TOPIC 2: BANK ACCOUNTS AND

CREDIT SECURITIES
ABIGAIL M. NARAG
SUBJECT TEACHER
LEARNING OBJECTIVES:
A. Discuss what is bank account and the different types.
B. Discuss the different factors to be considered before opening a bank
account.
C. Discuss what is credit securities and the different types.
D. Discuss the different factors to be considered before investing in credit
securities.
 BANK ACCOUNTS
• An account with a bank created by the deposit of money or its
equivalent and subject to withdrawal of money (as by check or
passbook).
• Is a financial account maintained by a bank or other financial
institution in which the financial transactions between the
bank and a customer are recorded.
When opening a bank account, the following factors are to be considered:
 Minimum balance required. Some banks charge penalties when the
balance goes below the minimum amount.
 Interest rate or rates. In some cases, interest rates are tiered. This means
that the interest rate changes depending on the balance in the bank
account. The bigger is the balance, the higher is the interest rate.
 Limitations as to withdrawals. Is the account withdrawable anytime?
What penalty is imposed in case it is not?
 The bank’s reputation. This refers to the track record of a bank in the
handling of its finances and the integrity of the people comprising its
management.
 Insurance. This refers to insurance coverage for deposits received by a
bank in the Philippines, bank accounts are insured with the Philippine
Deposit Insurance Corporation (PDIC) to the extent of P 500,000 per
account.
 PDIC was established to promote and safeguard the interests of the
depositing public by way of providing insurance coverage on all insured
deposits.
 It is therefore advisable that before one opens a bank account, he calls
up the different banks and makes inquiries regarding the first three
factors given above.
 DIFFERENT TYPES OF BANK ACCOUNTS
A. SAVINGS ACCOUNT – is a type of bank account wherein deposits
thereto and withdrawals therefrom can be made any time. Thus, it is
preferably maintained to take care of minor emergency requirements,
deposits that are small in amount and those that are intended to be
withdrawn anytime during the month.
 Deposits and withdrawals are made with the use of deposit and
withdrawal slips, respectively. All transactions are reflected on the
passbook provided by the bank.
 Savings accounts have account minimums and may charge a fee if the
balance falls below a certain threshold.
 You can withdraw cash from your savings account using an ATM card, or
you can transfer money electronically to and from this account.
B. CURRENT ACCOUNT – is a type of bank account from which withdrawals
are made by issuing checks. Deposits are made with the use of deposit
slips. It is often called a checking account.
 Most of the banks require a depositor to open a savings account before he
is allowed to open a current account.
 In general a current account does not earn interest.
 You're likely to open a checking account if you have a personal loan, auto
loan, or housing loan that requires repayments through post-dated checks.
 This type of bank account in the Philippines is also a safe and convenient
option for paying a large sum of money, such as down payments and other
amounts in six digits, which can't be paid in cash, with a credit card, or
using an e-wallet.
C. TIME DEPOSITS – A time deposit is an interest-bearing bank
account that has a date of maturity, such as a certificate of
deposit (CD).
• The money in a time deposit must be held for the fixed term to
receive the interest in full.
• Typically, the longer the term, the higher the interest rate that
the depositor receives.
• Time deposits are an extremely safe investment but they have
a low rate of return.
 ADVANTAGES
Time deposits offer investors a fixed
interest rate until maturity
Time deposits are risk-free
investments.
Time deposits have various maturity
dates and minimum deposit
amounts.
Time deposits pay a higher interest
rate than regular savings accounts.
DISADVANTAGES
Time deposits returns are lower than
that of other conservative
investments.
Investors may miss a better
opportunity if interest rates rise.
Depositors can’t withdraw their
money without a penalty.
Fixed interest rates don’t generally
keep pace with inflation.
D. MONEY MARKET DEPOSIT ACCOUNT (MMDA) - This
type of bank account usually pays a higher rate of
interest than a checking and savings account does.
 Money market accounts often require a higher
minimum balance to start earning interest, but they
frequently pay higher rates for higher balances.
 A money market account rewards you keeping a higher
balance by offering higher interest rates than a basic
savings account.
E. TRUST INVESTMENTS - or common trust fund refers to cash
entrusted to a trustee bank for investment in chosen items such
as treadury bills, loans, stocks and bonds for the benefit of the
designated beneficiary,
 The investor is called the trustor or grantor.
2 KINDS OF TRUST INVESTMENTS:
1. Retail basis - trust investments are accepted from individuals
with minimum placement set at P 100,000.
2. Big investors- (individuals and corporations), the minimum
placement ranges from P 1,000,000 to P 4,000,000.
 Trust investments is not part of normal bank operationsso that
it is not insured with the PDIC. However, it is also under the
supervision of Bangko Sentral ng Pilipinas (BSP) and banks are
required to set up the corresponding reserves for them.
 SECURITIES DEFINED

 Securities are written evidences of ownership,

interest, or participation, in an enterprise, or
written evidences of indebtedness of a person or
enterprise. Securities may be bought from the
primary market or the secondary market.
CLASSIFICATION OF SECURITIES MARKETS
The markets for securities may be classified as follows:
A. Based on maturity of securities:
Money market. This refers to the trading of short-term
securities. The most common among them are treasury bills and
commercial papers.
Capital market. This refers to the trading of long-term securities
such as bonds and shares of capital stock.
B. Based on who is the seller:
Primary market. The seller is the issuing entity. In other words, the
proceeds from sale of securities go to the issuing corporation. This
holds true even if the corporation is issuing promissory notes,
bonds, shares of stock or other securities for the first, second or
even the tenth time.
Secondary market. The seller is a party other than the issuing
entity. The proceeds from sale of securities do not go to the issuing
corporation. Examples are sales of bonds and shares of stock by one
security holder to another so that the proceeds go to the former
and not anyone to the corporation that issued the securities.
 Credit Securities Defined
 Credit securities are evidences of indebtedness issued
by an entity as a vehicle in borrowing from the public.
Upon their issuance, they evidence the transfer of
financial resources from a lender to a borrower. They
include commercial papers, commercial bonds and
government securities. The latter are in the form of
treasury bills and treasury bonds.
Factors to Consider in Investing in Credit Securities
Before buying credit securities, an investor should look into the following
aspects thereof:
 Interest rate
 Date of maturity or call
 Value of the security
 Yield on the security
 Credit rating of the issuing party
 Credit rating of the trustee (if any)
 Credit rating of the underwriter (if any)
COMMERCIAL PAPERS
 Commercial papers are promissory notes issued by big firms of
unquestionable credit standing and reputation.
 They can be short term or long term.
 In times of rising interest rates, entities issuing commercial
papers prefer to sell them on the long-term basis and vice-
versa.
 Commercial papers are either directly sold by the issuing
corporation or through commercial paper dealers.
BONDS
 Bond is a certificate of indebtedness with fixed interest rate and
maturity date.
 It is a formal and unconditional promise, made under seal, to pay a
specified sum of money at a determinable future date and to make
periodic interest payments at a stated rate until the principal amount
is paid.
 The written agreement on bond issues between the issuing party and
the bondholder is called indenture or bond indenture. The indenture
gives rise to a borrower-lender relationship between the issuing
party and the bondholder.
BONDS AS LONG-TERM OR SHORT-TERM
INVESTMENT
 Bonds are generally a long-term investment vehicle so that
before any party invests therein, he should see to it that the
investment is in track with his financial plans. As it is always
advisable not to put all the eggs in one basket.
 Bonds may be a short-term investment when they are listed in
the stocks exchanges so that a bondholder can sell his holdings
anytime he wants.
CLASSIFICATION OF BONDS
Bonds may be classified as follows:
A. As to the issuing party:
1. Government bonds - issued by a government unit.
2. Commercial bonds - issued by a private corporation.
B. As to security:
1. Mortgage bonds - secured by lien on real property.
2. Equipment trust bonds - secured by the equipment of the company.
3. Collateral trust bonds - secured by securities invested in by the issuing company.
4. Debenture bonds - secured by all of the free assets of the issuing company so
that in effect they are not secured by any specific asset.
C. As to maturity of principal:
1. Straight bonds - the entire principal will mature at one time.
2. Serial bonds - the principal matures in installments.
3. Convertible bonds - they can be exchanged for other securities
of the company at the option of the bondholder.
4. Callable or redeemable bonds - they can be called, redeemed
or retired by the issuing company before maturity date.
5. Noncallable or non-redeemable bonds - they are not subject
to calls or redemption before maturity date.
D. As to transferability:
1. Bearer bonds - they can be transferred to other parties by mere delivery
because bondholders are not registered in the books of the issuing entity.
2. Coupon bonds - interest coupons are attached to the bond certificates
and interest is paid to the holder of said coupons.
3. Registered bonds - they are registered in the books of the issuing entity
so that they can be transferred to other parties only upon surrender of the
bond certificate to the issuing entity or its transfer agent. Subsequently,
new bond certificates are issued to the transferee and recorded in the
books of the issuing entity or its transfer agent. Registered bonds may be
further classified into:
a. Registered as to principal only. Interest is paid to any party who
presents interest coupons.
b. Regsitered as to both principal and ineterest. Interest is paid only
to the party whose name appears as bondholder in the books of the
issuing entity or its trasfer agent.
Zero coupon bonds - are those on which there is no periodic
payment of interest. They are issued at a discount so that the
increase in value up to maturity is the interest earned by the investor.
Junk bonds - are high yielding bonds issued by companies with very
low credit rating so that there is higher risk from default in the
payment of interest and principal.
Bond Quotations; Premiums and Discounts
 Bonds are quoted in terms of percentage of par or face value.
Thus, if bonds with par value of P 50,000 were quoted at 98, it
means they are selling at 98% of par value or for P 49,000. If the
quotation were 105, they are selling for P 52,500 (or 105% of
P50,000).
 Bonds are selling at a premium when they are quoted at more
than 100% of their par value. If they are selling at less than par or
face value, they are selling at a discount. In case P 80,000 bonds
are quoted at 103, the premium is 3% of P80,000 or P2,400. If they
were quoted at 96, the discount is equal to 4% of P80,000 or
P3,200.
Effective Rate on Short-Term Bond
Investment
 When an investor has no intention of holding on to bonds beyond one
year, the yield thereon is computed by dividing the annual interest by
purchase cost.
EXAMPLE: An investor buys 8% P100,000 bonds for P95,000. He intends to
sell them before the end of the year. The effective rate may be arrived at as
follows:
Effective Rate = P8,000/P95,000 = 8.42%
It may be noted that the effective rate is higher because the bonds are
purchased at a discount.
BONDS AS LONG-TERM INVESTMENT; YIELD
AND BOND VALUE
 Yield on Bonds - refers to the effective rate at which an
investor is earning on his investment. It is also used to refer to
the increase in value of an investment.
 Bond value - refers to the price at which investors would be
willing to buy so that they can realize their desired yield on or
rate of return from the investment.
EFFECTS OF PURCHASE PRICE ON BOND YIELD
 Bonds may be purchased at face value, at a discount or at a
premium.
 Bonds Acquired at Face Value. If the bonds are acquired at
face value or at 100 (meaning 100% of face value), the yield
thereon must be equal to the nominal rate of interest. This is
proven in the illustrative problem wherein at 9% effective rate,
the present value of all future cash flows are equal to face
value of the bond of P 50,000.
 Bonds Acquired at a Discount. When bonds are acquired at a discount,
the yield therein is higher than the nominal rate. The reason for this is
that aside from the periodic interest, the investor gets paid 100% of face
value at maturity date of the bonds. In the illustrative problem, the
purchase price (P 48, 105) arrived at based on 10% yield is at a discount
of P 1,895.
 Bonds Acquired at a Premium. When bonds are acquired at a premium,
the yield thereon is lower than the nominal rate because the periodic
interest is based on face value regardless of purchase price and the
investor does not recover the premium upon settlements at maturity
date. Per illustrative problem, the bonds have to be acquired at P 51,246
based on an 8.37% yield which is lower than the 9% nominal rate.
Premium is P 1,246.
BONDS ACQUIRED AT INTEREST DATE AND
BETWEEN INTEREST DATES
 When bonds are acquired at interest date, the price paid
applies to the bonds only because all the interest due on the
bonds have already been paid by the issuing company.
 If the bonds were acquired between interest dates, the
payment made by an investior applies first to any interest that
has accrued on the bonds and the remainder, to the bonds.
GOVERNMENT SECURITIES
 Government securities are debt instruments issued by the
government.
 All government securities are considered risk free because they
are fully guaranteed by the national government.
 They are in the froms of treasury bills (GST-bills) and treasury
bonds (GST-bonds).
TREASURY BILLS
 Treasury bills (T-bills) are government securities that mature in less than a
year.
 They are offered in three terms namely, 91, 182 and 364 days to banks
and eligible dealers who in turn offer them to the public, the secondary
market.
 The minimum investment for treasury bills is P 100,000 unless they fall
under the Small Investors Program (SIP) in which case, minimum
investment is P 5,000.
TREASURY BONDS
 Treasury bonds are government securities that mature beyond one year.
 There are five (5) maturity periods for T-bonds, namely:
 two (2) years
 five (5) years
 seven (7) years
 ten (10) years
 twenty (20) years
 Treasury bonds are classified into regular bonds, progress bonds, ERAP bonds and small
denominated (SDT) bonds.
 Minimum investment in T-bonds is P 100,000 unless they fall under the SIP in which
case, it is P5,000
SMALL INVESTOR PROGRAM (SIP)
 The Small Investor Program or SIP is one instituted by the
Bureau of Treasury to sell Small Denominated Treasury Bills
(SDT-bills), SDT bonds and US Dollar Savings Bonds to improve
the affordability of these securities to small savers.
 It is aimed at deepening the capital market of the country by
expanding the base of the investors in government securities
and subsequently, allow the government to lower interest
rates.
 Minimum investment in SDT-bills and SDT-bonds is P 5,000.
 SIP securities are scripless because investors receive
electronically produced confirmations instead of certificates.
 The issuance of US dollar savings bond is still a future project
under the SIP and is generally intended for Filipinos employed
in other countries.