CHAPTER 5: [Bali, ‘yung mobilization of savings kasi matters
OVERVIEW OF FINANCIAL SYSTEM most to a low-income economy or to those that
Explain what financial system is as well as its
objective.
[Financial system is a system where there is an
exchange of financial medium or funds between
the lenders, investors, and borrowers.]
[Bali, may tinatawag kasi tayong budget balance
which refers to both budget surplus and budget
deficit. This budget balance is commonly used in
reference to government budgets but this can
also be applied to households or individuals or
businesses. When we say balanced budget kasi,
it means that your total expected revenues or
your total income is equal to your total spendings.
So, when you can save money because you
spend less than your income, then may budget
surplus; budget deficit naman if it’s the other way
around.]
[CONNECTION TO FINANCIAL SYSTEM]
- The mechanism of financial system kasi
is, as I have defined it earlier, may
exchange or reallocation of funds, and the
parties involved here are those na may
budget surplus which are the lenders and
those na may budget deficit which are the
borrowers naman. Those lender-savers
will offer their surplus either directly or
indirectly to the borrower-spenders to aid
the latter with their shortage of funds kasi
parang they want or wish to spend more
nga.
- So, basically, the objective of financial
system is to efficiently distribute funds to
their most productive uses.
Explain how the financial system affects a
nation’s economy.
[A well-functioning financial system is very crucial
for the development of a nation’s economy. Why?
Because, a sound financial system make way for
better mobilization of savings of the people and
the government which creates a larger pool of
savings, and if there’s a large pool of savings
then, maganda or marami rin ang pwedeng ioffer
na investments to the public, even to the
foreigners, which will also results to a faster rate
of capital accumulation.]
are suffering from capital scarcity. Hence, if a
nation can build a sound financial system, they
are also building a larger scope for their capital
sources, which will eventually lead to a faster
economic growth.]
Discuss the flow of funds through the
financial system.
[Based on the illustration in the book, the lender-
savers or those who have acquired surplus or
those who spend less than their income are on
the left side, while the borrower-spenders who
wish to spend more than their income but can’t
afford are on the right side. Sa direct finance
‘yung lender-savers are directly na
nakikipagtransact sa mga borrower-spenders.
Diba doon sa financial market, kumbaga
palengke siya pero ang tinda are stocks, bonds,
or other securities or financial instruments. Direct
finance siya, bakit? Kasi ‘yung lender-savers pa
rin naman ang nakikipagtransact directly sa
borrower-spender, para lang silang nagrenta ng
place nila sa market. Kasi diba channel or
medium lang naman ang financial market. Ang
ginagawa lang ng lender-savers is pinuput nila on
public sale sa market ang surplus nila.]
[On the other hand naman, we have the indirect
finance, dito is my third party nang involved which
are the financial intermediaries who are serving
as the agents or middleman between the lender-
savers and borrower-spenders. Example nito is
‘yung sa mutual funds, so this financial
intermediary kasi ang ginagawa niya is it creates
a stock portfolio then ayon ang binebenta niya sa
individual investors. Ano ba ang stock portfolio?
Collection siya ng stocks na pinag-investan mo
typically from different companies.]
Enumerate the key components of the
financial system.
[FINANCIAL INSTRUMENTS]
- As defined in chapter 4, is any contract
that gives rise to a financial asset of one
entity and a financial liability or equity
instrument to the other entity.
- Examples ng anito ay ‘yung sa derivatives
such as future contracts, forward
contracts, and options.
[FINANCIAL MARKET & FINANCIAL
INSTITUTIONS]
[THE CENTRAL BANK & OTHER FINANCIAL
REGULATORS]
- This will be discussed pa in the latter
chapters, 16 and 17. Pero just to give an
overview, ‘yung 4 principal regulatory
agencies ng Philippine Financial System
ay ang BSP, Philippine Deposit Insurance
Corporation, SEC, & Insurance
Commission.
- The main objectives of these financial
regulators is to:
a. Ensure the soundness of the
financial system.
b. Increase the information
available to investors.
c. Improve the control of the
financial system.
Explain the main functions of financial
system.
[RISK SHARING]
- Financial system helps people reduce
their exposure to risk through allowing
them to engage in diversification.
- Diversification is the splitting of wealth
into many assets or spreading your
investments instead of concentrating them
in a single company. Basically, parang ito
‘yung saying na “don’t put all your eggs in
one basket” kasi in one wrong move you
could lose everything.
[LIQUIDITY]
- it is said that stocks, bonds, or other
assets created by the financial system are
more liquid than physical assets. In order
to make those illiquid assets liquid,
financial system introduced the process of
securitization.
- Securitization is the process of
combining illiquid assets with other assets
to create a more liquid assets that can be
sold to another party.
[INFORMATION]
- Collecting and communicating information
help the borrowers to decide whether they
will push through with the investment and
help the lenders to assess the credit
worthiness of the borrower.
Distinguish between adverse selection and
moral hazard.
[these are two problems arising from asymmetric
information; so, ‘yung asymmetric information is
when one party in a economic transaction has
better information than does the other party,
kumbaga, parang mas kilala ni borrower si lender
or mas kilala ni lender si borrower.]
[ADVERSE SELECTION]
- This happens before the construction of
the contract wherein the investors or
lenders are having a hard time
distinguishing the low-risk borrowers from
high-risk borrowers.
[MORAL HAZARD]
- This happens naman after the
construction of contract. Ang problema
naman dito ay hindi alam ng investors or
ng lenders if the borrowers are using the
fund they had lent as intended. There are
tendencies kasi na very capable si
borrower, kahit pa he/she was determined
beforehand as a good borrower, to
conceal relevant information or to act in a
way that is outside the interest of the
lender or taliwas sa napag-usapan nila.
Describe how financial intermediaries:
[REDUCE ADVERSE SELECTION]
1. Requiring the borrowers to disclose
material information on their financial
performance and position.
2. Collecting information firms and selling
that information to investors.
3. Requiring borrowers to pledge some of
their assets as collateral.
[REDUCE MORAL HAZARD PROBLEMS]
1. Monitoring borrowers.
2. Imposing restrictive covenants.
[REDUCE TRANSACTION COSTS]
1. Economies of scale: these are cost
advantages that companies experience
when production becomes efficient, the
cost is being spread out over a larger
amount of goods or services.
 2. Technology lend credits to farmers, businessmen, and
3. Reliance on sophisticated software to cottage industries na nasa rural areas. So
evaluate the creditworthiness of loan ‘yung sa cottage industries pala are those
applicants. small manufacturing units producing
goods and services using conventional
CHAPTER 6: and low-technology methods. Examples
THE PHILIPPINE FINANCIAL SYSTEM are locally produced handicrafts and
textiles.
[COOPERATIVE BANKS]
Describe the nature and basic functions of:
These are small financial institutions
[BANKING INSTITUTIONS] naman that are owned by their members
with primary purpose of providing wide
1. Private Banking Institutions range of financial services and credits to
aid the members in their capital needs.
[UNIVERSAL BANK]
[COMMERCIAL BANK]
2. Government Banks
Both of them are the kinds of banking
[DEVELOPMENT BANK OF THE
institution that are primarily concerned
PHILIPPINES]
with receiving deposits from individuals,
then utilizing those deposits to extend
The primary objective naman of this
credit to businesses and offer related
government bank is to provide loans to
services. The only difference is that sa
MSME’s inclined in agricultural and
universal bank or extended commercial
industrial enterprises to help them cater
bank, they have the power of investment
their medium and long-term needs.
house wherein they are allowed to engage
in the primary selling of underwritten
[LANBANK OF THE PHILIPPINES]
securities; the commercial bank doesn’t
have this authority.
This government bank naman ay naka-
align ang purpose sa CARP or the
[THRIFT BANKS]
Comprehensive Agrarian Reform
Program. This act is founded on the right
These banks focused primarily on
of farmers and regular farmworkers, who
financing MSME’s & Home Building and
are landless. Bali, this program aims to
Home Development. Kaya Thrift Banks
grant those landless farmers and farm
are also known as savings and mortgage
workers ownership of agricultural lands.
banks as they accept savings and provide
mortgage loans. Diba ang familiar na
[AL-AMANAH ISLAMIC INVESTMENT
mortgage sa atin is using our houses as
BANK]
collateral for our liabilities. But, ‘yung
mortgage loans na tinutukoy kasi rito is
Its mandate is primarily to participate in
naka lean siya more on house loans kasi
the socio-economic development of the
nga thrifts banks promote homeownership
Autonomous Region of Muslim Mindanao
among Filipinos.
(ARMM) by promoting and utilizing Islamic
banking, financing and investment in
Examples nito ay:
agricultural, commercial and industrial
Stock Savings and Mortgage Bank
ventures in the ARMM.
Private Development Bank
Stock Savings and Loan Association
[NON-BANK FINANCIAL INSTITUTIONS]
[RURAL BANK]
1. Private Non-Bank Financial Institutions
Dito naman sa rural banks, from the name
itself for rural areas siya or like provinces
[INVESTMENT HOUSE]
ganiyan. Bali, they accept deposits and
[INVESTMENT BANK]

[FINANCING COMPANY]
They extend credit facilities to consumers,
as well as to industrial, commercial, and
agricultural entities. Bali, ano ba ‘yung
credit facilities? Kapag sinabi kasing credit
facilities ito ‘yung pre-approved loans that
allow the borrower to borrow money on an
on-going basis over an extended period of
time. ‘Yung point niya is para siyang credit
card, these don’t make the borrowers
reapply for a loan every time
kakailanganin nila.
[SECURITIES DEALER]
Serves like an agent in a way na engaged
siya sa buying and selling ng securities.
[SAVINGS AND LOAN ASSOCIATION]
[MUTUAL FUNDS]
[PAWNSHOPS]
[LENDING INVESTORS]
[PENSION FUNDS]
[INSURANCE COMPANIES]
[CREDIT UNIONS]
2. Government Non-Bank Financial
Institutions
[GOVERNMENT SERVICE INSURANCE
SYSTEM]
Grants life insurance, retirement, and all
other social security protection provided
under R.A. No. 8291 to all government
employees except the ff:
a. Members of Judiciary & Constitutional
Commissions (life insurance lang
granted sa kanila)
b. Contractual employees
c. Uniformed members of the Armed
Forces of the Philippines and the PNP,
including the Bureau of Jail
Management and Penology and the
Bureau of Fire Protection
Regarding contributions naman, sa
employee ay 9% of his/her actual monthly
salary and 12% naman sa government
agency.
Sa retirement benefits naman ng GSIS,
dapat ay the employee already rendered
15 years of service and must be at least
60 years old. (Cash payment equivalent to
18 times the Basic Monthly Pension
(BMP) payable upon separation and
monthly pension for life starting at age 60)
[SOCIAL SECURITY SYSTEM]
Granted naman to employees who are
working in private companies and offers.
This provides lifetime pensions to
members who have reached the age of 65
and have at least 10 years of
contributions. (‘yung contributions nito ay
nakadepende sa monthly income, which is
‘yung nakatable)
[PAG-IBIG]
Housing loans to both government and
private employees.
200 ang monthly contribution; 100 kay
employee and 100 kay employer.
Be familiar with the current risks in the
Philippine Finance System.
[REPRICING, REFINANCING, & REPAYMENT
RISKS (3Rs)]
Based on my understanding, these risks are
directly proportional to market changes. For the
repricing, from the term itself, pwedeng mabago
‘yung price ng let’s say loans na kailangan mong
bayaran. For example, may loan ka tapos may
fixed interest rate ito na 3% for let’s say 3 years.
Now, if that fixing period ends, pwede na maging
subject to changes or repricing ‘yung interest rate
depende sa galaw ng interest rate sa market.
Sa refinancing naman, ito ‘yung risks of being
unable to refinance an existing debt with a new
debt. Ang refinancing debt kasi is where the
borrower applies for a new loan with better terms,
and then used the proceeds from that loan to pay
the other existing debt. So kapag nagsusuffer na
sa refinancing risk most probably is wala ng credit
worthiness ang isang borrower kasi hindi na ulit
siya maka-acquire ng bagong loan or makautang.
Repayment risk naman ay ‘yung mga borrowers
na malaki ang potential in failing to make the
required payments.
[DEVELOPMENTS IN THE CREDIT MARKET]
[CONTINUOUS DEMAND FOR CREDIT BY
CORPORATE ENTERPRISES & HOUSEHOLDS
IS EVIDENT IN THE DOMESTIC ECONOMY]
CHAPTER 7:
FINANCIAL MARKETS: AN OVERVIEW
Describe what financial market is.
[In simple terms, this is the meeting place of the
lenders, borrowers, and investors. Hence, this is
very essential in catering the flow of money in the
economy, may it be globally or locally. Also, dito
sa financial markets nagrerely ang mga
individuals, businesses, corporations, even the
government in funding their short-term or long-
term needs and operations.]
Distinguish between public financial markets
and corporate financial markets.
[based on my understanding, public financial
markets differ from corporate financial markets
through their users. Kapag sa public financial
markets kasi ang users niyan are the national,
state, and local governments while for the
corporate financial markets naman ay large
corporations. Also, dahil nga magkaiba sila ng
users, consequently ay magkaiba rin sila ng main
target for funding. If tama pagkakaintindi ko,
public financial markets are for funding the public
activities of the government that are for public
order and use. While the corporate financial
markets, since for large corporations ito, ang
main focus nito is to help the corporations in
raising funds for their operations.]
Distinguish between “primary market” and
“secondary market”.
[Primary Market is where securities are made.
Kumbaga dito nangyayari ang initial public
offering of the firms of their stocks and bonds.
Therefore, may direct ang transaction dito. On the
other hand, in the Secondary Market, buy and sell
na ang nangyari dito. For example, bumili ako ng
stocks sa Jollibee tapos, let’s say noong binili ko
‘yon noong January 2023 ang stock price niya is
100 lang, then ngayong November 2023 it
increased to 200, with that increase gusto na
siyang ibenta. I can sell them in the Philippine
Stock Exchange through trading. Therefore,
obviously, hindi involved ‘yung Jollibee sa
transaction. Under din nitong Secondary Market
iyong mga Auction Markets.]
What are the basic functions of the financial
markets? Explain them briefly.
[RAISING CAPITAL]
- Financial markets serve as source of
capital for individuals who wish to
purchase something.
[COMMERCIAL TRANSACTION]
- Commercial transaction are interactions
between two or more parties in which
goods or services are exchanged for some
type of payment.
- Financial markets make these
transactions smoother.
[PRICE SETTING]
- Through financial markets, prices of items
are being determined by determining the
prices at which individuals are willing to
buy and sell them.
[ASSET VALUATION]
- Through market approach wherein the
value of an asset is being determined
based on the selling price of similar assets
in the market.
[ARBITRAGE]
- Kapag sinabi kasing arbitrage, this is the
act of buying a security in one market then
selling it in another at a higher price. This
shows the spread in prices of different
markets, and one of the functions of
financial markets is to make this spread
smaller by moving the prices towards a
uniform level.
[INVESTING]
- Parang serves as a parking lot for the
money of individuals who wants to store
their money somewhere that it will earn a
return or income in the future.
[RISK MANAGEMENT]
- Trading of risks.

Distinguish between “debt market” and
“equity market”.
[These two are sources of funds, parang sources
of financing lang din for a business which are the
credit and capital/equity. Sa debt market dito
nagtatake place ‘yung buying and selling of bonds
or pwede ring mortgages, tapos sa equity market
naman ay buying and selling of stocks.]
Distinguish between the organized stock
exchange and over-the-counter exchange.
[kapag organized stock exchange ito ‘yung may
mga physical location while the over-the-counter
exchange happens only virtually.]
Enumerate and explain the attributes of
financial markets that investors look for.
[LIQUIDITY]
- Investors look for a liquid market. Bakit?
Kasi in a liquid market mas madaling
makahanap ng katransaction and
madaling mag-meet kumbaga ‘yung
interests or terms ng seller and buyer, like
sa prices. Despite the fluctuations sa
prices or changes in supply and demand,
‘yung spread baga between the price na
gusto siyang ibenta and price na gusto
siyang bilhin remains relatively small.
Unlike in an illiquid market kung saan
sobrang laki ng spread which makes the
transaction almost impossible kasi hindi
na nagtatagpo, or at least naglalapit man
lang ‘yung buyer and seller. Also, sa
illiquid market, there’s always a lacking of
interested buyers or available assets or
securities na hinahanap ng buyers.]
[TRANSPARENCY]
[RELIABILITY]
[SUITABLE INVESTOR PROTECTION & prohibited the stockbrokers or ‘yung
REGULATION]
- Itong tatlo kasi ay kinda related to one
another or they are kumbaga leaning
forward to the same objective which I think
is to make investors feel safe transacting
in the financial market. Doon sa
transparency, although self-explanatory
naman siya, ibig sabihin lang niyan is
‘yung complete disclosure of information
about trades and prices sa market. Sa
reliability naman, is if ‘yung mga
makakatransaction ba nila sa market na
‘yon are really capable of meeting the
terms of their agreement or their interests
in general. Lastly, sa suitable investor
protection and regulation naman, sinasabi
lang dito na ‘yung like rules or policies or
bylaws governing the protection of the
parties and regulation of the transactions
occurring in the market should not be
excessive nor loose. Dapat ‘yung tama
lang.]
[LEGAL PROCEDURES]
- Of course investors want a backup in case
may anomalies or irregularities sa
transaction nila sa market para mayroon
silang available remedies, and also this
legal procedures allow the enforcement of
contracts.
[LOW TRANSACTION COSTS]
- Syempre kung saan mura, doon ang tao
Enumerate and explain the factors that
brought about major changes in the financial
market.
[TECHNOLOGY]
[DEREGULATION]
[LIBERALIZATION]
[CONSOLIDATION]
- Itong tatlong ‘to ang effect nila sa financial
market is like a domino effect, from
deregulation, nagkaroon ng liberalization,
and now consolidation. Sa deregulation
kasi kumbaga is nagluwag ‘yung policies
or ‘yung controls sa financial markets.
Based on my understanding sa book,
nagsimula ito noong 1975 when the US
nagbubuy and sell ng stocks to sell to
clients from setting a uniform commission
or brokerage fee for share trading. Ever
since then mas nagloosen up na ‘yung
restraints sa market from one country to
another.
- Now, dahil nga nagkaroon ng
deregulation, mas maluwag na, mayroon
na ngayon ng tinawatag nating
liberalization in the participation in the
market. Kung dati siguro may rules
 separating financial institutions from one
another, ngayon wala na kaya nagkaroon
din ng consolidation or merging of firms.
Also, sa liberalization, mas pinalawak din
‘yung rules governing the issuance of
shares ng mga company, this time sila na
ang bahala kung kanino sila mag-iisue ng
shares nila, sila na bahalang mag-assess
and all.
[GLOBALIZATION]
- Globalization extended the scope of a
financial market globally or internationally.
What benefits could be achieved if the Code of
Ethics governing Financial Market Activities
would be implemented and followed by the
participants.
details that need to be sent to the stock
exchange)]
What is the implication of the SEC granting a
“Self-Regulation Organization” status to the
Philippine Stock Exchange?
[So, noong June 1998 kasi the SEC granted the
PSE a self-regulatory organization. This means
that the SEC is now allowing the PSE to
implement its owns rules and regulations and to
impose penalties to those participants and listed
companies who failed to adhere to the standards.]

[then, the country will have a sound financial

market which means that the individual
participants as well as the government, and
different entities will be able to fund their
operations or needs in a smoother manner with
more secured regulations.]

Describe what “stock exchange” is.

[Ito ‘yung secondary market na nagpprovide ng

platform for the buying and selling of securities
from listed companies.]

[The national stock exchange in the country is

Philippine Stock Exchange.]

[for further discussion of the PSE & PSEi, refer to

your notebook]

What does “listing of securities” mean?

[First is ano muna ‘yung listing, in simple terms ito

lang ‘yung putting on sale or for dealings ‘yung
securities of any company or firm on a recognized
stock exchange. ‘Yung recognized stock
exchange naman ay any stock exchange
recognized by the government through
registration in the SEC.]

[Now, listing happens after the company entered

into a listing agreement with the concerned stock
exchange and after paying the required listing
fees.]

[‘Yung terms and clauses in the listing agreement

have to be followed; (refer to the book for the

CHAPTER 8:
MONEY MARKETS AND CAPITAL 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.
[‘yung financial instruments na tinutukoy rito ay
‘yung mga money market instruments to 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.]