon ka
ay favorable sayo in a way na if
nangailangan ka, let’s say you need funds
or additional investments ay sa kanila ka
makakahingi or sila ang maaasahan mo.
This is basically the money market. Kasi this
is where the short-term liquidity transactions
occur. Kapag may isang company ang
kailangan ng funds to carry out their day-to-
day operations or pwedeng nashort sila and
they need funds for payroll payment which
is also short-term liability, sa money market
sila pwedeng dumiretso dahil dito sila
makakahanap ng lenders who can provide
them cash immediately.]
Describe how the money market
mechanism works to bring providers and
users of short-term fund together.
[so, the money market serves as a medium
wherein those who immediately needs
funds or financing for their financial assets
will meet those investors or providers with
highly liquid asset at a very low cost or
without the intermediation of banks or any
financial intermediaries.]
Explain how banks, companies, and
investors use financial instruments in
the money market.
be specific, and kapag money market
instruments automatic short-term nga siya,
halimbawa nga ay ‘yung commercial
papers, certificate of deposits that are
generally long-term kasi pwede siyang
maglast up to 10 years pero nakadepende
naman kasi kung anong term ‘yung
inapplyan, meron din tayong mga treasury
bills.
[So, paano nga ba ‘to ginagamit ng mga
banks, companies, and investors? For the
banks, may mga instances kasi na
tumataas ang demand ng public for long-
term loans and mortgages, and ‘yung mga
deposits that they hold are not enough to
finance these long-term commitments dahil
pwedeng ‘yung deposits na hawak nila ay
short-term lang din or highly liquid in a way
na pwede siyang iwithdraw ng customers
any time, so hindi talaga siya pwedeng
gamitin for long-term kasi ‘yung mga
customers naman nila, which are the
owners of those deposits, ang mawawalan.
In this case, the banks may issue
certificates of deposit. Kapag sinabi kasing
certificate of deposit, savings account siya
na you can only withdraw after a specified
period of time, and withdrawing money early
will give rise to a penalty fee.]
[For the companies naman, ang main
purpose nila for entering the money market
is to finance their running costs kapag
nagkulang sila sa pondo. Kapag sinabing
running costs, this is the money that they
spend regularly to keep their system or
operations going, so obviously, it’s very vital.
If naubos ito, the company may issue
commercial paper. Commercial paper is an
unsecured short-term debt security issued
by SEC-Registered corporations. This is
typically used to fund short-term liabilities of
an entity.]
[Lastly, for the investors naman, usually ay
ito ‘yung mga individuals who want to invest
a large sum of money pero at a relatively
low risk, or those who wants to just “park”
their cash until makahanap sila ng better
investment or until they need it for short-
term funding. Kaya dito sa money market,
kasi kapag long-term, the risk is obviously
higher, especially kapag mas malaking
amount, and also dito sa money market
dahil nga short-term lang siya, most
probably is very stable lang ‘yung
investment less ‘yung fluctuations tapos can
be turned into cash pa immediately.]
Give and describe the types of money
market instruments.
[COMMERCIAL PAPER]
- Already explained sa previous
question.
[BANKERS’ ACCEPTANCES]
- For the company that issues it, a
banker's acceptance is a way to pay
for a purchase without borrowing to
do so. For the company that
receives it, the bill is a guaranteed
form of payment. A banker's
acceptance requires the bank to pay
the holder a set amount of money on
a set date.
- issued at a discount to their face
value.
[TREASURY BILLS]
- Issued by national government.
[GOVERNMENT AGENCY NOTES]
[LOCAL GOVERNMETN NOTES]
[INTERBANK LOANS]
- Loans extended from bank to
another bank.
[TIME DEPOSITS/CERTIFICATES OF
DEPOSIT]
- Already explained in the previous
question.
[REPOS]
- Repurchase agreements.
- Keep the money market highly liquid
by ensuring that there will always be
a sufficient supply of customers for
newly offered money market
instruments.
- So bali, in simple words, from the
term itself “repurchase agreement”
happens when the party selling the
security agrees to repurchase it in
the future from the buyer who also
agrees of selling it in the future,
usually on an overnight basis.
Explain what capital market is.
[this is the opposite naman of the money
market; this market naman ay for funding
long-term finances or for building your
capital. At dahil nga long-term ito, unlike sa
money market that offers less cost and risk,
sa capital market offers greater risk but
greater potential also for higher returns.
‘Yung cost na tinutukoy rito ay dahil usually
held by financial intermediaries ang capital
market instruments such as bonds, stocks,
and mortgages.]
Who are the primary issuers of capital
market securities?
[NATIONAL & LOCAL GOVERNMENT]
- The national government issue
capital market securities to finance
national debt while the local
government issue capital market
securities to finance capital projects.
- What are capital projects by the
way? In the perspective of the
LGUs, Capital Projects are long-
term, high-value endeavor with the
purpose of building upon or
improving their respective
municipalities. Examples nito ay
 roads, ‘yung mga nakikita nating
ginagawang mga daan lagi,
railways, manufacturing plants,
power transmission, and electrical
distribution. Bali, and common
denominator nila ay bukod sa long-
term ang paggawa sa mga ito at ang
benefits nito, large scale rin siya
kumbaga hindi lang siya enclosed or
limited sa isang place or person of
beneficiary.
[CORPORATIONS]
- For corporations naman, they may
enter the capital market for they do
not have sufficient capital to fund
their investment expenditures and
for investment opportunities.
- When we say investment
expenditure, this concerns the
expenses or costs a corporation has
incurred for their capital operations.
So, when a corporation enter into
the capital market to finance their
investment expenditure it means that
they need funds for loan payments,
investment grants, and even
equipment or real estate acquisition.
Where does capital market trading
occur?
[The capital market trading occurs in either
a primary market or secondary market. We
are all familiar naman na with the difference
between the two markets, just to elaborate
na lang in connection with capital market
trading, most capital market transactions
take place in the secondary market. Bakit?
Because in primary market only once lang
pwede maibenta ang isang capital market
security and the process of creating a batch
of this security naman is very lengthy due to
regulatory requirement kaya matatagalan
‘yung raising of funds. Meanwhile, sa
secondary market naman, since buy-and-
sell of securities lang talaga ang nangyayari
dito, the process is rather quicker and
there’s no limit to the number of times a
security can be traded.]
What are the bonds? How are they
traded?
[Bonds are long-term debt instruments
issued by governments and corporations to
finance their operations, expenditures, or
other debts. When an entity issues a bond
kasi, actually if hindi talaga familiar ang
isang individual sa nature and definition ng
bonds, medyo nakakalito siya, kasi usually
kung sinong nag-issue diba ay sila ang may
upper hand sa transaction or sila kasi ang
naglabas ng pera or ang nagpahiram. Pero,
in bonds, it’s the other way around; the party
who issues the bond is the debtor and the
other party becomes the creditor. Pero, the
latter is actually called the bondholder kasi
they are more of an investor than of a
creditor.]
[Bonds are traded publicly in the market
kaya the interest affiliated to the debt
instrument ay nakadepende sa movement
ng interest rate sa market. When bonds are
traded publicly, ang nagsisilbing middle man
ay the investment banking firms kaya may
tinatawag tayong Firm Commitment
Underwriting. The process is illustrated in
our book; firstly underwriting kasi means
that an individual or an institution takes on
the risk associated with an investment or a
loan in exchange of a premium. So,
basically, the investment banking firms will
serve as underwriters wherein they will be
the ones to buy first the issued bonds of a
corporation without any assurance na
maireresell nila ito at a higher price or kung
maibebenta nila ito at all sa mga investors
or potential bondholders.]
[As I’ve said nga kanina since traded
publicly ang bonds, nakadepende ang
interest rates nito sa prevailing market
rates, kaya literal na nagttake risks ang
investment banking firms dahil firstly, binibili
nila ang issued bonds at a fixed price pero
maibebenta nila ito depende sa galaw ng
market.]
Enumerate the advantages and
disadvantages of issuing bonds as a
source of long-term funds.
[page 120-121]
How is the bond’s internal rate of return
or yield to maturity determined?
[Firstly, what is a yield-to-maturity? This
refers to the total return that you can expect
from your investment in the bonds if the
issuer managed to properly pay all interest
payments plus the principal at the maturity.
Kumbaga ay ito ‘yung tinatawag nating
Internal Rate of Return or the metric that
measures the profitability of an investment.]
[Unlike the current yield, YTM applies the
significance of the time value of money. Ano
ba kapag sinabing time value of money?
This is the concept that a sum of money
today ay mas malaki ang halaga compared
sa sum of money that is to be received on a
later or future date. This is because of its
earning potential. It is believed kasi na ‘yung
pera na hawak mo ngayon ay mas mag-
eearn dahil pwede mo na siyang iinvest
unlike sa pera na matatanggap mo pa in the
future dahil madedelay ‘yung earnings mo
so it’s a lost opportunity.]
[The approximate YTM can be determined
through a formula na provided sa book with
an illustration din under page 122.]
How is credit quality risk of bonds
issued by a corporation may be
minimized?
[Firstly, what is credit quality risk? Credit
quality risk is the chance or probability that
the issuer may not be able to make required
payments of interests and principal amount
on time.]
[To minimize this risk, a lot of strategies may
be used, but to name a few, utilizing credit
ratings, issuer analysis, imposing restrictive
covenants.]
What is the relationship between bond
rating and expected rate of return?
[They are inversely proportionate. A higher
bond rating or those considered investment
grade offers lower rate of return since the
likeliness of the issuer being able to meet
his/her debt obligations is strong. On the
other hand, a lower bond rating offers a
higher rate of return, kumbaga kasi nga
speculative sila or junk bonds kung tawagin
meaning ang taas ng risk na hindi
makabayad ang issuer on time or at all due
to different underlying factors, kaya to
compensate this risk and to attract
investors, they will offer higher yields or
interest rates.]
[Same lang sa idea na kapag mas risky ang
investment, mas mataas ang interest rates,
and vice versa.]
Describe the following types of bonds:
[UNSECURED LONG-TERM BONDS]
- These are the debenture bonds that
are only backed up by the reputation
and financial stability of a
corporation.
- Normally issued by a well-known
and established borrower entity.
[SECURED LONG-TERM BONDS]
- These are mortgage bonds which
are secured by collaterals such as
land, buildings, and other real
properties.
[JUNK BONDS]
- These are the speculative or those
bonds rated BB or below. Usually,
these are firms that are newly built
hence, haven’t established yet their
credit ratings.
[FLOATING RATE OF VARIABLE RATE
BONDS]
- These are bonds naman na
nakadepende ang interest payments
sa market condition. This is
favorable in times when the interest
rates are unstable.
Distinguish between ordinary or
common stock and preferred stock.
[Ordinary shares provide the holder or
owner a voting right while the preference
shares do not. On the other hand naman,
ang advantage naman ng owners of
preferred stocks ay dahil nga preferred sila,
mas inuuna silang bayaran and residual
lang ang ibibigay sa owners of ordinary
shares, even during the liquidation.
However, again, a disadvantage ulit sa part
ng preferred stock owners ay fixed rate lang
ang natatanggap nila, so regardless kung
tumaas man ang profit ng isang corporation,
their shares will remain the same.
CHAPTER 9:
FOREIGN EXCHANGE MARKET
List the factors that affect the value of a
currency in foreign exchange markets.
[the exchange rate between two currencies
is determined by the supply and demand for
those currencies, if the supply increases but
the demand decreases then, the value of
the currency in foreign exchange markets
ay bababa rin, on the other hand naman, if
the supply decreases while the demand
increases, may pagtaas sa value ng
currency. But this alone does not fully
predict the changes in exchange rates.]
[INFLATION]
- Inflation deflates the value of a
currency in a way that it reduces its
purchasing power. We all know
naman na kapag may inflation, the
value of money today is mas mataas
compared sa magiging value nito in
the future, the money you receive
today will get you lesser goods and
services at the end of the year.
[INTEREST RATES]
- Higher interest rates calls for more
investment, and more investment
means higher demand for a
currency.
[BALANCE OF PAYMENTS]
- Firstly, what is balance of payments
muna? Balance of Payments kasi
means based on my interpretation
po is the summary or overall
economic or monetary transactions
of a country with the rest of the
world; or simply the inflow and
outflow of foreign exchange.
- Then, meron din tayong tinatawag
na Balance of Trade which is the
difference naman between the
country’s imports and exports over a
given period.
- The relation of these two affects the
changes in value of a currency. Let’s
say for example, kagaya rito sa
book, sabi rito is Philippines is a net
exporter, kapag sinabing net
exporter, a country exports more
than it imports, and therefore
Philippines has a trade surplus
which also occurs when a country
exports more goods than it imports.
Dahil dito, since mas nag-eexport
ang Pinas mas lamang ang demand
 the Philippine currency compared to
other currency since syempre if
other countries are purchasing our
goods, ang currency na gagamitin
nila ay peso, parang kapag nasa
ibang bansa ka lang nagpurchase
diba, you have to convert pa your
cash to their currency. Unlike kapag
more on imports ang isang bansa
syempre mas mataas ang demand
for other countries’ currencies.
[GOVERNMENT INTERVENTION]
- Ang government intervention na
tinutukoy rito ay ‘yung pag-iinterfere
ng BSP since sila nga ang
humahawak sa Monetary Policy ng
bansa which regulates the
movements of interest rates and
money supply.
[OTHER FACTORS]
- Political and Economic Stability
- Extended Stock Market Rallies
- Significant Declines in the Demand
for Major Exports
Explain how exports and imports tend to
influence the value of a currency.
[TRADE SURPLUS & TRADE DEFICIT]
[SUPPLY & DEMAND FOR CURRENCY]
Differentiate between the spot exchange
rate and the forward exchange rate.
[May tinatawag kasi tayong spot transaction
and forward transactions and the exchange
rates to be used for those transactions are
the spot exchange rate and forward
exchange rate respectively.]
[Kapag sinabing spot transaction ito ‘yung
mga transactions na immediate ‘yung
exchanging of currencies, or on the spot
kumbaga.]
[Kapag naman forward transactions, on a
later date pa siya.]
[So, their further difference ay mapapansin
sa kung magkano ang palitan. Kapag spot
exchange rate kasi typically kung ano lang
‘yung current rate that time of the
transaction. Unlike sa forward transaction,
since in the future date pa nga siya,
predetermined na ‘yung magiging palitan,
may negotiation nang naganap between the
parties involved. Therefore, sa forward
exchange rate mas narereflect dito or mas
nasisignify ‘yung probable future value of a
currency in case of factors na mag-ooccur
to either increase or decrease a value of a
currency.]
What is meant by translation exposure in
terms of foreign exchange risk?
[Translation exposure or translation risk
refers to the risk that a company might face
due to the fluctuations of exchange rates
that can eventually affect the value of its
foreign currency-denominated assets,
liabilities, and equities when they are
translated or converted in their home
currency.]
[Bali, nangyayari ito usually sa mga
companies that are operating in multiple
countries, pero syempre kasi diba their
financial statements still have to prepared in
their home currency, kaya ‘yung values ng
assets, liabilities, and equities nila na let’s
say for example ay transacted
internationally or nasa ibang bansa
nakatayo, then the values of those assets
will be determined based on the current
exchange rate.]
What procedure(s) would you
recommend for a multinational company
in studying exposure to political risk?
What actual strategies can be used to
guard against such risk?
PROCEDURES:
[Country Risk Analysis]
- Conduct a thorough analysis of the
political environment in each country
where the company operates or
plans to operate. Consider factors
such as political stability,
government policies, rule of law,
corruption levels, and regulatory
frameworks.
[Scenario Planning]
- Develop scenarios for potential
political events that could impact the
business. Assess the potential
impact of changes in government,
policy shifts, geopolitical tensions,
and other political events on the
company's operations.
[Regulatory Compliance]
- Ensure strict compliance with local
laws and regulations. Stay informed
about any changes in regulations
that could affect the business.
Establish clear processes for
monitoring and adapting to
regulatory changes.
[Insurance and Risk Mitigation Strategies]
- Consider political risk insurance to
protect against losses arising from
political events. This insurance can
cover expropriation, political
violence, currency inconvertibility,
and other risks.
STRATEGIES:
[Diversification]
- Diversify operations across different
countries to reduce exposure to
political risk in any single location.
This helps spread the risk and
minimizes the impact of adverse
political events.
[Hedging]
- Use financial instruments to hedge
against currency risk. This can
include forward contracts, options,
and other derivatives to protect
against adverse movements in
exchange rates.
[Legal Protections]
- Seek legal protections through
contracts, investment treaties, and
bilateral agreements. Include
clauses that address potential
political risks, such as arbitration
mechanisms to resolve disputes.
[Continuous Monitoring]
- Implement a system for continuous
monitoring of political developments.
Stay informed about changes in the
political landscape and be prepared
to adapt strategies accordingly.
What is LIBOR? How does it compare to
the U.S prime rate?
[LIBOR or the London Interbank Offered
Rate is the benchmark interest rate that
represents the average interest rate that
major banks in UK are charging to another
financial institution in the international
interbank market.]
[On the other hand, the U.S Prime Rate, is
the interest rate naman that the U.S charge
their most creditworthy customers. It is not
directly connected to LIBOR. Ang pinaka
nakakainfluence dito ay ang The Fed which
is the central bank of U.S.]
[Ang pagkakapareho nilang dalawa ay
pareho silang nagiging reference or basis
kumbaga ng rates na ginagamit or
chinacharge sa market.]
[Regarding their differences, firstly is ang
LIBOR ay international since it involves
interactions between various countries and
markets while U.S Prime Rate is a domestic
one for it only affects US-based borrowers
and lenders. Also, LIBOR is being phased
out based on the latest update in January
2022 and they are now transitioning to
alternative reference rates. The rest of the
transitioning is scheduled to end in the
summer of 2023 which was last June 30,
2023. It was phased out due to different
scandals it faced such as when LIBOR was
involved in manipulation of the rate-setting
banks and the because of the role it played
in worsening the 2008 financial crisis.]
 Balance payments – a deficit in
current account due to spending
more its currency on importing
products than it is earning through
sale of exports causes depreciation
 Government intervention – central
bank often buys or sell domestic
currency to stabilize it, by buying
foreign and selling domestic
currency they make domestic
currency relatively cheaper. CB can
manage the value of currency by
controlling supply. Buy / sell foreign
currencies
 Other factors

2. Explain how exports and imports tend

to influence the value of a currency
 When a currency appreciates
CHAPTER 9 (rises in value relative to other
currencies), the country’s goods
1. List the factors that affect the value of a
abroad become more expensive
currency in foreign exchange markets.
and foreign goods in that
 Inflation – high inflation will
country become
decrease the purchasing power, the
cheaper(holding domestic
value of the currency drops, less
prices constant in the two
amount yung mabibili pero high
country’s) and vice versa. Kapag
amount of money naman ang
nag eexport madalas ang bansa
magagastos, kapag naman bumaba
tumataas ang value ng currency
ang inflation tataas ang purchasing
natin dahil nagiging in demand
power kasi low cost then the
ito at kabaligtaran kapag
currency has more value.
import.
 Interest rates – higher interest rates
mean higher return in investors,
3. Differentiate between the spot
increasing the demand for that
exchange rate and the forward
currency therefore its value. If ang
exchange rate
interest rates on dollar is higher
 The spot rate represents the
than peso then most of the people
current exchange rate, while the
or lenders will deposit dollars since
forward rate is a predetermined
they will get higher returns. Higher
rate for future transactions.
interest rate attract more foreign
SER, the current price in the
capital and it will result in higher
market to trade one currency
value of currency since it will be in
for another. Example,
demand.
immediately trade P56 TO $1.
 CFC, contract in the foreign
exchange market that locks in
the price for the purchase or
sale of a currency on a future
date. Example, 1 year from now,
trade P100 for $1.

4. What is meant by translation exposure

in terms of foreign exchange risk?
 the risk that a company's
equities, assets, liabilities, or
income will change in value as a
result of exchange rate changes.
Translation exposure,
sometimes called accounting
exposure, measures the effect
of an exchange rate change on
published financial statements
of a firm. Foreign currency
assets and liabilities that are
translated at the current
exchange rate are considered to
be exposed.