CHAPTER 5: [Bali, ‘yung mobilization of savings kasi matters

OVERVIEW OF FINANCIAL SYSTEM most to a low-income economy or to those that

are suffering from capital scarcity. Hence, if a
nation can build a sound financial system, they
Explain what financial system is as well as its are also building a larger scope for their capital
objective. sources, which will eventually lead to a faster
economic growth.]
[Financial system is a system where there is an
exchange of financial medium or funds between
the lenders, investors, and borrowers.] Discuss the flow of funds through the
financial system.
[Bali, may tinatawag kasi tayong budget balance
which refers to both budget surplus and budget [Based on the illustration in the book, the lender-
deficit. This budget balance is commonly used in savers or those who have acquired surplus or
reference to government budgets but this can those who spend less than their income are on
also be applied to households or individuals or the left side, while the borrower-spenders who
businesses. When we say balanced budget kasi, wish to spend more than their income but can’t
it means that your total expected revenues or afford are on the right side. Sa direct finance
your total income is equal to your total spendings. ‘yung lender-savers are directly na
So, when you can save money because you nakikipagtransact sa mga borrower-spenders.
spend less than your income, then may budget Diba doon sa financial market, kumbaga
surplus; budget deficit naman if it’s the other way palengke siya pero ang tinda are stocks, bonds,
around.] or other securities or financial instruments. Direct
finance siya, bakit? Kasi ‘yung lender-savers pa
[CONNECTION TO FINANCIAL SYSTEM] rin naman ang nakikipagtransact directly sa
- The mechanism of financial system kasi borrower-spender, para lang silang nagrenta ng
is, as I have defined it earlier, may place nila sa market. Kasi diba channel or
exchange or reallocation of funds, and the medium lang naman ang financial market. Ang
parties involved here are those na may ginagawa lang ng lender-savers is pinuput nila on
budget surplus which are the lenders and public sale sa market ang surplus nila.]
those na may budget deficit which are the
borrowers naman. Those lender-savers [On the other hand naman, we have the indirect
will offer their surplus either directly or finance, dito is my third party nang involved which
indirectly to the borrower-spenders to aid are the financial intermediaries who are serving
the latter with their shortage of funds kasi as the agents or middleman between the lender-
parang they want or wish to spend more savers and borrower-spenders. Example nito is
nga. ‘yung sa mutual funds, so this financial
- So, basically, the objective of financial intermediary kasi ang ginagawa niya is it creates
system is to efficiently distribute funds to a stock portfolio then ayon ang binebenta niya sa
their most productive uses. individual investors. Ano ba ang stock portfolio?
Collection siya ng stocks na pinag-investan mo
typically from different companies.]
Explain how the financial system affects a
nation’s economy.
Enumerate the key components of the
[A well-functioning financial system is very crucial financial system.
for the development of a nation’s economy. Why?
Because, a sound financial system make way for [FINANCIAL INSTRUMENTS]
better mobilization of savings of the people and - As defined in chapter 4, is any contract
the government which creates a larger pool of that gives rise to a financial asset of one
savings, and if there’s a large pool of savings entity and a financial liability or equity
then, maganda or marami rin ang pwedeng ioffer instrument to the other entity.
na investments to the public, even to the - Examples ng anito ay ‘yung sa derivatives
foreigners, which will also results to a faster rate such as future contracts, forward
of capital accumulation.] contracts, and options.
[FINANCIAL MARKET & FINANCIAL
INSTITUTIONS]

[THE CENTRAL BANK & OTHER FINANCIAL

REGULATORS] Distinguish between adverse selection and
- This will be discussed pa in the latter moral hazard.
chapters, 16 and 17. Pero just to give an
overview, ‘yung 4 principal regulatory [these are two problems arising from asymmetric
agencies ng Philippine Financial System information; so, ‘yung asymmetric information is
ay ang BSP, Philippine Deposit Insurance when one party in a economic transaction has
Corporation, SEC, & Insurance better information than does the other party,
Commission. kumbaga, parang mas kilala ni borrower si lender
- The main objectives of these financial or mas kilala ni lender si borrower.]
regulators is to:
a. Ensure the soundness of the [ADVERSE SELECTION]
financial system. - This happens before the construction of
b. Increase the information the contract wherein the investors or
available to investors. lenders are having a hard time
c. Improve the control of the distinguishing the low-risk borrowers from
financial system. high-risk borrowers.

[MORAL HAZARD]
Explain the main functions of financial - This happens naman after the
system. construction of contract. Ang problema
naman dito ay hindi alam ng investors or
[RISK SHARING] ng lenders if the borrowers are using the
- Financial system helps people reduce fund they had lent as intended. There are
their exposure to risk through allowing tendencies kasi na very capable si
them to engage in diversification. borrower, kahit pa he/she was determined
- Diversification is the splitting of wealth beforehand as a good borrower, to
into many assets or spreading your conceal relevant information or to act in a
investments instead of concentrating them way that is outside the interest of the
in a single company. Basically, parang ito lender or taliwas sa napag-usapan nila.
‘yung saying na “don’t put all your eggs in
one basket” kasi in one wrong move you
could lose everything. Describe how financial intermediaries:

[LIQUIDITY] [REDUCE ADVERSE SELECTION]

- it is said that stocks, bonds, or other 1. Requiring the borrowers to disclose
assets created by the financial system are material information on their financial
more liquid than physical assets. In order performance and position.
to make those illiquid assets liquid, 2. Collecting information firms and selling
financial system introduced the process of that information to investors.
securitization. 3. Requiring borrowers to pledge some of
- Securitization is the process of their assets as collateral.
combining illiquid assets with other assets
to create a more liquid assets that can be [REDUCE MORAL HAZARD PROBLEMS]
sold to another party. 1. Monitoring borrowers.
2. Imposing restrictive covenants.
[INFORMATION]
- Collecting and communicating information [REDUCE TRANSACTION COSTS]
help the borrowers to decide whether they 1. Economies of scale: these are cost
will push through with the investment and advantages that companies experience
help the lenders to assess the credit when production becomes efficient, the
worthiness of the borrower. cost is being spread out over a larger
amount of goods or services.
 2. Technology lend credits to farmers, businessmen, and
3. Reliance on sophisticated software to cottage industries na nasa rural areas. So
evaluate the creditworthiness of loan ‘yung sa cottage industries pala are those
applicants. small manufacturing units producing
goods and services using conventional
CHAPTER 6: and low-technology methods. Examples
THE PHILIPPINE FINANCIAL SYSTEM are locally produced handicrafts and
textiles.
[COOPERATIVE BANKS]
Describe the nature and basic functions of:
These are small financial institutions
[BANKING INSTITUTIONS] naman that are owned by their members
with primary purpose of providing wide
1. Private Banking Institutions range of financial services and credits to
aid the members in their capital needs.
[UNIVERSAL BANK]
[COMMERCIAL BANK]
2. Government Banks
Both of them are the kinds of banking
[DEVELOPMENT BANK OF THE
institution that are primarily concerned
PHILIPPINES]
with receiving deposits from individuals,
then utilizing those deposits to extend
The primary objective naman of this
credit to businesses and offer related
government bank is to provide loans to
services. The only difference is that sa
MSME’s inclined in agricultural and
universal bank or extended commercial
industrial enterprises to help them cater
bank, they have the power of investment
their medium and long-term needs.
house wherein they are allowed to engage
in the primary selling of underwritten
[LANBANK OF THE PHILIPPINES]
securities; the commercial bank doesn’t
have this authority.
This government bank naman ay naka-
align ang purpose sa CARP or the
[THRIFT BANKS]
Comprehensive Agrarian Reform
Program. This act is founded on the right
These banks focused primarily on
of farmers and regular farmworkers, who
financing MSME’s & Home Building and
are landless. Bali, this program aims to
Home Development. Kaya Thrift Banks
grant those landless farmers and farm
are also known as savings and mortgage
workers ownership of agricultural lands.
banks as they accept savings and provide
mortgage loans. Diba ang familiar na
[AL-AMANAH ISLAMIC INVESTMENT
mortgage sa atin is using our houses as
BANK]
collateral for our liabilities. But, ‘yung
mortgage loans na tinutukoy kasi rito is
Its mandate is primarily to participate in
naka lean siya more on house loans kasi
the socio-economic development of the
nga thrifts banks promote homeownership
Autonomous Region of Muslim Mindanao
among Filipinos.
(ARMM) by promoting and utilizing Islamic
banking, financing and investment in
Examples nito ay:
agricultural, commercial and industrial
Stock Savings and Mortgage Bank
ventures in the ARMM.
Private Development Bank
Stock Savings and Loan Association
[NON-BANK FINANCIAL INSTITUTIONS]
[RURAL BANK]
1. Private Non-Bank Financial Institutions
Dito naman sa rural banks, from the name
itself for rural areas siya or like provinces
[INVESTMENT HOUSE]
ganiyan. Bali, they accept deposits and
[INVESTMENT BANK]
 60 years old. (Cash payment equivalent to
[FINANCING COMPANY] 18 times the Basic Monthly Pension
(BMP) payable upon separation and
They extend credit facilities to consumers, monthly pension for life starting at age 60)
as well as to industrial, commercial, and
agricultural entities. Bali, ano ba ‘yung
credit facilities? Kapag sinabi kasing credit
facilities ito ‘yung pre-approved loans that
allow the borrower to borrow money on an [SOCIAL SECURITY SYSTEM]
on-going basis over an extended period of
time. ‘Yung point niya is para siyang credit Granted naman to employees who are
card, these don’t make the borrowers working in private companies and offers.
reapply for a loan every time This provides lifetime pensions to
kakailanganin nila. members who have reached the age of 65
and have at least 10 years of
[SECURITIES DEALER] contributions. (‘yung contributions nito ay
nakadepende sa monthly income, which is
Serves like an agent in a way na engaged ‘yung nakatable)
siya sa buying and selling ng securities.
[PAG-IBIG]
[SAVINGS AND LOAN ASSOCIATION]
[MUTUAL FUNDS] Housing loans to both government and
[PAWNSHOPS] private employees.
[LENDING INVESTORS]
[PENSION FUNDS] 200 ang monthly contribution; 100 kay
[INSURANCE COMPANIES] employee and 100 kay employer.
[CREDIT UNIONS]

2. Government Non-Bank Financial Be familiar with the current risks in the

Institutions Philippine Finance System.

[GOVERNMENT SERVICE INSURANCE [REPRICING, REFINANCING, & REPAYMENT

SYSTEM] RISKS (3Rs)]

Grants life insurance, retirement, and all Based on my understanding, these risks are
other social security protection provided directly proportional to market changes. For the
under R.A. No. 8291 to all government repricing, from the term itself, pwedeng mabago
employees except the ff: ‘yung price ng let’s say loans na kailangan mong
a. Members of Judiciary & Constitutional bayaran. For example, may loan ka tapos may
Commissions (life insurance lang fixed interest rate ito na 3% for let’s say 3 years.
granted sa kanila) Now, if that fixing period ends, pwede na maging
b. Contractual employees subject to changes or repricing ‘yung interest rate
c. Uniformed members of the Armed depende sa galaw ng interest rate sa market.
Forces of the Philippines and the PNP,
including the Bureau of Jail Sa refinancing naman, ito ‘yung risks of being
Management and Penology and the unable to refinance an existing debt with a new
Bureau of Fire Protection debt. Ang refinancing debt kasi is where the
borrower applies for a new loan with better terms,
Regarding contributions naman, sa and then used the proceeds from that loan to pay
employee ay 9% of his/her actual monthly the other existing debt. So kapag nagsusuffer na
salary and 12% naman sa government sa refinancing risk most probably is wala ng credit
agency. worthiness ang isang borrower kasi hindi na ulit
siya maka-acquire ng bagong loan or makautang.
Sa retirement benefits naman ng GSIS,
dapat ay the employee already rendered
15 years of service and must be at least
Repayment risk naman ay ‘yung mga borrowers ‘yon noong January 2023 ang stock price niya is
na malaki ang potential in failing to make the 100 lang, then ngayong November 2023 it
required payments. increased to 200, with that increase gusto na
siyang ibenta. I can sell them in the Philippine
[DEVELOPMENTS IN THE CREDIT MARKET] Stock Exchange through trading. Therefore,
obviously, hindi involved ‘yung Jollibee sa
[CONTINUOUS DEMAND FOR CREDIT BY transaction. Under din nitong Secondary Market
CORPORATE ENTERPRISES & HOUSEHOLDS iyong mga Auction Markets.]
IS EVIDENT IN THE DOMESTIC ECONOMY]

What are the basic functions of the financial

CHAPTER 7: markets? Explain them briefly.
FINANCIAL MARKETS: AN OVERVIEW
[RAISING CAPITAL]
- Financial markets serve as source of
Describe what financial market is. capital for individuals who wish to
purchase something.
[In simple terms, this is the meeting place of the
lenders, borrowers, and investors. Hence, this is [COMMERCIAL TRANSACTION]
very essential in catering the flow of money in the - Commercial transaction are interactions
economy, may it be globally or locally. Also, dito between two or more parties in which
sa financial markets nagrerely ang mga goods or services are exchanged for some
individuals, businesses, corporations, even the type of payment.
government in funding their short-term or long- - Financial markets make these
term needs and operations.] transactions smoother.

Distinguish between public financial markets [PRICE SETTING]

and corporate financial markets. - Through financial markets, prices of items
are being determined by determining the
[based on my understanding, public financial prices at which individuals are willing to
markets differ from corporate financial markets buy and sell them.
through their users. Kapag sa public financial
markets kasi ang users niyan are the national, [ASSET VALUATION]
state, and local governments while for the - Through market approach wherein the
corporate financial markets naman ay large value of an asset is being determined
corporations. Also, dahil nga magkaiba sila ng based on the selling price of similar assets
users, consequently ay magkaiba rin sila ng main in the market.
target for funding. If tama pagkakaintindi ko,
public financial markets are for funding the public [ARBITRAGE]
activities of the government that are for public - Kapag sinabi kasing arbitrage, this is the
order and use. While the corporate financial act of buying a security in one market then
markets, since for large corporations ito, ang selling it in another at a higher price. This
main focus nito is to help the corporations in shows the spread in prices of different
raising funds for their operations.] markets, and one of the functions of
financial markets is to make this spread
smaller by moving the prices towards a
Distinguish between “primary market” and uniform level.
“secondary market”.
[INVESTING]
[Primary Market is where securities are made. - Parang serves as a parking lot for the
Kumbaga dito nangyayari ang initial public money of individuals who wants to store
offering of the firms of their stocks and bonds. their money somewhere that it will earn a
Therefore, may direct ang transaction dito. On the return or income in the future.
other hand, in the Secondary Market, buy and sell
na ang nangyari dito. For example, bumili ako ng [RISK MANAGEMENT]
stocks sa Jollibee tapos, let’s say noong binili ko - Trading of risks.
 makakatransaction ba nila sa market na
Distinguish between “debt market” and ‘yon are really capable of meeting the
“equity market”. terms of their agreement or their interests
in general. Lastly, sa suitable investor
[These two are sources of funds, parang sources protection and regulation naman, sinasabi
of financing lang din for a business which are the lang dito na ‘yung like rules or policies or
credit and capital/equity. Sa debt market dito bylaws governing the protection of the
nagtatake place ‘yung buying and selling of bonds parties and regulation of the transactions
or pwede ring mortgages, tapos sa equity market occurring in the market should not be
naman ay buying and selling of stocks.] excessive nor loose. Dapat ‘yung tama
Distinguish between the organized stock lang.]
exchange and over-the-counter exchange.
[LEGAL PROCEDURES]
[kapag organized stock exchange ito ‘yung may
mga physical location while the over-the-counter - Of course investors want a backup in case
exchange happens only virtually.] may anomalies or irregularities sa
transaction nila sa market para mayroon
Enumerate and explain the attributes of silang available remedies, and also this
financial markets that investors look for. legal procedures allow the enforcement of
contracts.
[LIQUIDITY]
[LOW TRANSACTION COSTS]
- Investors look for a liquid market. Bakit?
Kasi in a liquid market mas madaling - Syempre kung saan mura, doon ang tao
makahanap ng katransaction and
madaling mag-meet kumbaga ‘yung Enumerate and explain the factors that
interests or terms ng seller and buyer, like brought about major changes in the financial
sa prices. Despite the fluctuations sa market.
prices or changes in supply and demand,
‘yung spread baga between the price na [TECHNOLOGY]
gusto siyang ibenta and price na gusto
siyang bilhin remains relatively small. [DEREGULATION]
Unlike in an illiquid market kung saan [LIBERALIZATION]
sobrang laki ng spread which makes the [CONSOLIDATION]
transaction almost impossible kasi hindi
na nagtatagpo, or at least naglalapit man - Itong tatlong ‘to ang effect nila sa financial
lang ‘yung buyer and seller. Also, sa market is like a domino effect, from
illiquid market, there’s always a lacking of deregulation, nagkaroon ng liberalization,
interested buyers or available assets or and now consolidation. Sa deregulation
securities na hinahanap ng buyers.] kasi kumbaga is nagluwag ‘yung policies
or ‘yung controls sa financial markets.
[TRANSPARENCY] Based on my understanding sa book,
[RELIABILITY] nagsimula ito noong 1975 when the US
[SUITABLE INVESTOR PROTECTION & prohibited the stockbrokers or ‘yung
REGULATION] nagbubuy and sell ng stocks to sell to
clients from setting a uniform commission
- Itong tatlo kasi ay kinda related to one or brokerage fee for share trading. Ever
another or they are kumbaga leaning since then mas nagloosen up na ‘yung
forward to the same objective which I think restraints sa market from one country to
is to make investors feel safe transacting another.
in the financial market. Doon sa
transparency, although self-explanatory - Now, dahil nga nagkaroon ng
naman siya, ibig sabihin lang niyan is deregulation, mas maluwag na, mayroon
‘yung complete disclosure of information na ngayon ng tinawatag nating
about trades and prices sa market. Sa liberalization in the participation in the
reliability naman, is if ‘yung mga market. Kung dati siguro may rules
 separating financial institutions from one details that need to be sent to the stock
another, ngayon wala na kaya nagkaroon exchange)]
din ng consolidation or merging of firms.
Also, sa liberalization, mas pinalawak din What is the implication of the SEC granting a
‘yung rules governing the issuance of “Self-Regulation Organization” status to the
shares ng mga company, this time sila na Philippine Stock Exchange?
ang bahala kung kanino sila mag-iisue ng
shares nila, sila na bahalang mag-assess [So, noong June 1998 kasi the SEC granted the
and all. PSE a self-regulatory organization. This means
that the SEC is now allowing the PSE to
[GLOBALIZATION] implement its owns rules and regulations and to
impose penalties to those participants and listed
- Globalization extended the scope of a companies who failed to adhere to the standards.]
financial market globally or internationally.
What benefits could be achieved if the Code of
Ethics governing Financial Market Activities
would be implemented and followed by the
participants.

[then, the country will have a sound financial

market which means that the individual
participants as well as the government, and
different entities will be able to fund their
operations or needs in a smoother manner with
more secured regulations.]

Describe what “stock exchange” is.

[Ito ‘yung secondary market na nagpprovide ng

platform for the buying and selling of securities
from listed companies.]

[The national stock exchange in the country is

Philippine Stock Exchange.]

[for further discussion of the PSE & PSEi, refer to

your notebook]

What does “listing of securities” mean?

[First is ano muna ‘yung listing, in simple terms ito

lang ‘yung putting on sale or for dealings ‘yung
securities of any company or firm on a recognized
stock exchange. ‘Yung recognized stock
exchange naman ay any stock exchange
recognized by the government through
registration in the SEC.]

[Now, listing happens after the company entered

into a listing agreement with the concerned stock
exchange and after paying the required listing
fees.]

[‘Yung terms and clauses in the listing agreement

have to be followed; (refer to the book for the
 Explain how banks, companies, and investors
use financial instruments in the money
market.

[‘yung financial instruments na tinutukoy rito ay

‘yung mga money market instruments to be
specific, and kapag money market instruments
automatic short-term nga siya, halimbawa nga ay
‘yung commercial papers, certificate of deposits
that are generally long-term kasi pwede siyang
maglast up to 10 years pero nakadepende naman
kasi kung anong term ‘yung inapplyan, meron din
tayong mga treasury bills.

[So, paano nga ba ‘to ginagamit ng mga banks,

companies, and investors? For the banks, may
mga instances kasi na tumataas ang demand ng
CHAPTER 8: public for long-term loans and mortgages, and
MONEY MARKETS AND CAPITAL MARKETS ‘yung mga deposits that they hold are not enough
to finance these long-term commitments dahil
Explain the phrase “money market”. pwedeng ‘yung deposits na hawak nila ay short-
term lang din or highly liquid in a way na pwede
[as defined by the book, money market is the siyang iwithdraw ng customers any time, so hindi
network of corporations, financial institutions, talaga siya pwedeng gamitin for long-term kasi
investors, and governments which deal with the ‘yung mga customers naman nila, which are the
flow of short-term capital.] owners of those deposits, ang mawawalan. In this
case, the banks may issue certificates of deposit.
[so, based on my own interpretation, kapag sinabi Kapag sinabi kasing certificate of deposit, savings
kasing network diba, in the business field, it’s a account siya na you can only withdraw after a
connection na kapag mayroon ka ay favorable specified period of time, and withdrawing money
sayo in a way na if nangailangan ka, let’s say you early will give rise to a penalty fee.]
need funds or additional investments ay sa kanila
ka makakahingi or sila ang maaasahan mo. This [For the companies naman, ang main purpose
is basically the money market. Kasi this is where nila for entering the money market is to finance
the short-term liquidity transactions occur. Kapag their running costs kapag nagkulang sila sa
may isang company ang kailangan ng funds to pondo. Kapag sinabing running costs, this is the
carry out their day-to-day operations or pwedeng money that they spend regularly to keep their
nashort sila and they need funds for payroll system or operations going, so obviously, it’s very
payment which is also short-term liability, sa vital. If naubos ito, the company may issue
money market sila pwedeng dumiretso dahil dito commercial paper. Commercial paper is an
sila makakahanap ng lenders who can provide unsecured short-term debt security issued by
them cash immediately.] SEC-Registered corporations. This is typically
used to fund short-term liabilities of an entity.]
Describe how the money market mechanism
works to bring providers and users of short- [Lastly, for the investors naman, usually ay ito
term fund together. ‘yung mga individuals who want to invest a large
sum of money pero at a relatively low risk, or
[so, the money market serves as a medium those who wants to just “park” their cash until
wherein those who immediately needs funds or makahanap sila ng better investment or until they
financing for their financial assets will meet those need it for short-term funding. Kaya dito sa
investors or providers with highly liquid asset at a money market, kasi kapag long-term, the risk is
very low cost or without the intermediation of obviously higher, especially kapag mas malaking
banks or any financial intermediaries.] amount, and also dito sa money market dahil nga
short-term lang siya, most probably is very stable
lang ‘yung investment less ‘yung fluctuations
tapos can be turned into cash pa immediately.]
Give and describe the types of money market Who are the primary issuers of capital market
instruments. securities?

[COMMERCIAL PAPER] [NATIONAL & LOCAL GOVERNMENT]

- Already explained sa previous question. - The national government issue capital
market securities to finance national debt
[BANKERS’ ACCEPTANCES] while the local government issue capital
- For the company that issues it, a banker's market securities to finance capital
acceptance is a way to pay for a purchase projects.
without borrowing to do so. For the - What are capital projects by the way? In
company that receives it, the bill is a the perspective of the LGUs, Capital
guaranteed form of payment. A banker's Projects are long-term, high-value
acceptance requires the bank to pay the endeavor with the purpose of building
holder a set amount of money on a set upon or improving their respective
date. municipalities. Examples nito ay roads,
- issued at a discount to their face value. ‘yung mga nakikita nating ginagawang
mga daan lagi, railways, manufacturing
[TREASURY BILLS] plants, power transmission, and electrical
- Issued by national government. distribution. Bali, and common
[GOVERNMENT AGENCY NOTES] denominator nila ay bukod sa long-term
[LOCAL GOVERNMETN NOTES] ang paggawa sa mga ito at ang benefits
nito, large scale rin siya kumbaga hindi
[INTERBANK LOANS] lang siya enclosed or limited sa isang
- Loans extended from bank to another place or person of beneficiary.
bank.
[CORPORATIONS]
[TIME DEPOSITS/CERTIFICATES OF DEPOSIT] - For corporations naman, they may enter
- Already explained in the previous the capital market for they do not have
question. sufficient capital to fund their investment
expenditures and for investment
[REPOS] opportunities.
- Repurchase agreements. - When we say investment expenditure, this
- Keep the money market highly liquid by concerns the expenses or costs a
ensuring that there will always be a corporation has incurred for their capital
sufficient supply of customers for newly operations. So, when a corporation enter
offered money market instruments. into the capital market to finance their
- So bali, in simple words, from the term investment expenditure it means that they
itself “repurchase agreement” happens need funds for loan payments, investment
when the party selling the security agrees grants, and even equipment or real estate
to repurchase it in the future from the acquisition.
buyer who also agrees of selling it in the
future, usually on an overnight basis. Where does capital market trading occur?

Explain what capital market is. [The capital market trading occurs in either a
primary market or secondary market. We are all
[this is the opposite naman of the money market; familiar naman na with the difference between the
this market naman ay for funding long-term two markets, just to elaborate na lang in
finances or for building your capital. At dahil nga connection with capital market trading, most
long-term ito, unlike sa money market that offers capital market transactions take place in the
less cost and risk, sa capital market offers greater secondary market. Bakit? Because in primary
risk but greater potential also for higher returns. market only once lang pwede maibenta ang isang
‘Yung cost na tinutukoy rito ay dahil usually held capital market security and the process of
by financial intermediaries ang capital market creating a batch of this security naman is very
instruments such as bonds, stocks, and lengthy due to regulatory requirement kaya
mortgages.] matatagalan ‘yung raising of funds. Meanwhile,
sa secondary market naman, since buy-and-sell [Firstly, what is a yield-to-maturity? This refers to
of securities lang talaga ang nangyayari dito, the the total return that you can expect from your
process is rather quicker and there’s no limit to investment in the bonds if the issuer managed to
the number of times a security can be traded.] properly pay all interest payments plus the
principal at the maturity. Kumbaga ay ito ‘yung
What are the bonds? How are they traded? tinatawag nating Internal Rate of Return or the
metric that measures the profitability of an
[Bonds are long-term debt instruments issued by investment.]
governments and corporations to finance their
operations, expenditures, or other debts. When [Unlike the current yield, YTM applies the
an entity issues a bond kasi, actually if hindi significance of the time value of money. Ano ba
talaga familiar ang isang individual sa nature and kapag sinabing time value of money? This is the
definition ng bonds, medyo nakakalito siya, kasi concept that a sum of money today ay mas
usually kung sinong nag-issue diba ay sila ang malaki ang halaga compared sa sum of money
may upper hand sa transaction or sila kasi ang that is to be received on a later or future date.
naglabas ng pera or ang nagpahiram. Pero, in This is because of its earning potential. It is
bonds, it’s the other way around; the party who believed kasi na ‘yung pera na hawak mo ngayon
issues the bond is the debtor and the other party ay mas mag-eearn dahil pwede mo na siyang
becomes the creditor. Pero, the latter is actually iinvest unlike sa pera na matatanggap mo pa in
called the bondholder kasi they are more of an the future dahil madedelay ‘yung earnings mo so
investor than of a creditor.] it’s a lost opportunity.]

[Bonds are traded publicly in the market kaya the [The approximate YTM can be determined
interest affiliated to the debt instrument ay through a formula na provided sa book with an
nakadepende sa movement ng interest rate sa illustration din under page 122.]
market. When bonds are traded publicly, ang
nagsisilbing middle man ay the investment How is credit quality risk of bonds issued by a
banking firms kaya may tinatawag tayong Firm corporation may be minimized?
Commitment Underwriting. The process is
illustrated in our book; firstly underwriting kasi [Firstly, what is credit quality risk? Credit quality
means that an individual or an institution takes on risk is the chance or probability that the issuer
the risk associated with an investment or a loan in may not be able to make required payments of
exchange of a premium. So, basically, the interests and principal amount on time.]
investment banking firms will serve as
underwriters wherein they will be the ones to buy [To minimize this risk, a lot of strategies may be
first the issued bonds of a corporation without any used, but to name a few, utilizing credit ratings,
assurance na maireresell nila ito at a higher price issuer analysis, imposing restrictive covenants.]
or kung maibebenta nila ito at all sa mga
investors or potential bondholders.] What is the relationship between bond rating
and expected rate of return?
[As I’ve said nga kanina since traded publicly ang
bonds, nakadepende ang interest rates nito sa [They are inversely proportionate. A higher bond
prevailing market rates, kaya literal na nagttake rating or those considered investment grade
risks ang investment banking firms dahil firstly, offers lower rate of return since the likeliness of
binibili nila ang issued bonds at a fixed price pero the issuer being able to meet his/her debt
maibebenta nila ito depende sa galaw ng market.] obligations is strong. On the other hand, a lower
bond rating offers a higher rate of return,
Enumerate the advantages and disadvantages kumbaga kasi nga speculative sila or junk bonds
of issuing bonds as a source of long-term kung tawagin meaning ang taas ng risk na hindi
funds. makabayad ang issuer on time or at all due to
different underlying factors, kaya to compensate
[page 120-121] this risk and to attract investors, they will offer
higher yields or interest rates.]
How is the bond’s internal rate of return or
yield to maturity determined?
[Same lang sa idea na kapag mas risky ang
investment, mas mataas ang interest rates, and
vice versa.]

Describe the following types of bonds:

[UNSECURED LONG-TERM BONDS]

- These are the debenture bonds that are
only backed up by the reputation and
financial stability of a corporation.
- Normally issued by a well-known and
established borrower entity.

[SECURED LONG-TERM BONDS]

- These are mortgage bonds which are
secured by collaterals such as land,
buildings, and other real properties.

[JUNK BONDS]
- These are the speculative or those bonds
rated BB or below. Usually, these are firms
that are newly built hence, haven’t
established yet their credit ratings.

[FLOATING RATE OF VARIABLE RATE BONDS]

- These are bonds naman na nakadepende
ang interest payments sa market
condition. This is favorable in times when
the interest rates are unstable.

Distinguish between ordinary or common

stock and preferred stock.

[Ordinary shares provide the holder or owner a

voting right while the preference shares do not.
On the other hand naman, ang advantage naman
ng owners of preferred stocks ay dahil nga
preferred sila, mas inuuna silang bayaran and
residual lang ang ibibigay sa owners of ordinary
shares, even during the liquidation. However,
again, a disadvantage ulit sa part ng preferred
stock owners ay fixed rate lang ang natatanggap
nila, so regardless kung tumaas man ang profit
ng isang corporation, their shares will remain the
same.]
 [BALANCE OF PAYMENTS]
- Firstly, what is balance of payments
muna? Balance of Payments kasi means
based on my interpretation po is the
summary or overall economic or monetary
transactions of a country with the rest of
the world; or simply the inflow and outflow
of foreign exchange.
- Then, meron din tayong tinatawag na
Balance of Trade which is the difference
naman between the country’s imports and
exports over a given period.
- The relation of these two affects the
changes in value of a currency. Let’s say
for example, kagaya rito sa book, sabi rito
is Philippines is a net exporter, kapag
sinabing net exporter, a country exports
more than it imports, and therefore
Philippines has a trade surplus which also
occurs when a country exports more
goods than it imports. Dahil dito, since
mas nag-eexport ang Pinas mas lamang
ang demand the Philippine currency
compared to other currency since
syempre if other countries are purchasing
CHAPTER 9: our goods, ang currency na gagamitin nila
FOREIGN EXCHANGE MARKET ay peso, parang kapag nasa ibang bansa
ka lang nagpurchase diba, you have to
List the factors that affect the value of a convert pa your cash to their currency.
currency in foreign exchange markets. Unlike kapag more on imports ang isang
bansa syempre mas mataas ang demand
[the exchange rate between two currencies is for other countries’ currencies.
determined by the supply and demand for those
currencies, if the supply increases but the [GOVERNMENT INTERVENTION]
demand decreases then, the value of the - Ang government intervention na tinutukoy
currency in foreign exchange markets ay bababa rito ay ‘yung pag-iinterfere ng BSP since
rin, on the other hand naman, if the supply sila nga ang humahawak sa Monetary
decreases while the demand increases, may Policy ng bansa which regulates the
pagtaas sa value ng currency. But this alone does movements of interest rates and money
not fully predict the changes in exchange rates.] supply.

[INFLATION] [OTHER FACTORS]

- Inflation deflates the value of a currency in - Political and Economic Stability
a way that it reduces its purchasing power. - Extended Stock Market Rallies
We all know naman na kapag may - Significant Declines in the Demand for
inflation, the value of money today is mas Major Exports
mataas compared sa magiging value nito
in the future, the money you receive today Explain how exports and imports tend to
will get you lesser goods and services at influence the value of a currency.
the end of the year.
[TRADE SURPLUS & TRADE DEFICIT]
[INTEREST RATES] [SUPPLY & DEMAND FOR CURRENCY]
- Higher interest rates calls for more
investment, and more investment means Differentiate between the spot exchange rate
higher demand for a currency. and the forward exchange rate.
[May tinatawag kasi tayong spot transaction and where the company operates or plans to
forward transactions and the exchange rates to operate. Consider factors such as political
be used for those transactions are the spot stability, government policies, rule of law,
exchange rate and forward exchange rate corruption levels, and regulatory
respectively.] frameworks.

[Kapag sinabing spot transaction ito ‘yung mga [Scenario Planning]

transactions na immediate ‘yung exchanging of - Develop scenarios for potential political
currencies, or on the spot kumbaga.] events that could impact the business.
Assess the potential impact of changes in
[Kapag naman forward transactions, on a later government, policy shifts, geopolitical
date pa siya.] tensions, and other political events on the
company's operations.
[So, their further difference ay mapapansin sa
kung magkano ang palitan. Kapag spot exchange [Regulatory Compliance]
rate kasi typically kung ano lang ‘yung current - Ensure strict compliance with local laws
rate that time of the transaction. Unlike sa forward and regulations. Stay informed about any
transaction, since in the future date pa nga siya, changes in regulations that could affect
predetermined na ‘yung magiging palitan, may the business. Establish clear processes
negotiation nang naganap between the parties for monitoring and adapting to regulatory
involved. Therefore, sa forward exchange rate changes.
mas narereflect dito or mas nasisignify ‘yung
probable future value of a currency in case of [Insurance and Risk Mitigation Strategies]
factors na mag-ooccur to either increase or - Consider political risk insurance to protect
decrease a value of a currency.] against losses arising from political
What is meant by translation exposure in events. This insurance can cover
terms of foreign exchange risk? expropriation, political violence, currency
inconvertibility, and other risks.
[Translation exposure or translation risk refers to
the risk that a company might face due to the STRATEGIES:
fluctuations of exchange rates that can eventually
affect the value of its foreign currency- [Diversification]
denominated assets, liabilities, and equities when - Diversify operations across different
they are translated or converted in their home countries to reduce exposure to political
currency.] risk in any single location. This helps
spread the risk and minimizes the impact
[Bali, nangyayari ito usually sa mga companies of adverse political events.
that are operating in multiple countries, pero
syempre kasi diba their financial statements still [Hedging]
have to prepared in their home currency, kaya - Use financial instruments to hedge against
‘yung values ng assets, liabilities, and equities currency risk. This can include forward
nila na let’s say for example ay transacted contracts, options, and other derivatives to
internationally or nasa ibang bansa nakatayo, protect against adverse movements in
then the values of those assets will be determined exchange rates.
based on the current exchange rate.]
[Legal Protections]
What procedure(s) would you recommend for - Seek legal protections through contracts,
a multinational company in studying exposure investment treaties, and bilateral
to political risk? What actual strategies can be agreements. Include clauses that address
used to guard against such risk? potential political risks, such as arbitration
mechanisms to resolve disputes.
PROCEDURES:
[Continuous Monitoring]
[Country Risk Analysis]
- Implement a system for continuous
- Conduct a thorough analysis of the monitoring of political developments. Stay
political environment in each country informed about changes in the political
 landscape and be prepared to adapt
strategies accordingly.

What is LIBOR? How does it compare to the

U.S prime rate?

[LIBOR or the London Interbank Offered Rate is

the benchmark interest rate that represents the
average interest rate that major banks in UK are
charging to another financial institution in the
international interbank market.]

[On the other hand, the U.S Prime Rate, is the

interest rate naman that the U.S charge their
most creditworthy customers. It is not directly
connected to LIBOR. Ang pinaka nakakainfluence
dito ay ang The Fed which is the central bank of
U.S.]

[Ang pagkakapareho nilang dalawa ay pareho

silang nagiging reference or basis kumbaga ng
rates na ginagamit or chinacharge sa market.]

[Regarding their differences, firstly is ang LIBOR

ay international since it involves interactions
between various countries and markets while U.S
Prime Rate is a domestic one for it only affects
US-based borrowers and lenders. Also, LIBOR is
being phased out based on the latest update in
January 2022 and they are now transitioning to
alternative reference rates. The rest of the
transitioning is scheduled to end in the summer of
2023 which was last June 30, 2023. It was
phased out due to different scandals it faced such
as when LIBOR was involved in manipulation of
the rate-setting banks and the because of the role
it played in worsening the 2008 financial crisis.]