FINANCIAL INSTRUMENT AND CAPITAL MARKET INSTRUMENTS

Financial instruments can be real or virtual documents representing a legal agreement involving any kind of monetary value. Equity-based financial instruments represent ownership of an asset. Debt-based financial instruments represent a loan made by an investor to the owner of the asset. They can be created, traded, modified and settled. They can be cash, evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form of currency; debt; equity; or derivatives.

1. FINANCIAL INSTRUMENTS PRESENTED BY: CATIPAY & POLINAR

2. INTRODUCTION CMIP is a bullish organization that stokes and develops the investment character of Filipinos in the Philippine financial/capital market.

3. INTRODUCTION CMIP is committed to promoting, developing, and advancing awareness and knowledge on capital market and its role in the development of the national economy through developing, organizing, and conducting programs, projects, researches, and other activities to upgrade competencies of members, practitioners, entrepreneurs, professionals, teachers, and students in dealing with the Philippine capital market.

4. INTRODUCTION CMIP further aims to: inculcate in the Filipino people a lasting investment consciousness and a strong desire to save and invest and to become active participants in the Philippine capital market; inculcate in the Filipino people a lasting investment consciousness and a strong desire to save and invest and to become active participants in the Philippine capital market;

5. INTRODUCTION coordinate with educational, business, financial institutions, and other relevant agencies nationwide in formulating programs, strategies, and methodologies that will facilitate teaching and learning about financial markets and investment concepts, principles, and practices; and conduct national seminars, briefings, and workshops on current trends and issues related to investments and the financial market.

6. MONEY MARKET INSTRUMENTS Money market instruments are short-term securities. They are paper or electronic evidences of debt dealt in the money markets. Only debt securities are short-term. Equity securities are long-term and belong to the capital market. Money market instruments are issued by the government and corporations needing short-term funds.

7. Cash Management Bills Cash management bills are government-issued securities with maturities of less than 91 days, specifically 35 days or 42 days. They have shorter maturities than T-bills. Government securities (GS) are unconditional obligations of the government issuing them, backed up by the full taxing power of the issuing government. As such, they are theoretically default-free. Investing in these bills affords security and liquidity to investors.

8. Treasury Bills (T-Bills) Treasury bills (T-bills) are issued by the Bureau of the Treasury with 91-day, 182-day, and 364-day maturities. The odd number of days is to generally ensure that they mature on a business day.

9. Treasury Bills (T-Bills) The Philippine government issues two types of government securities: Treasury bills, which are short-term, and T-bonds, which are long-term. T-bills are zero coupon securities because they have no coupon payments (interest payment) and only have face values. They are sold at a discount, which means that their purchase price is less than their face value.

10. Banker's Acceptances Banker's acceptance is a time draft issued by a bank payable to a seller of goods. It is drawn on and accepted by the bank. Before acceptance, the draft is not an obligation of the bank; it is merely an order by the drawer to the bank to pay a specified sum of money on a specified date to a named person or to the bearer of the draft just like an ordinary check.

11. Letters of Credit Banker's acceptances are generally used with the purchase of goods or services either domestically or internationally. In these cases, the buyer has its bank issue a letter of credit (L/C) on its behalf in favor of the seller. For imports, an international letter of credit is opened; for local purchase, a domestic letter of credit is opened.

12. Negotiable Certificates of Deposit Certificate of deposit (CD) is a receipt issued by a commercial bank for the deposit of money. It is a time deposit with a definite maturity date (of up to one year) and a definite rate of interest. CD stipulates that the bearer is entitled to receive annual interest payments at the rate indicated in the certificate, together with the principal upon maturity of the certificate.

13. Negotiable Certificates of Deposit Negotiable certificate of deposit is a bank-issued time deposit that specifies an interest rate and maturity date and is negotiable. It is a short-term, 2 to 52 weeks, and of a large denomination, 100,000, P500,000, and P1M. The normal round lot trading unit among dealers is 1 million. It is a bearer instrument, that is, payable to whoever holds the CD when it matures.

14. Negotiable Certificates of Deposit In Asia, CDs market has grown rapidly in the past decade, despite that it is relatively small and illiquid compared to its counterparts in Europe and the United States. In the Philippines, banks like Union Bank, BDO, and HSBC offer CDs. In the US, the heart is found in New York City. CDs are more heterogeneous than T-bills. T-bills have similar rates, maturity periods, and denominations; more variety is found in CDs.

15. Repurchase Agreements Repurchase agreements are legal contracts that involve the actual sale of securities by a borrower to a lender with a commitment on the part of the borrower to repurchase the securities at the contract price plus a stated interest charge at a later date. A repurchase agreement is usually a short-term loan (often overnight) from å corporation, state or local government, or other large entity that has idle funds to a commercial bank, securities dealer, or other financial institution.

16. Repurchase Agreements Repurchase agreements are closely associated with the functioning of the interbank call loan market in the Philippines and the federal funds market in the US. In an interbank loan market or Fed funds transaction, the bank with excess reserves sells fed/reserve funds for one day to the purchasing bank.

17. Repurchase Agreements RPs are free from interest rate ceilings and are not subject to reserve requirements as long as the collateral are GS. The contract price of the securities that makes up the arrangement is fixed for the duration of the transaction.

18. Money Market Deposit Accounts Money market deposit accounts (MMDAs) are PDIC-insured deposit accounts that are usually managed by banks or brokerages and can be a convenient place to store money that is to be used for upcoming investments or has been received from the sale of recent investments. They are very safe and highly liquid investments, typically paying higher interest than regular savings accounts but lower than money market mutual funds.

19. Money Market Deposit Accounts he growth of MMDA market retarded the growth of MMMF market. MMDA was actually designed by the government as a step to save small depository institutions that were threatened by the fast development of MMMF market. There is always a very close competition between these two markets.

20. Money Market Mutual Funds Money market mutual funds (MMMFs) are investment funds that pool funds from numerous investors and invest in money market instruments offered by investment companies. A mutual fund is an investment company that pools the funds of many individual and institutional investors to form a massive asset base. The assets are then entrusted to a full-time professional fund manager who develops and maintains a diversified portfolio of security investments.

21. More comprehensively, mutual funds can be classified as: 1. Growth funds invest in assets that are expected to reap large capital gains (generally equity securities) 2. Income funds-invest in stocks that regularly pay dividends and in notes and bonds that regularly pay interest 3. Balanced funds-combine the features of both growth funds and income funds

22. More comprehensively, mutual funds can be classified as: 4. Sector funds-invest in specific industries as health care, financial services, utilities, extractive industries 5. Index funds - invest in a basket of securities that make up some market index as the S&P 500 index of stocks 6. Global funds-invest in securities issued in many countries providing diversification

23. Mutual fund shareholders own a portfolio of low-risk, liquid investments, typically consisting of short-term securities like T-bills, CDs, and commercial papers. Money Market Mutual Funds (MMMFs) allow small investors to access these instruments, offering check-writing capabilities similar to MMDAs, but without government insurance. MMMFs cater to different types of investors, including institutional investors with high minimum investments (wholesale MMMFs) and individual investors with lower minimum investments (retail MMMFs).

24. Mutual fund shareholders own a portfolio of low-risk, liquid investments, typically consisting of short-term securities like T-bills, CDs, and commercial papers. Money Market Mutual Funds (MMMFs) allow small investors to access these instruments, offering check-writing capabilities similar to MMDAs, but without government insurance. MMMFs cater to different types of investors, including institutional investors with high minimum investments (wholesale MMMFs) and individual investors with lower minimum investments (retail MMMFs).

25. MMMFs are open-ended mutual fund that invest in commercial paper, banker's acceptances, repurchase agreements, government securities, certificates of deposit, and other highly liquid and safe securities, and pay money market rates of interest.

26. Launched in the middle 1970s, MMMFs became popular in the early 1980s when interest rates and inflation soared. Management's fee was less than 1% of an investor's assets; interest over and above that amount was credited to shareholders monthly.

27. MMMFs sell their shares to raise cash, and by pooling the funds of large numbers of small savers, they can build their liquid assets portfolios. In the US, one can start an account with merely $1,000, which makes it suited for small businesses and even individuals.

28. Certificate of Assignment Certificate of assignment is an agreement that transfers the right of the seller over a security in favor of the buyer. The underlying security carries a promise to pay a certain sum of money on a fixed date like a promissory note.

29. Certificate of Assignment For example, ABC Corporation owns certain securities, say T-bills worth $100,000 ABC Corporation goes to a bank and borrows money corresponding to the amount of the T-bills, that is, 100,000. ABC Corporation executes a certificate of assignment assigning the right over of the T-bills to the bank.

30. Certificate of Participation Certificate of participation is an instrument that entitles the holder to a proportionate equitable interest in the securities held by the issuing firm or an entitlement to a pro rata share in a pledged revenue stream, usually lease payments.

31. Certificate of Participation For example, DEF Corporation issued a promissory note for P300 million to a bank. The bank later sold P5 million of this instrument to RST Company, Inc. The bank will issue a certificate of participation in DEF's promissory note to RST Company, Inc. The bank's certificate of participation does not make the bank liable in case DEF Corporation defaults on its note.

32. Eurodollar CDs and Eurocommercial Papers The US dollar has been an international medium of exchange. Foreign governments and financial institutions, like banks, hold a store of funds denominated in US dollars outside of the United States. Moreover, US corporations conducting international trade often hold US dollar deposits in foreign banks overseas to facilitate expenditures of their companies and branches or offices in these foreign countries.

33. Eurodollar CDs and Eurocommercial Papers Eurodollar certificates of deposit (CDs) are large, dollar-denominated deposits held in banks outside the US. Eurocommercial papers ( EuroCPs ) are negotiable commercial papers issued in Europe, often in local currencies or US dollars, with rates about 0.5-1% above LIBOR. The Euro market is growing, and with the introduction of the Euro, EuroCPs denominated in Euros are becoming common.

34. Eurodollar CDs and Eurocommercial Papers Eurodollar certificates of deposit (CDs) are large, dollar-denominated deposits held in banks outside the US. Eurocommercial papers ( EuroCPs ) are negotiable commercial papers issued in Europe, often in local currencies or US dollars, with rates about 0.5-1% above LIBOR. The Euro market is growing, and with the introduction of the Euro, EuroCPs denominated in Euros are becoming common.

35. CAPITAL MARKET INSTRUMENTS Capital market instruments include corporate stocks, mortgages, corporate bonds, treasury securities, state and local government bonds, US government agency securities, and non-negotiable bank, and consumer loans and leases.

36. CAPITAL MARKET INSTRUMENTS Capital market instruments, just like capital markets, can be classified as: 1. Non-negotiable/non-marketable instruments 2. Negotiable/marketable instruments

37. Non-Negotiable/Non-Marketable Instruments Non-negotiable or non-marketable instruments in the capital markets are the following: 1. Loans Loans are direct borrowings of deficit units from surplus units like banks. They can be short-term or long-term. Companies needing large amounts of funds to finance special projects like purchase of land or building, plant expansion, or even bond retirement usually resort to borrowing from capital markets.

38. Non-Negotiable/Non-Marketable Instruments 2. Leases Leases are rent agreements. The owner of the property is called the lessor and the one who is renting and using the property is the lessee. The lease can be an operating lease, where the lessor shoulders all expenses including insurance and taxes related to the property leased out and the lessee pays a fixed regular amount usually on a monthly basis.

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