Republic of the Philippines

CAPIZ STATE UNIVERSITY

BURIAS CAMPUS
Burias, Mambusao, Capiz
www.capsu.edu.ph email address: burias@capsu.edu.ph

College of Management
Anna Mae Isoy Ariel N. Labaniego
BSBA III-FM Course Facilitator

Capital Market
FM 327

Chapter 3 DEPOSITORY INSTITUTIONS

Study Question
1. Explain the way in which a commercial bank can accommodate withdrawal and loan
demand.
There are ways in which the commercial bank can accommodate the withdrawal and the
loan demands, Attract additional Deposits, mainly do this to satisfy the rising loan demands, by
trying to reach out maximum individuals and commercial entities for deposits. Using the
securities owned by the banks as collateral for making additional borrowing from the federal
agency, the commercial banks have privilege of borrowing funds from the federal reserve bank.
The commercial banks also have the alternative of approaching the repurchase agreement
market, by using the own marketable securities as collateral to rise additional from short term
money market.

2. What do you think debt instrument whose interest rate is changed periodically based on
some market interest rate would be more suitable for a depository institution that a long
term debt instrument with a fixed interest rate?

3. What mean by: a. individual banking? B. institutional banking? C. global banking?

a. Individual banking typically offer a variety of services to assist individuals in managing
their finances, it encompasses consumer lending, residential mortgage lending consumer
instalment loans, credit card financing .
b. Institutional banking is a specialized division within a bank that offers a
comprehensive suite of products and services for large institutions both locally and in particular
they can provide complex financing and advisory functions for corporate and government
clients who may require tailored capital products. In addition they may also advise on
surrounding debt, equity capital markets, risk management and transactional banking.
c. Global Banking delivers integrated solutions to its clients across a wide range of
services. Global banking covers a broad range of activities involving corporates financing and
capital market, foreign exchange product and services. Most activities of this bank, generates
fee income rather than interest income.

4. Explain each of the following: a: Reserve ratio; b: required reserves; c: excess reserves.
 Reserve ratio is the percentage of deposits that the Federal Reserve requires a bank to keep on
hand at a Federal Reserve Bank. Reserve ratios are set by the Federal Reserve, the central
bank of the U.S. It is a bank for banks. Its several branches around the U.S. hold deposits for and
lend to banks. As a means of ensuring the safety of the nation's financial institutions, the
Federal Reserve sets reserve ratios so that banks always have some money on hand to prevent
a run. If a bank is unable to meet its reserve ratio, it can borrow from the Federal Reserve to
meet the requirement.
Required Reserves are the amount of reserves vault cash and Federal Reserve deposits that
regulators require banks to keep for daily transactions. Required reserves are specified as a
fraction of outstanding deposits usually about 1 to 3 percent.
Excess Reserves any legal reserves over and above those required by regulators are excess
reserves. These excess reserves are used for loans, which makes them exceedingly important to
the banking industry. Because reserves, unlike loans, do not generate interest, add to revenue,
or enhance profit, banks are prone to hold as few reserves as possible. Banks hold enough
reserves to satisfy reserve requirements, because they are required by law. But they try not to
hold excess reserves. Holding excess reserves means lost interest revenue.

5. How did the Glass- Stegall Act impact the operation of a bank?
The Glass-Steagall Act was encourage banks to use their funds for lending rather than
investing those funds in the equity markets. Glass-Stegall effectively separated commercial
banking from investment banking and created the Federal Deposit Insurance Corporation,
among other things.

6. What are primary assets in which savings and loans association invest?
The assets in which the savings and loans are associate to invest have mortgages,
mortgage-backed securities, and government securities.
 Republic of the Philippines
CAPIZ STATE UNIVERSITY
BURIAS CAMPUS
Burias, Mambusao, Capiz
www.capsu.edu.ph email address: burias@capsu.edu.ph

College of Management
Anna Mae Isoy Ariel N. Labaniego
BSBA III-FM Course Facilitator

Capital Market
FM 327

Chapter 4 INSURANCE COMPANY

Study Questions
1. Why insurance companies referred to as risk bearers?
Insurance companies are referred as risk bearers because , they accept or unwritten the
risk in return for an insurance premium paid by the policyholder or owner of the policy. They
bear risk that individuals are willing to pay to avoid risk of death, disability, property loss,
litigation, investment fluctuation, etc.

2. What is bankassurance?
Bancassurance is the combination of bank and Life Assurance Company. It is a
partnership between bank and Assurance Company to sell products like life assurance, and
other insurance products to a bank’s client, they also offer insurance benefits to the bank’s
customers and by doing this both companies earn a profit. Banks and life insurance companies
come together to do business in partnership. It is useful for both the banks and insurance
companies because, the bank sells the product of insurance companies to their clients, and the
bank also offers bank products to those insurance clients.

3. What is a GIC? Does a GIC carry a “guarantee” like a government obligation?

GIC or Guaranteed Investment Contact is the first major investment-oriented product
developed by life insurance companies. It is like a zero-coupon bond issued by an insurance

company, usually to pension funds. GIC is nothing more than the debt obligation of the
life insurance company using the issuing contact.
The guarantee is given only by the insurance company. There is no government bailout
incase of insolvency of the issuer.

4. Why are all participating policies written in an insurance company’s general account?
Participating policies are written, so that the policy holder can able share the profits of
insurance company.
5. How does the Financial Modernization Act of 1999 affect the insurance industry?
The Financial Services Modernization Act of 1999 is a law that serves to partially
deregulate the financial industry. The law allowed banks, insurers, and securities firms to start
offering each other's products, as well as to affiliate with each other. The law included other
changes for the financial industry such as requiring clear disclosures on their privacy policies.
Financial institutions were required to inform their customers what nonpublic information
about them would be shared with third parties and affiliates. Customers would be given a
chance to opt out of allowing such information to be shared with outside parties
 Republic of the Philippines
CAPIZ STATE UNIVERSITY
BURIAS CAMPUS
Burias, Mambusao, Capiz
www.capsu.edu.ph email address: burias@capsu.edu.ph

College of Management
Anna Mae Isoy Ariel N. Labaniego
BSBA III-FM Course Facilitator

Capital Market
FM 327

Chapter 5 ASSET MANAGEMENT FIRMS

Study Questions

1. What is the source of income for an asset management firm?

 A fee based on assets undergoing management is the main source of income for
a management firm.
2. What is by a performance-based management fee and what is the basis for determining
performance in such an arrangement?

3. What are closed-end funds?

Closed-end funds are funds that sell shares like any other corporation and usually do
not redeem their shares. Investors pay a broker commission. The market price may differ from NAV,
because of supply and demand conditions for that particular fund's stock, future tax liability of the
fund, the leverage and risk of the fund, or because the fund has access to markets that investors are
willing to pay a premium for.
4. Why might the price of a share of a closed-end fund diverge from its NAV?

5. What is funds of fund?

 A Fund of Fund is a mutual fund scheme that invests in other mutual fund schemes. In
this, the fund manager holds a portfolio of other mutual funds instead of directly investing in
equities or bonds. A given Fund of Funds may invest in a scheme of the same fund house or
another fund house. The portfolio is designed to suit investors across risk profiles and financial
goals. The investors get an opportunity to benefit from the diversification as a result of
investing in numerous fund categories.
6. What costs are incurred by a mutual fund?
The cost of operating are incurred by a mutual fund.
7. Does an investment company provides any economic function that individual investors
cannot provide for themselves on their own? Explain your answer.
Yes, Investment Company providing economic function those individual investors
cannot provide for themselves on their own because, an investment company is an investment
tool that comprises a pool of funds collected from a large number of investors who invest in
securities such as stocks, bonds, and money markets instruments. The portfolio of an
investment company (mutual fund) is designed and monitored by fund managers. Mutual fund
undertakes a very special role for each kind of investors. It performs a variety of economic
functions which an individual investor is incapable of.

8. What is difference between a unit trust and a closed-end fund?

The difference between the two are, unit trust typically invest in bounds. No active
trading of the bonds take place in the portfolio on the unit trust. Unit trust set a fixed
termination date, also the investors knows that the portfolio consists of a specific portfolio of
funds and has no concern that the trustee will alter the portfolio. While, closed-end funds are
funds that do not issue shares. Investors can invest in close end funds by purchasing them
through brokers and investing in diversified portfolio, and staying active in them. In close end
funds, investors can sell their securities to other investors.
9. a. Describe the following : Front-end load, back-end load, level load, 12b-1 fee,
management fee.

A Front-end load is a commission or sales charge applied at the time of the initial
purchase of an investment. The term most often applies to mutual fund investments, but may
also apply to insurance policies or annuities.
A Back-end load is a fee paid by investors when selling mutual fund shares, and it is
expressed as a percentage of the value of the fund's shares. A back-end load can be a flat fee
or gradually decrease over time, usually within five to ten years
12b-1 fees are fees paid out of mutual fund or ETF assets to cover the costs of
distribution – marketing and selling mutual fund shares and sometimes to cover the costs of
providing shareholder services. And
Management fee,

b. Why do mutual funds have different classes of shares?

10. What is an exchange-traded fund?

 An Exchange-Traded Fund (ETF) is an investment fund that holds assets such as stocks,
commodities, bonds, or foreign currency. An ETF is traded like a stock throughout the trading day at
fluctuating prices. They often track indexes. Investors in these funds do not directly own the underlying
investments, but instead, have an indirect claim and are entitled to a portion of the profits and residual
value in case of fund liquidation. Their ownership shares or interest can be readily bought and sold in
the secondary market.

11. What is meant by a convergence traded hedge fund?

Convergence trading hedge funds, or arbitrage strategy try to discover situations where
two related securities are mispriced relative to one another. They buy the relatively
underpriced security and sell the relatively overpriced one. Profit is made when the price
relationship gets back into normal. In other words Convergence trading is an investing strategy
that involves constructing two positions at the same time, Buying security (going long the asset)
with a future delivery date or expiration date, but for a low price.
12. What is meant by an insured pension plan?

13. what is the meaning of ERISA’s “prudent man” rule?

14. What is the function of the Pension Benefit Guaranty Corporation?
The Pension Benefit Guaranty Corporation is a government corporation established by
the Employee Retirement Income Security Act. The Pension Benefit Guaranty Corporation
(PBGC) insures thepensions of millions of private sector workers and retirees in certain
employer-sponsored pension plans. The Pension Benefit Guaranty Corporation step in if an
insured pension plan is unable to fulfill its obligations. It will then cover pension benefits at
normal retirement age, most early retirement benefits, annuities for survivors of plan
participants, and disability payments for those receiving such payments before the covered
plan was terminated.

15. What is the significance of the funding rating for a corporate defined benefit pension
plan?