Ameeryl Financial Markets – Reviewer Basic Function of Financial System:

Chapter 1: Financial Markets 1. Promote Saving Functions

2. Payment Function
Financial Market – crucial in facilitating the transfer of funds from
3. Protection against Risk Functions
the savers and users of funds.
4. Means to Wealth Function
- It is part of the financial system that helps to efficiently direct 5. Provide Liquidity Function
the flow of savings and investments in the economy in ways 6. Credit Facility Function
that facilitate the accumulation of capital and production of
Economic System – involved in the aspect of producing goods and
goods & services.
services.
- Plays a major role in economic growth.
- It acts as an intermediary between providers and users of $. Financial System – interacts in a variety of ways to create and to
manage credit facilities including the supplying of money and
Financial System – group of financial institutions and financial
much needed financial instruments.
markets that creates financial instruments and financial services.
Financial Institutions – banks and non-banks, business
- It transfers the funds from one party to another.
organizations, and individuals.
- Diversified activities being performed by the different
economic units. R.A. 8791 – General Banking Act of 2000
- The level of economic growth of a country heavily depends
R.A. 7653 – The New Central Bank Act; classified banking institutions
on how it is facilitated by the state of financial system in the
into the following categories:
economy.
- Serves as a channel to transfer funds from individual, private, • Banking Institutions
or public companies and government agencies who have A. Private Banking Institutions
excess money to people who want to borrow money. 1. Commercial Banks
a. Universal Bank
Savers – suppliers of funds who channel their funds sa financial
b. Commercial Bank
system to be sent sa mga borrowers in return of principal + interest
2. Thrift Banks
+ capital + dividends + capital gains in the future.
a. Savings and Mortgage Banks
Borrowers – users of funds for consumer goods, services, houses, or b. Stock savings and loan associations
business plants and equipment. c. Private Development Banks
 3. Rural Banks Commercial Bank – accepts drafts and issue letter of credit
4. Cooperative Banks
Thrift Bank – concerned with the mobilization of savings and loans
5. Islamic Banks
and provide short-term working capital, medium and long-term
6. Others (based on monetary board of the BSP)
financing and diversified financial and allied services for their
B. Government Banks
chosen market and constituencies.
1. Development Bank of the Philippines
2. Land Bank of the Philippines Cooperative Bank – retail and commercial bank organized in a
cooperative basis. Just like thrift banks, accept deposits and
provides loan to individuals to undertake ventures using the
• Non-Bank Financial Institutions principles of the cooperative.
A. Private
- Carried out by credit unions, mutual savings bank, building
1. Investment Banks
societies, and cooperatives.
2. Insurance Companies
- It is common in barangays, farmers and workplace.
3. Investment Companies
4. Securities Dealers/Brokers Islamic Bank – have the function and purpose of conventional
5. Credit Unions banking. It adheres to Islamic law and ensures fair play as their core.
6. Pawnshops
- Forbids lending money for interest
B. Government
- Basic principle is based on risk-sharing (trade) rather than
1. Govnmnt. Insurance System
risk-transfer
2. Social Security System
- Introduces concepts such as profit-sharing, safekeeping,
joint venture, cot plus, and leasing.

Universal Bank – provides financial services combing investment Government Bank – financial institution controlled by the
banking, commercial banking, development banking, and government. Have special role in economy.
insurance to encompass a wider variety of services.
Investment Banks – enterprise whose function is to underwrite
- Authority to exercise commercial bank, the power of an securities of another person or enterprise, including securities of
investment house and the power to invest in non-allied government and private companies.
enterprises. Under supervision of BSP.
 - Provides planning, consultancy, fund management, and
raising funds through equity financing and borrowings.
Financial Intermediary – brings together the users and the
Investment Companies – engaged in buying and selling of providers of funds without having them meet face to face.
securities.
- Indirect form of fund channeling.
- Closed- end fund or open-end fund.
Advantages of nasa taas:
- Open-end/Mutual Fund does not have restrictions on the
number of shares the fund will issue. Redeemable anytime 1. Financial Intermediaries hire people who are highly qualified
and on a day-to-day basis. Allows investors to buy back to assess risky investments.
shares anytime they want. 2. FI know how to diversify
3. Have a cost advantage or economies of scale
Securities Dealers – company that buy and sell stocks to resell for
4. Helps reconcile conflicting interests of the users and lenders
profit. No commission since they earn profit from trade.
of funds
Security Brokers – individuals or firms engaged in the buying and 5. Give savers liquidity
selling of stocks for commission.
Liquidity – ability to convert assets into spendable form quickly.
Insurance Companies – provide insurance in case of loss to the
insured individuals and firms. They transfer risk of loss from one
entity to another in exchange for premiums. Two Types of Financial Market:

- Uses insurance against any possibility of financial loss. Money Market – intended for short-term placements that takes
one year or less to mature.
Credit Unions – composed of member-owned producers and
consumers. Operated to promote thrift. They provide services to 1. Negotiable Certificate of Deposit – time deposit where the
support community development or sustainable international investor and the bank agree on the term of the placement.
development on a local level. The amount is higher than regular TD.
2. Commercial Paper – unsecured promissory note with a fixed
maturity of 1 to 270 days. Issued by high rating companies to
Pawnshops – financial institutions that cater to financing relatively raise money to meet short term obligations. Sold at a
low-income individuals. Borrowing requires collateral to guarantee discounted price and gives higher interests than bonds.
payment.
 3. Repurchase Agreement – financial instrument where one - Initial Public Offering – unang beses ibebenta yung security
party sells to another party a financial instrument at a sa market. Stocks are sold for the 1st time.
specified price with a commitment to repurchase the FI at a - Issuers – pub or priv corporations.
fixed amount and a specific date. - FI – instruments purchased by the investors.
4. Treasury Bills – obligation by the national government. - Financial Intermediary – financial institutions that facilitate
5. Banker’s Acceptance – bank draft where the bank is the issuance of securities.
required to pay the holder a specified amount on a specific - Investors – individs or firms who have excess funds and are
date. willing to invest,
2. Secondary Market – also called the aftermarket. Place
Capital Market – for long-term financial instruments. Included here
where FI already issued are traded.
is the issuance of securities for long-term financial obligations by
3. Bond Market – place where long term debt instruments are
businesses and governmet agencies.
issued by firms and govnmt agencies to raise money. Buying
Philippine Stock Exchange – private organizations that provide and selling of bonds.
and ensure a fair, efficient, transparent, and orderly market for - Bond and interest have inverse relationship.
buying and selling of securities. - When the interest rate for bond is high, the price of the bond
is low, and when the interest is low, the price of the bond is
- From Manila Stock Exchange and Makati Stock Exchange.
high.
- Founded in March 1927, MSE first stock exchange and oldest
4. Commodity Market – place where raw or primary
in Asia.
commodities are traded.
Over-the-counter Market – it involved in the buying and selling of 5. Stock Market – place where publicly listed stocks are
FI but not in organized security exchanges. brought and sold. If gusto ng firm magraise ng money in a
form of stock, they normally go sa investment banker to
facilitate the selling.
Types of Capital Market: 6. Derivatives Market – provides instruments to manage
financial risks.
7. Foreign Exchange Market – Otc and global market for
1. Primary Market – venue where firms and government
trading of currencies.
agencies raise money issuing FI like stocks and bonds for the
first time. Efficient Market Hypothesis – hypothesis that serves as one of the
foundations of modern finance theory.
 - States that the stock prices already reflect all available - If money is to buy equity, they expect dividends.
information in the market and this information is - If money is used to invest in fixed income securities like
immediately available to the investing public. corporate bonds, commercial paper, government securities,
- It implies that nobody can beat the market consistently on a they expect to receive interest in exchange.
risk-adjusted basis because the market price only react to - Most common type of debt securities is corporate and
new information. treasury bonds.
- Also descrbes that the market is perfect and wala dapat
Nominal Interest Rate – guide in establishing an acceptable
magbenefit sa fluctuation ng prices.
level of return for the diff. types of financial securities.
- Gitman (2006) securities are in an equilibrium meaning they
are fairly priced. - Interest charged is classified according to the tenor or
- First proposed by the French mathematician Louis Bachelier maturity period.
in his thesis “the theory of speculation” describing how - Determines how much funds will circulate from the savers to
commodities and stocks varied in markets. the users and it determines how the FI will be valued in the
- Eugene Francis Rama – father of efficient market hypothesis. money and capital markets.
a. Strong form – concern with all information sets, including
Loanable Funds Theory – identifies consumers, gov agencies,
private infs, are incorporated in price trends and it states
private and public companies, foreign investors as the different
no monopolistic info can entail profits.
sectors that determine how the level of interest moves.
b. Semi-strong form -requires that all public information is
reflected in prices already, such as companies’ - They are the factors that affect the supply and demand for
announcements or annual earnings figures. loanable funds.
c. Weak efficiency – information set is just historical prices,
impossible to profit from it. - Supply of funds means the providers they are:
a. Households (highest supplier of loan funds)
b. Gov agencies
Chapter 2: Structure of Interest Rates c. Priv and pub companies
d. Foreign investors
- Funds are transferred from providers to users of funds, then
- As the interest rates increase, the supply of funds increases
these funds are transferred to the financial system, the
as well. High interest rates, high loanable funds.
financial system then channels the funds to the users for their
- All other things are held constant.
intended use.
 down. On the other hand, a decrease in the supply will move
the supply curve to the left bringing the interest rate to go up)
Factors that Affect the Supply of Loanable Funds
2. Economic Conditions (If there’s an increase in wealth, the
1. Levels of Interest Rates supply curve move to the right. The large supply of LF in the
2. Risk of the Centuries markets brings the equilibrium to go down to a new level of
3. Spending Needs equilibrium)
4. Economic Condition 3. Risk ((the supply of LF decrease and the supply curve moves
5. Monetary Policy to the left bringing the equilibrium to go up. On the other
6. Foreign Investors hand, if the FI is less risky then there will be more supply)
- The demand for loanable funds is descried as the excess of 4. Spending Needs (same effect sa supply curve)
funds of the users. 5. Monetary Policy (same effect)
- Downward slope – means as the number of loanable funds
Factors that cause the demand of LF to shift:
increases the lower the interest rates.
1. Demands for Funds (when the demand for LF increases the
Factors that Affect the Demand for Loanable Funds:
demand curve will move the right causing the interest rate to
1. Interest Rates go down.)
2. Demand for Funds 2. Economic Conditions (same effect)
3. Spending Needs 3. Changes in Business Opportunities (same effect)
4. Economic Conditions 4. Change in Government Spending (same effect)
5. Foreign Participants - The Philippine Economy on 2008 to 2016 is good because the
- It has to be understood that once the number of FI supplied interest rate is low.
in demanded change, a shift in the supply demand curve will
Cost of Capital – also known as cost of money, the amount you are
occur. Thus, the interest rate will move every time there is a
paying or receiving for the use of money.
change in the supply or demand of loanable funds.
Factors Affecting the Cost of Money:
Factors that cause the supply of LF to shift:
1. Production Opportunities
1. Supply of Funds (an increase in the supply of LF will move the
2. Time Preference for Consumption
supply curve to the right bringing the equilibrium IR to go
3. Risk
4. Inflation
 Default Risk Premium – the risk that the lender will default sa sched
payment ng interest at principal.
Determinants of Interest Rates
- The higher the chances na magdefault si lender the higher
- Interest rate varies depending on whether the security is a
the DRP.
corporate or treasury bond or long-term and short-term.
- Only applicable sa short-term and long-term corporate
1. Real risk-free rate
securities, hindi naman nagdedefault ang gobyerno.
2. Inflation Premium
3. Default Risk Premium Liquidity Premium – If an asset is not considered to be liquid then
4. Liquidity Premium a liquidity premium is added to compensate the risk for selling the
5. Maturity Risk Premium asset when money is not needed.
6. Special Provision or Covenant
- Only charged for the corporate securities.

Maturity Risk Premium – premium charged for the risks associated

with the term of security.

- Only applied to long-term securities.

Term Structure of IR – is the relationship between interest rates or

bond yields between long and short-term interest rates on varying
maturity dates.
Real risk-free rate – rate of interest that exist on a riskless
investment in the absence of inflation over the expected holding - Yields increase in line with the maturity which leads to an
period. upward sloping.
- Yield curve – used to illustrate the term structure of interest
- Not considered to be stagnant.
rates for standard gov issued securities.
Inflation Premium – With the decrease in the purchasing power of - Upward sloping happens kapag yung long-term interest
the currency caused by inflation investors asked for premium called rates ay higher kesa sa short-term interest rates. (normal
IP. slope)
- The average expected inflation rate over the life of the - Downward sloping happens kapag yung short term IR is mas
financial security. mataas kesa sa long term IR. (inverted yield curve and it
- Inflation – erosion of purchasing power.
 signifies na malapit na magenter sa recession yung - Interest rates are determined by the supply and demand for
economy) loanable funds in specific market segments. Each segment
- Flat happens kapag similar yung borrowing cost ng short is divided by maturity, such as short-term or long-term.
and long-term securities. (tells that the market is uncertain - The equilibrium interest rate for each segment depends on
about the future of the economy) the balance of demand and supply within that segment.
- emphasizes that different market segments for financial
Term Structures are guided by three theories:
securities operate independently, with their own supply-
1. Expectation Theory – says that the interest rate on long- demand dynamics setting the interest rates for each
term bonds is determined by current and expected future maturity. Investors and borrowers rarely switch between
short-term interest rates. segments unless they’re offered significant compensation.
- Long term rates are simply an average of the future short- This segmentation leads to varied interest rates across
term rates people expect. maturities and contributes to the overall shape of the yield
curve.
Liquidity Preference Theory – view that investors are indifferent
between short and long-term securities. Expectations Theory – Maturity Risk Premium

- Believes that there is no need to compensate for an Liquidity Theory – Liquidity Premium
additional premium for the IR and business risk it may incur
Market Segmentation Theory – supply & demand of LF
should the investor decide to invest in long term securities.
- This theory emphasizes that investors naturally favor short-
term securities due to lower risks and easier liquidity. For
Chapter 3: BSP, Monetary and Fiscal Policy
them to accept long-term securities, they must be
compensated with higher interest rates, which include a Money – consists of bills and coins that are generally accepted as
liquidity premium. This makes long-term securities payments for goods and services.
inherently costlier for borrowers and results in an upward-
- Also used to make payments for obligations incurred in a
sloping yield curve.
given socio-economic context or country.
Market Segmentation Theory – says that interest rates are - Created due to the increasing need of individuals and
determined by the interaction between the aggregate demand country as a whole.
and the supply of loanable funds for each segment. (upward slope)
Barter System – the exchange of goods or services without the use - Silver coins – midsized transactions and as a unit of account
of the medium of exchange. for taxes, dues, contracts, and fealty.
- Copper coins – represented the coinage of common trans.
- There must be two parties involved.
Functions of Money:
Limitations of Barter System:
1. Medium of Exchange – used to facilitate the exchange of
1. Double coincidence of wants
goods and services between two parties.
2. Absence of common measure of value
2. Unit of Account – standard numerical unit of measurement
3. Indivisibility of certain commodities
of the market value of goods and services.
4. Making a payment on the obligation
5. The complexity of storing wealth To function as a unit of account, it should be:
6. Barter results to slow down of trading
a. Divisible to smaller units w/out losing value
Commodity Money – the value of money comes from the b. Fungible that it is perceived to be equivalent to any other
commodity itself. commodity, and
c. Specific weight and measure are inherent for each cut of
- Ex. gold, silver, corn, salt, leather, cattle, copper, etc.
coin or paper currency
- Through the use of commodities, trading became simpler
3. Store of Value – means that money can be reliably saved,
and the existence of a unit of measure becomes feasible.
stored, and retrieved and still use as a medium of exchange
- The commodity itself is the medium of exchange.
when it is needed.
Metallic Money – became inherent because of the difficulty of - Have the capacity of being saved and stored.
storage and handling. - May also be in a form of real estate, precious stones, works of
art, and even collectible cards.
- Metals were divided into a single grain.
- Common eqpmnt. Of merchants are gold, silver, and a Nature of Money
weighing scale.
M1 = Demand deposits and currency in circulation (real money)
Coin – stamped by monarchs, goldsmiths, and bankers.
M2 = M1 + time and savings deposit (money or quasi-money). Also
- In most major economies using gold, coinage, copper, and known as broad money.
silver formed three tiers of coins.
M3 = M2 + deposit substitutes. Known as total liquidity.
- Gold coins – for large purposes.
M4 = M3 + peso equivalent of dollar deposits of residents in Foreign Special Drawing Rights – is a paper asset created out of thin air by
Currency. the IMF.

Deposit Units and Offshore Banking Units The Jamaica Accords (1976)

Characteristics of Money 1. Each member country was free to adopt its preferred
exchange rate arrangements.
1. Acceptability – everyone can exchange it for G&S
2. The role of gold was downgraded in the international
2. Durability – can last for long time
monetary system.
3. Portability – easy to carry around
3. The role of the SDR was to be enhanced.
4. Divisibility – can be divided into smaller units
4. The IMF was to maintain surveillance of exchange rate
5. Uniformity – must have same size, designs, weights
behavior.
6. Malleability – coins can be melted down and cut into any size
7. Limited Supply – to maintain its value, it should be limited. Bangko Sentral ng Pilipinas
Money in circulation must be restricted.
- Concept of a Philippine central bank surfaced with
Bretton Wood System (1994) discussions under the Hare-Hawes Cutting bill.
- Monetary system managed by the Department of Finance
- UN monetary and financial conference was held in Bretton
and National Treasury.
Woods, New Hampshire, in 1944.
- The Philippines used the US dollar-backed gold reserve
- From this emerged two international institutions:
system as currency.
International Monetary Fund and International Bank for
1. President Manuel Roxas (1946):
Reconstruction and Development or World Bank.
- Directed Finance Secretary Miguel Cuaderno, Sr. to draft a
World Bank – set up to provide long-term loans for projects and central bank charter.
programs in developing countries. 2. Joint Philippine-American Finance Commission (1947):
- Recommended shifting from a dollar exchange standard to
International Monetary Fund – institution in the functioning of the
a managed currency system.
international monetary system known as the Bretton Wood System.
3. Establishment of the Central Bank (1948):
Its main purpose is to seek stability in exchange rates.
- Republic Act No. 265 signed by President Elpidio Quirino.
• In 1967, the British pound was officially devalued from its - Aimed to promote national sovereignty and manage
parity exchange rate (14% devaluation). monetary policy.
1972-1973: 2. Policy-Making:

• Presidential Decree No. 72: Adopted recommendations from o Managed by the Monetary Board, focusing on:
the Joint IMF-CB Banking Survey Commission to strengthen
▪ Money supply and credit control.
the banking system.
▪ Impact of domestic and global price
• 1973 Constitution: Mandated an independent central
movements.
monetary authority.
3. Vision:
• Central Bank designated as the Central Monetary Authority
(CMA). o Be a world-class monetary authority.

1987 Constitution: o Ensure a strong financial system for all Filipinos.

• Retained provisions for an independent monetary authority. Governance of the Bank

• Focus: Increased capitalization and private sector - Governor – the chief executive officer of the BSP and required
involvement in the Monetary Board. to supervise the operations and internal administration of
the BSP.
1993 (Bangko Sentral ng Pilipinas):
- Its Chairman is the BSP Governor with the five full-time
• Republic Act No. 7653 signed by President Fidel V. Ramos. members from the private sector and one member from the
cabinet.
• Replaced the Central Bank with Bangko Sentral ng Pilipinas
- A deputy governor heads the following sectors:
(BSP).
1. Monetary Stability Sector
• Goals: Price stability and fiscal and administrative 2. Supervision and Examination Sector
autonomy. 3. Resource Management Sector

• BSP launched on July 3, 1993. The Monetary Board

BSP Guiding Principles - Have seven members appointed by the President of the
Philippines.
1. Core Mission:
- The monetary board meets atleast once a week.
o Maintain price stability. - Maybe called to the meeting by the Governor of the BSP or by
two other members of the Board.
o Promote sustainable economic growth.
- Usually they meet every Thursday.
Monetary Policy – defined as the management of the expansion Open Market Operations – buying and selling of Government
and construction of the volume of money in circulation for the Bonds.
explicit purpose of attaining a specific objective, such as full
Reserve Requirements – percentage of commercial Banks, and
employment.
other depository institutions, demand deposts.
- how the Bangko Sentral ng Pilipinas controls the supply of
Discount Rate Policy – where commercial bank can borrow
money and interest rates to achieve specific goals.
reserves from central bank at a discount rate.
- Measures taken by the BSP to regulate the supply of money.
- Aimed to influence the: timing, cost, and availability of money Fiscal Policy – the use of the budget of the government to achieve
and credit as well as other financial factors, to stabilize price full employment, control inflation, and stimulate economic growth.
level.
- a government’s budget plan—deciding where to spend and
how to collect money para mapatakbo ng maayos ang
Contractionary monetary policy - is when a central bank takes economy.
steps to reduce the supply of money in the economy and increase
Types of Fiscal Policy
interest rates. The goal is to slow down economic activity to control
inflation (when prices rise too quickly). 1. Expansionary Fiscal Policy: (recession)

Expansionary monetary policy - is when a central bank takes o Goal: Boost the economy during a slowdown or
steps to increase the supply of money and lower interest rates to recession.
stimulate economic growth. The goal is to encourage spending and
o How: Increase government spending (e.g., on
investment, especially during periods of slow economic activity or
infrastructure, education) or reduce taxes so people
recession.
have more money to spend.
Monetary Policy Framework
o Effect: Stimulates demand, encourages businesses to
- Inflation targeting focuses mainly on achieving price hire, and supports economic growth.
stability.
2. Contractionary Fiscal Policy: (peak of bus. Cycle)
- Adopted on January 2002.
o Goal: Control inflation or reduce government debt.
Republic Act No. 7653 – the new central bank act.
o How: Decrease government spending or increase
- Achieving price stability is a universal goal.
taxes to reduce the amount of money in the economy.

o Effect: Slows down demand and economic activity.

 3. Discretionary Fiscal Policy - refers to deliberate changes in - Issued by government or corporations agencies to obtain
government spending and taxation made by policymakers short-term funds of one year or less.
to influence the economy. These changes are planned and - Place where short term debt securities are issued.
implemented as a response to economic conditions. - Executed through telephones, wire transfers, and computer
4. Nondiscretionary Stabilization Policy - Also known as trading thus they are said to be OTC markets.
automatic stabilizers, these are mechanisms built into the - Yields on money market are based on discounts. (securities
economy that naturally adjust spending and taxation are bought below face value)
without the need for government intervention. - Parties in MM: corporations, financial institutions, and gov.

Crowding-Out Effect – notion that gov. borrowing to finance a Characteristics of MM:

deficit may crowd out or reduce private borrowing.
1. MM is sold in a large denominations.
- happens when the government increases its spending (for 2. MM have low default risk.
example, on public projects or programs) and to fund this, it 3. MM have a maturity of one year or less.
borrows money or issues bonds. This increases the demand
for money, causing interest rates (the cost of borrowing Important Dates in MM:
money) to rise.
1. Transaction Date – date where terms and conditions of the
Fiscal-Monetary Mix (Policy Mix) FI are stated like maturity date, amount to be invested, and
price.
- refers to the coordinated use of both fiscal policy 2. Value Date – date when invested amount will start accruing
(government spending and taxation) and monetary policy interest. If TD and VD is the same, then it is said to be for the
(central bank actions, like setting interest rates or controlling same-day value.
money supply) to achieve economic goals, such as price 3. Maturity Date – date where contract is terminated.
stability, economic growth, and low unemployment.
MM transfers money to economic sectors who have excess funds to
Chapter 4: Money Market econ sectors who need additional funds.

Money Market – place where the savers and users of funds meet. Interest – cost of borrowing money.

- Venue where they get money to be used on a short-term Simple Interest – principal that earns interest. (I=PRT)
basis.
Discounting – the process of knowing the present value of any Discounted Security – where interest earned in a security is already
amount in the future. deducted from the face value. Where securities are sold at a
discount.
- The interest is immediately deducted from the future
payment. - These securities deduct the discount from the face value but
- The borrower receives the difference of the maturity value receives the entire FV at the maturity period.
and interest.
Discount Yield = 360 days
- Ex. commercial papers and treasury bills
- Interest here is also called Discount. BEY = 365 days
- D=FDT
Single Payment Yields – intended for securities where the interest
- Proceeds=FV-D
payment together with the principal is made at the maturity period.

Bond Equivalent Yields – denoted as BEY - Ex. negotiable certificate of deposit, overnight borrowings,
and MM fund.
- The quoted nominal yield on a given security.
- Tool used by investors to determine the annual yield on the Money Market Instruments that can be offered are:
security offered at a discount. 1. Treasury Bills (T-Bills) - are short-term government obligations
- Used for securities like T-Bills, Commercial Paper, and bonds issued to finance immediate government expenses.
issued at a discount.
- If the investor has a commercial paper and wants to - Maturities: 91 days, 182 days, and 364 days.
compare it to a short term investment, they should calculate - Sold at a discount: The difference between the face value
the BEY first. (maturity value) and the discounted price is the investor’s
profit.
Effective Annual Return – diff. types of instruments use diff. - Risk-Free Investment: Guaranteed by the government.
compounding periods.
- Higher Returns: Interest is higher compared to savings
accounts.
- If the investor want to make a comparison of the FI with
different compounding periods, the EAR (effective annual - Subject to 20% final tax on earnings plus broker commissions.
rate) should be used. - Used by the government to manage short-term funding
needs.
Examples of issuer paying interest and principal to investors are - Tool for monetary policy implementation to regulate liquidity
REPO and negotiable certificate of deposit. in the economy.
Auction Process - if owner wants to withdraw before maturity, a penalty is charged
for early termination.
• Announcement: New T-Bills announced every Thursday.
- not traded in the secondary market and is offered only to the
• Auction Day: Held on the following Monday.
depositor of the bank.
• Settlements: Conducted by the next Thursday.
- if bank is liquid = interest is lower and vice versa
Bidding Types:
- minimum balance is 1,000 also subject to 20% tax
• Competitive Bidders:
3. Negotiable Certificate of Deposit – difference from COD is the
o Typically large investors or government securities term and its negotiability with the issuer.
dealers.
- unlike time deposit, this is already fixed by nature and it can also
o Specify desired quantity and acceptable yield be sold at a discount.
(discount rate).
- it is with a secondary market as well where investors can sell it at
• Non-Competitive Bidders: a realizable value before maturity.

o Smaller investors. - issued and guaranteed by bank.

o Indicate desired face value, but not the yield. - the investor can negotiate the terms of the COD here unlike other
CODs.
o Granted full allocation before competitive bids are
considered. - Maturity: two weeks or less than a year

- Inverse Relationship: Yield and T-Bill price move oppositely. 4. Money Market Funds – are mutual funds composed of highly
- Cut-Off Yield (Stop-Out Rate): Determines which bids are liquid and highest quality money market instruments. (less risky)
successful.
- Managed by licensed mutual fund agents who aim to
- Competitive bids above the stop-out rate are rejected. achieve capital appreciation and income for investors.
2. Certificate of Time Deposit – issued by banks to their depositors - Considered less risky than stocks or bonds due to their
who want to invest their excess money for less than a year. short-term nature and high-credit-rating securities
composition.
- Banks placements withholding 30,60,90,120, to 360 days. - Offered by mutual fund companies, Unit Investment Trust
- The higher amount invested and the longer the maturity, the Funds (UITFs), Personal Equity and Retirement Accounts
higher the interest income earned.
 (PERA), Variable Universal Life (VUL) plans, and other BSP- - CPs can be resold before maturity, either in the secondary market
authorized institutions. or by endorsement to retail investors.
- Transactions are based on the Net Asset Value (NAV), which
- CPs are ideal for firms with strong financial health needing short-
is calculated at the end of the trading day.
term funds. They offer competitive returns for investors while being
Types of Investment Companies a cost-effective alternative to bank loans for issuers. The presence
of a secondary market provides liquidity for investors who want to
1. Open-End Investment Companies
exit before maturity.
o Shares are purchased directly from the company.
6. Repurchase Agreement - short-term borrowing arrangement
o The company issues new shares and invests the funds where a company sells money market securities to another party
received. and agrees to repurchase them at a later date with added interest.

o To sell shares, the company sells its assets to pay the - The securities (e.g., T-bills, T-notes, or other government
investor. securities) serve as collateral for the loan.

2. Closed-End Investment Companies Types of Repos

o Operates with a fixed number of shares or units. 1. Overnight Repo:

o Investors buy or sell shares only through other o Transaction is completed overnight.
investors, not the company.
o The borrowed amount is repaid with interest the next
5. Commercial Papers – unsecured promissory notes issued by day.
firms with high-credit standing.
2. Term Repo:
- Typically issued in multiples of ₱100,000 or more.
o Fixed duration beyond one day.
- Sold at a discount from face value.
o Provides longer-term borrowing options.
- Interest rates are below the bank's prime rate offered to preferred
3. Continuing Contract Repo:
clients.
o No set maturity date.
- Requires approval from the Securities and Exchange
Commission (SEC). o Can be terminated by either party on short notice.
7. Interbank Money Market – loan granted by one bank to another London Interbank Bid Rate – if banks have excess deposits and were
bank. not able to lend at LIBOR, the bank to earn additional income on its
excess deposits will lend it another bank or companies at LIBID.
Loans offered under Interbank MM:
- It is the average interest rate where London and
- Overnight Money (borrowed or loaned for less than a week or
eurocurrency deposits from other banks in interbank market.
1 banking day only)
- Rate charged to companies/banks who like to borrow
- Call Money (loan payable on demand. The lender can call or
eurocurrency.
ask for payment anytime)
- Notice Money (borrow and lend on an unsecured basis)
- Term Money (loaned and deposited for a fixed period)
- Intraday Money (loan borrowed in a day)

8. Eurocurrency Market – market for short-term deposits

denominated in currencies and other easily convertible currencies
other than the one in which the bank operates

- international equivalent for the domestic money market.

- maintaining a US dollar account in a bank whose currency is

different from the US currency.

9. Banker’s Acceptance – used for transactions to finance the

shipment and handling of merchandise between the exporter and
importer.

- can be traded in the secondary market.

London Inter-Bank Offer Rate (LIBOR) – the rate offered to

Eurodollar funds offered in the international money market.

- Standard measure of interest rate whenever loans are

granted.