Finals Exam Flashcards by King David Ostan

conduct financial sector assessments
of countries that they help. It is
imperative that they
monitor the financial standing of
country borrowers. A study of the country’s financial system is crucial in
the study of capital markets because
the financial market in central to the
financial system.

The International Monetary Fund (IMF) and World Bank (WB)

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was based on the joint work of IMF
and World Bank Financial Sector
Assessment Program (FSAP) Update
Mission to Manila form November 4 to 17,
2009. The initial FSAP took place in 2002.
The initial FSAP took place in 2002. The
update team comprised of World Bank
staff including Pamela Madrid, the main
author of the report.

The financial Sector Stability Assessment
(FSSA)

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are designed to assess the stability of
the financial system as a whole and not that of individual institutions. It has been developed to help countries identify and remedy weaknesses in their financial sector
structure, thereby enhancing their resilience to macroeconomic shocks and cross-border contagion

FSAP Assessments

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describes collectively the financial
markets ,the participants, and the financial instruments and securities that are traded in the financial markets. The functions of these are:
• To channel the funds from the savings units (lenders) to
the deficit units (borrowers);
• To provide a medium of exchange
• To provide a mechanism for risk sharing; and
• To provide a channel through which the central bank can
influence the economy, in general and the financial
system , in particular.

Financial System

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a way of getting deposits and necessary funds to finance projects and investments.

Fund Acquisition

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determining to which uses, projects, or investments the acquired funds will be used.

Fund Allocation

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the process by which necessary funds are given to the uses, projects, or investment that need funds.

Fund Distribution

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using the funds for its intended purpose

Fund Utilization

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Are generally described as the group that
receives income majority of which typically
comes form wages and salaries. Such income is
spent on goods and services, and a part is saved.

Households or Consumers

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Are the firms that bridge the gap between
surplus units (SUs) or investors/lenders and
deficit units (DUs) or borrowers. They channel funds form lenders to borrowers. They include depository institutions and non depository institutions. Other than being channels, they are lenders and borrowers at times.

Financial Institutions/Intermediaries

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Are businesses other than financial institutions or intermediaries. They include trading, manufacturing, extractive industries, construction, genetic industries, and all the
firms other than the financial ones. Just like
households and financial institutions, these are also borrowers or lenders or both at one time or another.

Non-financial Institutions

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Means the national, provincial, municipal or
city governments, and barangays or towns
comprising the Philippines as a whole. Each
division has its heads and agencies that help in running the division they are responsible for. The Bureau of Treasury (BTR) is part of the government that is a participant in the financial system. When BTR or any other subdivisions of government issue their own securities, they act as borrowers/deficit units, and when the BTR or any other subdivisions of government buy securities, they act as investors or savers/surplus units

Government

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The Bangko Sentral ng Pilipinas and all the other central banks of the different countries are mandated to ensure that their respective countries have a stable and healthy
financial system. They oversee the operations of their entire financial system and mandate the rules, regulations, and monetary policies that will help them
maintain a healthy and stable economy. This is
the “banker” to banks. It provides various services to banks such as helping them collect and clear checks and loaning them funds as needed. As a lender and
regulator, central bank oversees the health of the banking system. Central banks are the monetary policymakers of their respective countries.

Central Bank

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Refer to the participants from the rest of the world- households, governments, financial and non-financial firms, and central banks. Goods and services and financial instruments/securities are exchanged across national boundaries, as well as within boundaries. International trade and finance are parts of globalization. As globalization affects the entire world, the role of foreign participants in the financial system has become more important.

Foreign Participants

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It was established on January 3, 1949 as the
country’s central monetary authority. The
Bangko Sentral ng Pilipinas (BSP) was
established on July 3, 1993 pursuant to the
provisions of the 1987 Constitution and
Republic Act No. 7653, the New Central Bank Act of 1993 to replace the Central Bank of the Philippines. BSP enjoys fiscal and administrative autonomy in the pursuits of its mandated responsibilities.

Bangko Sentral ng Pilipinas and The Philippine Financial System

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the first governor of the Central Bank of the Philippines initiated the concept of central bank in 1933.

Miguel Cuaderno

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the Phil legislature passed a law establishing a central bank. Franklin Roosevelt disapproved due to strong opposition form vested interests.

Tydings McDuffie Act

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What is the organizational structure of BSP?

Monetary Board
Governor
• Monetary and Economics Sector
• Financial Supervision Sector
• Corporate Services Sector
• Payments and Currency Management Sector

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was formed form the country’s two former stock exchanges. The Manila Stock Exchange (MSE), and the Makati Stock Exchange (MKSE), established on May 27, 1963.

Philippines Stock Exchange (PSE)

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• Are markets in which users of funds (e.g corporations) raise funds, through new issues of financial instruments such as stocks and bonds .
• They consist of underwriters, issuers, and instruments involved in buying and selling original or new issues of securities referred to as primary securities.
• Are markets for new issues of financial instruments like stocks and bonds.
• They raise cash for the issuing company, which acts as borrower by increasing its current capital stock when it issues stocks, or outstanding liabilities when it issues bonds.

Primary Markets

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guarantees the sale of the issues, but
not intend to hold the shares or bond in his own account

Underwriter

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helps the corporations issuing the stocks or bonds sell these stocks or bonds to interested investors

Investment banks or Merchant banks

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• Once financial instruments are issued in primary markets, they are then traded here.

• Provide liquidity for investors as they sell their financial securities when they need cash.
• All transactions after the initial issue in the primary market are done in the secondary markets. For instance, A owns initially issued by Co. X and later on sells these Co. X stocks to B; the sale of A to B or anyone else is done in the secondary market.

Secondary Markets

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a financial institution organized usually as a corporation or a partnership which principal business is to buy and sell securities

Securities Dealer

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cover markets for short-term debt instruments, usually issued by companies with high credit standing. They consist of a network of institutions and facilities for trading debt securities with a maturity of one year or less. • They are markets in which commercial banks and other business adjust their liquidity position by borrowing, lending, or investing for short periods. • The government treasury uses money markets to finance its day-to-day-operations. Business and households also use money markets to borrow and lend. • Money market instruments that generally have short maturities are highly liquid and have low default risk.

Money Market

What are examples of short term money market?

Treasury bills (T-bills) issued by the government, banker’s acceptances, negotiable securities of deposits, money market deposit accounts(MMDAs), money market mutual funds (MMMFs) and commercial papers (CPs)

Banks with temporary cash surpluses led commercial banks to set up the money market as an auction house for excess reserves it is called what?

Interbank call market

These are credits of one bank to another for a period not exceeding 4 days. The 4-day limit is based on the BSP regulation and beyond this period, BSP presumes that a bank could not fund its assets form its deposit, that is, the bank is in trouble. Interbank call loan are treated as deposit substitutes.

Interbank call loans

are alternative ways of getting money from the public other that traditional bank deposits. They are borrowings by commercial banks form the public through other banks or money market

Deposit Substitutes

It was opened in May 1972 by the Chicago Mercantile Exchange (CME) pioneering the trading of international financial derivatives, most notably futures

The International Money Market (IMM)

It is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. Repo markets allow participants to undertake rapid refinancing in the interbank market independent of credit limits to stabilize the system

Repo Rate

It is a sale of securities for cash with commitment to repurchase them at a specified price at a future date.

Repurchase Agreement

The Philippine government issue two kinds of government securities, these are?

Treasury bills (T-bills) and Treasury bonds (T-bonds)

These are government securities which mature in less than a year. There are three tenors of T-bills: (1) 91-day, (2) 182-day, and (3) 364-day bills. The number of days is based on the universal practice around the world of ensuring that the bills mature on a business day

T-bills

are government securities which mature beyond a year. At present, these are five maturities of bonds: (1) 2-year, (2) 5-year, (3) 7-year, (4) 10-year and (5) 20-year. These are sold at its face value on origination. The yield is represented by the coupons, expressed as a percentage of the face value on per annum basis, payable semi-annually

T-bonds

It is an electronic mode by which the national government sells government securities to a network government securities eligible dealers (GSEDs) which are linked to BTR using bridge Information Systems (BIS), every Monday for T-Bills and every second and fourth Tuesday for T-bonds.

The Automated Debt Auction Processing System (ADAPS)

It is a SEC-licensed securities dealer belonging to a service industry supervised/regulated by Government (SEC, Bangko Sentral ng Pilipinas, or Insurance Commission) which has met the (1) P100M unimpaired capital and surplus account, (2) the statutory ratio prescribed for the industry, and (3) has the infrastructure for an electronic interface.

Government Securities Eligible Dealer (GSED)

non-formally organized markets are another mode of originating GS for specific investors, namely, the government-owned or controlled corporations (GOCCs), the local government units (LGUs), and the tax-exempt institutions (TEIs), such as pension funds, GSIS, SSS, etc. It is non-competitive

Over-the-counter (OTC)

the official registry of absolutely ownership, legal, or beneficial titles or interest in GS (T-bills and T-bonds). Upon award of GS to GSEDs at the auction, the securities awards are electronically downloaded to the RoSS system. On issue date, the Principal Securities Accounts of the GSEDs are credited of the winning bids.

RoSS

It is the increment or interest on an investment in GS. It is the discount earned on Treasury bills or the coupon paid to the holder of the treasury bonds.

Yield

It is a tender to buy an amount of GS at an indicated yield rate per annum that a GSED believes will wrest an award for the GSED by out-bidding other GSEDs in the primary market auction of GS.

Competitive Bid

It is a tender to buy a specified amount of GS by a GSED in the primary auction of GS, without indicating any yield rate, on the understanding that the award shall be at the weighted average yield rate of the competitive bids awarded at the same auction.

non-competitive bid

a method in which successful competitive bidders pay the price they have bid, and all the winning bidders may pay different prices. Uniform price or Dutch auction is a method of pegging a uniform coupon rate of a T-bond at the stop-out level of arrayed amounts of bid with the corresponding yield rate tendered.

Price Discrimination or English Auction

It is the payment process both in the primary and secondary markets for GS traded. This is undertaken by BSP being authorized by GSEDs to debit their respective demand deposit accounts with BSP in favor of the demand deposit account of the Treasurer of the Phil or their GSED also with BSP or vice versa.

Settlement of Trades

It is are markets for long-term securities. Long-term securities are either debt securities (notes bonds, mortgages, leases) or equity (stocks). Major suppliers of capital market securities are corporations for stocks and corporation and governments for bonds

Capital Markets

companies issue stocks or bonds, which are marketable/negotiable, to obtain long term funds. An instrument that is transferable by endorsement or delivery is negotiable. Negotiability allows securities to be traded anonymously. The identity of the seller need not be known. Negotiability improves liquidity because anyone who holds the security can immediately sell the security when the holder needs cash. The holder can eve sell the security prior to maturity

Securities Market

Securities market is composed of?

1. Stock Market 2. Bond Market 3. Derivatives Securities

It serves as the medium or agent of exchange transactions dealing with equity securities. It involves institutions and analysts who review the performance of listed companies. When companies are successful in their operations and investments, analysts recommend buying of their stocks creating demand and increasing share prices and shareholders’ wealth.

Stock Market

It is a measure of the price level of the shares listed in the exchange by the indicated category. Index reflects the prices of selected stocks. It is useful as a track record of changes in stock prices over time.

Stock Index

These are issued by the government’s treasury. These are backed by the full faith and credit of the government and are therefore free from risks. As a result, they pay relatively low rates of interest (yields to maturity) to investors

Treasury notes and bonds

It is an important financial instrument for development. In the Philippines, LGU bonds have recently been acknowledged as a potential tool for development

Municipal Bond (LGU)

These are long-term bonds issued by private corporations. Bond indenture is the legal contract that specifies the rights and obligations of bond issuer and bondholders (investors), term of the bond, interest rate, and interest payment dates.

Corporate Bonds

The term derivative is commonly used to describe a type of security which market value is directly related to or derived form another traded security. Derivative securities are financial instruments which payoffs are linked to another, previously issued securities.

Derivative Securities Market

does not involve securities, thus called non securities market. This is socalled negotiated because it results form negotiation between a borrower and a lender. It includes a direct loan by a company or a person form a lending institution, like a bank.

Negotiated or non-securities market

involves parties and transactions related to loans granted to households who desire to buy properties, such as cars or appliances, travel, obtain education for themselves or their loved ones or similar needs.

Consumer Credit Market

These are the exchanges. Exchanges, whether stock markets or derivative exchanges, started as physical places where trading took place

Organized Market

Unlike exchanges, OTC markets have never been a “place”. They are less formal although often well organized networks of trading relationships centered on one or more dealers.

Over-the Counter (OTC) Market

It is where the trading is done by an independent third party matching prices on orders received to buy and sell securities. Stocks are sold to the highest bidder on the trading floors.

Auction Market

This provides the physical and institutional structure through which the money of one country is exchanged for that of another country, the rate of exchange between currencies is determined, and foreign exchange transactions are physically completed.

Foreign Exchange Markets

are called such because buying and selling is done “on the spot” that is for immediate delivery and payment

Spot Market

Unlike the spot market, future market is where contracts are originated and traded that give the holder right to buy something in the future at a price specified in the contract.

Futures Market

Both the futures market and the forward market involve trading contracts calling for the future delivery of financial instruments, commodities or currencies.

Forward Market

This is where stock options are traded. This is formal market where the options are bought and sold, and not when a stockholder is given the option or pre-emptive right to buy additional shares of stock to maintain his proportionate share or ownership in the corporation.

Options Market

are agreement between two parties (counterparties) in exchanging specified periodic cash flows in the future based on an underlying instrument or price swaps allow firms to better manage their interest rate, foreign exchange, and credit risks.

Swap Market

Are government-issued securities with maturity of less than 91 days, specifically 35 days or 42 days. They have shorter maturities than Tbills. Government securities (GS) are unconditional obligations of the government issuing them, backed up by the full taxing power of the issuing government.

Cash Management Bills

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. Upon acceptance, which occurs when an authorized bank employee stamps the draft “accepted” and signs it, the draft becomes primary and unconditional liability of the bank. If the bank is well known and enjoys a good reputation, the accepted draft may be readily sold in an active market.

Banker's Acceptances

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 this 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. A commercial letter of credit is a contractual agreement between a bank, known as the issuing bank, on behalf of the buyer (drawer), authorizing another bank, the correspondent bank known as the advising or confirming bank, to make payment to the beneficiary, the seller.

Letters of Credit

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.

Certificate of Deposit (CD)

It is a bank-issued time deposit that specifies an interest rate and maturity date is negotiable. I is a short term, 1 to 52 weeks, and of a large denomination, P100,000, P500,000 and P1M. The normal round lot trading unit among dealers is P1 million. It is a bearer instrument, that is, payable to whoever holds the CD when it matures. Therefore, it is important that the owners must take good care of them because when lost, the one who found it can claim payment.

Negotiable Certificate of Deposit

invest in assets that are expected to reap large capital gains (generally equity securities)

Growth Funds

invest in stocks that regularly pay dividends and in notes and bonds that regularly pay interest

Income Funds

combine the features of both growth funds and income funds

Balance funds

invest in specific industries as healthcare, financial services, utilities extractive industries

Sector Funds

invest in a basket of securities that make up some market index as the S&P 500 index of stocks

Index Funds

invest in securities in many countries providing diversification

Global Funds

It 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. The arrangement allows the buyer to hold the security as a guaranteed source of payment. The buyer has the option to force the liquidation of the underlying security to ensure repayment.

Certificate of Assignment

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 pledge revenue stream, usually lease payments. The lessor assigns the lease and the payments to a trustee, which then distributes the payments to the certificate holders. The transaction is between the buyer and the original issuer of the security.

Certificate of Participation

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. These dollar-denominated deposits held offshore in US bank branches overseas and in other foreign banks are called?

Eurodollar CDs and Eurocommercial Papers

This 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.

Capital Market Instruments

Are direct borrowings of deficit units form surplus units like banks. They can be short-term and 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 borrowing from capital markets. They do one-on-one transaction with the lenders.

Loans

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 the expenses including insurance and taxes related to the property leased out and the lessee pays a fixed regular amount usually on a monthly basis. It can also be a financing or capital lease, where the lessee shoulders all expenses of the property as insurance and taxes

Leases

Are agreements where a property owner borrows money from a financial institution using the property as a security or collateral for the loan. The assets covered by the mortgages are non-current assets or permanent assets as land, building, and other real estate properties. Land, building, and machineries are usually mortgaged upon purchase.

Mortgages

It is a bank’s commitment to make loans to regular depositors up to a specific amount. This includes letter of credit, standby letters of credit, and revolving credit agreements, under which borrowings can be made up to a maximum amount as of any point in time conditional on satisfaction of specified terms, before, as of, and after the date of drawdowns on the line.

Lines of Credit

Are the largest capital market instruments. Stocks are evidences of ownership in a corporation. The holders are called shareholders or stockholders. Shares of stocks are actually intangible while the stock certificates are the tangible evidence of ownership. While there are stocks held for short-term use, classified as current assets under marketable securities or temporary investments, stocks are by nature long-term. They do not have maturity dates, although redeemable preferred shares, like callable bonds, can be called for redemption at the option of issuing company.

Corporate Stocks

are incorporated in the countries where they are located. Any other company is considered as foreign corporation as far as that country is concerned.

Domestic Companies

These are shares where the specific money value is shown on the face of the stock certificate and fixed in the Article of Incorporation. The primary purpose of par value is to fix the minimum issue price of the shares. The par value shares may be issued at a premium (above par value), but not be sold at a discount (below par value).

Par Value Shares

are shares without money value appearing on the face of the stock certificate. Our Corporation Code provides that no par value shares may not be issued for less than five pesos per share (₱5.00). No par value shares by the Board of Directors if authorized, or by a majority of the stockholders at a meeting called for that purpose

No Par Value Shares

If a corporation issues only one class of stock, it is called

Common Stock

as to assets upon liquidation mean that the shares shall be given preference over common shares in the distribution of the assets of the corporation in case of liquidation.

Preferred Shares

refer to shares with preferential rights to share in the earnings of the corporation, that is, the owners thereof are entitled to receive dividends before payment of any dividend to the common stock is made.

Preferred shares as to dividends

are entitled to receive all passed dividends in arrears. Non-cumulative preferred shares are not entitled to passed dividends or which are called dividends in arrears for cumulative shares. They receive only dividends that are currently declared

Cumulative Preferred shares

are entitled not only to the stipulated dividend, but also to the share with the common stock in the dividends that may remain after the common shares have received dividends at the same rate as the preferred for the current year

Participating preferred shares

are entitled to a fixed amount or rate of dividend only, say 10% or 8% or 12%

Non-participating preferred shares

Refers to that part of the authorized capital stock that has not been fully paid, meaning, stock certificates have not been issued, hence unissued. Retained earnings refer to the profits of the company that have not been declared as dividends and retained by the business to help in its operations. A board declaration means a resolution issued by the Board of Directors to the effect that dividends are being declared.

Unissued Common Stock

Are dividends distributed in the form of cash, say ₱10/share cash dividend, which means the company will pay those who own shares in the company at the rate of ₱10/share. Cash dividends can also be a certain percent, say 10% or 5%, In terms of share, if the par value or stated value of a stock is P20, a 10% cash dividend will mean 10% of ₱20 or ₱2/share, and if you own 1,000 shares, you will receive 1,000 shares x₱2 or ₱2,000.

Cash Dividends

Are dividends given out to stockholders in the form of the company’s own shares. If company declares a 10% stock dividend, it will be 10% of the shares owned by the stockholder. If you 1,000 shares of stock in a corporation, a 10% stock dividend will mean that you will receive 10% of 1,000 shares or 100 shares of the company’s own stock as stock dividend.

Stock Dividends

Are in the form of non-cash assets of the company distributed as dividends to stockholders. A company can declare property dividends and then distribute its own holdings of government securities, or marketable securities or even inventories. Instead of selling the securities or inventories and giving cash dividends, the company distributes the government securities, marketable securities, or inventories as property dividends.

Property Dividends

Are deferred cash dividends. These are promissory notes that will be paid by the company in cash at a certain future date. Unlike dividends out of earnings, liquidating dividends (return of capital) are given by companies who are in the process of liquidation (going out of business) or by companies in the extractive industry. Natural resources are depleted and stockholders of these companies receive what is known as liquidating dividends, which are in effect return of capital.

Scrip Dividends

It is issued by the Bureau of the Treasury are called T-bonds. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. These bonds are certificates of indebtedness with definite maturity dates, that is the date when the bond issuers need to redeem the bonds (redemption dates).

Government Bond

Bonds are certificate of indebtedness issued by corporations who need large amount of cash. Bond arrangements are called bond indentures. At times, it is impossible to borrow a large amount from a single institution. This is the time corporations decide to issue binds instead.

Corporate Bonds

are collateralized either by mortgages or other assets. Securitized mortgages (mortgagebacked securities) are mortgages packaged together by financial institutions and sold as bonds backed by mortgages cash flows as interest and principal repayments on these mortgages.

Secured Bonds

also called debentured bonds, do not have any sort of guarantee. They do not provide lien against any specific property or security for the obligation.

Unsecured Bonds

are bonds whose interest rate fluctuates and changes when the market rates change

Variable Rate Bonds

have rates that are fixed as stated in the bond indenture.

Fixed Rate Bonds

are bonds that can be turned in and exchanged for cash at the holder’s option. A putable bond allows the investor to sell the bond back to the issuer, prior to maturity, at a price specified at the time the bond is issued.

Putable Bonds

It is a bond in which the issuer has the right to call the bond for retirement for a price determined at the time the bond is issued

Callable/redeemable bond

can be exchanged for common stocks. This feature attracts investors, but these convertible bonds usually carry, lower interest rates. Usually, these bonds come with warrants , which are options to buy common stock at a stated price

Convertible Bonds

are bonds that pay interest only when the interest is earned by the issuing company

Income Bonds

are bonds which interest rate paid on these bonds are based on an inflation index

Indexed or purchasing power bonds

are speculative, below-investment grade , highyielding bonds.

Junk bonds

are government securities which mature beyond one year.

Treasury bonds (T-bonds)

These are issued by municipalities or local government units.

Municipal bonds or local government unit (LGU) bonds

These are negotiable certificates of deposit with a designated maturity or tenor beyond 1 year, representing a bank’s obligation to pay the face value upon maturity, as well as periodic coupon or interest payments during the life of the deposit.

Long-term negotiable certificates of deposit (LTNCDs)

Finals Exam Flashcards

(113 cards)