Securities Markets

Ma. Roma Angela R. Miranda-Gaton, LPT, MMBM

 Money Markets

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Money markets involve debt instruments with original maturities of one
year or less.
Money market debt.
• Issued by high-quality (i.e., low default risk) economic units that require
short-term funds.
• Purchased by economic units that have excess short-term funds.
• Little or no chance of principal loss.
• Low rates of return.
Most money market instruments have active secondary markets to provide liquidity.

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Money Market Instruments

Treasury bills (T-bills).

Federal funds (fed funds).
Repurchase agreements (repos or RP).
Commercial paper (CP).
Negotiable certificates of deposit (CD).
Banker’s acceptances (BA).

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They are offered by the following companies:
• mutual fund companies
• unit investment trust funds
• Personal Equity and Retirement Account (PERA)
• variable universal life (VUL) plans

Why money market fund is considered less risky than others?

• Money market tends to be regarded as the least risky compared to bonds and
stocks. This is because of the short maturity. Risk is reduced because there is a
shorter length of time that these debts are expected to be paid.
 Bond Markets

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 BONDS (The BASICS)

Bonds are debt instruments wherein an investor (you) lends money to a borrower
(government or company). [“IOU”]

They are obligations by the borrower (bond issuer) to pay the lender (bondholder) a
specific amount of money at specified times in the future.

There are two general types of bonds – bonds issued by the government (treasury
bonds) and those issued by corporations (corporate bonds).
 BONDS vs. STOCKS

A major difference between a stock and a bond is that stocks do not guarantee any
future payment (dividend) while bonds have a known and specific payment in the future
(coupon interest).
Bond Terms: FACE VALUE, MATURITY DATE, COUPON RATE

•The face value of the bond is the amount of money the bond issuer borrowed and must
be repaid at the end of the loan period.

•The end of the loan period is called the maturity date.

•The amount of money earned from a bond is determined by the coupon rate or interest
rate of that bond.
How to Make Money with Bonds

There are two ways to make money from bonds: through coupon interest and bond
trading.

What is Coupon Interest Payment?

The coupon rate is the interest rate the bond pays. This rate is usually fixed for the
duration of the life of the bond, although some bonds pay a floating rate, meaning the
interest rate is adjusted based on a benchmark rate.
How to Make Money with Bonds

How to compute the Interest Payment

Ex. A bond paying a coupon rate of 8% annually with a par value of P100,000.

The interest payment can be computed by multiplying the coupon rate of 8% with the
P100,000 par value of the bond.

8% x P100,000 = P8,000
How to Make Money with Bonds

Bond Trading

One strategy for making money investing in bonds is called rolling down the yield
curve.  The strategy involves buying longer dated bonds and selling them after 2 to 3
years to profit from their rise in value during that time.  
A. Government Bond Issues
1. Treasury Bills – negotiable, non-interest bearing securities with original maturities of
one year or less
2. Treasury Notes – original maturities of 2 to 10 years
3. Treasury Bonds – original maturities of more than 10 years
B. Municipal Bond Issues
1. Method of sale
a. Competitive bid – usually involves sealed bids
b. Negotiated sale – involves contractual arrangements between underwriters and
issuers
c. Private placement – involves sale of securities directly to a small group of investors
or institutional investors
2. Underwriting function – the investment banker purchases the entire issue from the
issuer and resells the security to the investing public. The firm charges a commission
for providing this service. For municipal bonds, the underwriting function is performed
by both investment banking firms and commercial banks.
This function can involve three services: origination, risk-bearing, and distribution.
a. Origination – involves the design of the bond issue and initial planning
b. Risk-bearing – refers to the underwriter’s risk of reselling the securities to the
investing public
c. Distribution – selling to investors with the help of selling syndicate consisting of
other investment banking firms and/or commercial banks if the issue is very large 
C. Corporate Bond Issues
1. Almost always sold through a negotiated arrangement with an investment banking
firm that maintains a relationship with the issuing firm  
D. Corporate Stock Issues
1. Types of new issues
a. Seasoned equity issues – new shares offered by firms that already have stock
outstanding
b. Initial public offerings (IPOs) – a firm selling its common stock to the public for the
first time 
•E. Relationship with Investment Bankers
•1. Negotiated arrangement
•2. Competitive bid arrangement
•3. Best-efforts arrangement

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Mortgages and Mortgage-Backed Securities

Mortgages are loans to individuals or businesses to purchase homes, land, or other real
property.
Many mortgages are securitized.
• Securitization occurs when securities are packaged and sold as assets backing a publicly
traded or privately held debt instrument.

Mortgages differ from bonds and stocks.

• Mortgages are backed by a specific piece of real property.
• Primary mortgages have no set size or denomination.
• Primary mortgages generally involve a single investor.
• Comparatively little information exists on mortgage borrowers.

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Primary Mortgage Market

Four basic types of mortgages are issued by financial institutions.

• Home mortgages are used to purchase one- to four-family dwellings (called “single-family
mortgages”).
• Multifamily dwelling mortgages are used to purchase apartment complexes, townhouses,
and condominiums.
• Commercial mortgages are used to finance the purchase of real estate for business
purposes.
• Farm mortgages are used to finance the purchase of farms.

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What are stocks?

Stocks are shares of ownership in a corporation. The stock market is a

place where stocks are bought and sold. The Philippine Stock Exchange
(PSE) is the corporation that governs our local stock market. People buy
or invest in stocks to benefit from a company's tremendous value
potential over time.

Once you buy or invest into a stock you now become part owner or a
shareholder of that particular corporation.

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How to make money in stocks?

As a Shareholder, you can now participate in the company's growth and

success through stock Price Appreciation and by earnings Dividends.
Capital or price appreciation is an increase in the market price of your
stock over time brought about by an increase in its potential value and
the demand to buy its shares. The faster a company can grow, the faster
its price can appreciate. 
Profitable corporations can also issue dividends, whether in cash or in
additional shares of stock as a means for shareholders to share in their
distributed profits.

• Why Invest in the Stock Market?

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• 
Why Invest in the Stock Market?

History has proven that investing in quality stocks can provide greater
returns than most investment instruments. This offers people the best
chance in achieving their financial goals and gives them the ability to
later enjoy the benefits of their money working for them.
Another reason why stocks can outperform other asset classes is because
it can compound the value of investment. Companies can reinvest the
profits they make to generate even more profit. Moreover, any dividends
investors receive can also be used to buy more shares and thereby
enlarging their overall value as well.

• The 4 Golden Rules

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The 4 Golden Rules

• Invest EARLY – “Early bird catches the worm”

• Invest REGULARLY – “Consistency is the key”
• Invest LONG TERM – “There’s a reward in waiting”
• Invest using DIVERSIFICATION - "Do not put all your eggs in one basket."

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 Foreign Exchange
Markets

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 Foreign exchange markets are markets in which one currency is exchanged for
another, either today (in the spot market) or at a set time in the future (in the
forward market).
Foreign exchange markets facilitate:
• Foreign trade.
• Raising capital in foreign markets.
• The transfer of risk between market participants.
• Speculation in currency values.

A foreign exchange rate is the price at which one currency can be exchanged for
another currency.

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Foreign Exchange 2

Foreign exchange risk is the risk that cash flows will vary as the actual amount of U.S. dollars
received on a foreign investment changes due to a change in foreign exchange rates.
Currency depreciation occurs when a country’s currency falls in value relative to other
currencies.
• Domestic goods become cheaper for foreign buyers.
• Foreign goods become more expensive for foreign sellers.

Currency appreciation occurs when a country’s currency rises in value relative to

other currencies.

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 Derivative
Securities Markets

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Derivatives
A derivative is a financial security whose payoff is linked to another, previously issued
security.
• Derivatives involve the buying and selling, or transference, of risk.

In many derivatives, two parties agree to exchange a standard quantity of an asset at a

predetermined price at a specific date in the future.
In theory, derivative trading should not adversely affect the economic system because
it allows individuals who want to bear risk to take more risk, while allowing individuals
who want to avoid risk to transfer that risk elsewhere.

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Derivatives’ Uses
Derivatives are leveraged instruments where participants put up a small
amount of money and obtain the gain or loss on a much larger position.
Derivatives are used for speculation and for hedging.
• Speculation:
• Buying or selling a derivative contract in order to earn a leveraged rate of
return.
• Hedging:
• Entering into a derivatives contract to reduce the risk associated with positions
or commitments in their line of business.

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Forwards and Futures 1

A spot contract is an agreement to transact involving the immediate exchange of assets and
funds.
A forward contract is an agreement to transact involving the future exchange of a set amount
of assets at a set price.
Forward contracts:
• Can be based on a specified interest rate rather than a specified asset.
• Involve underlying assets that are nonstandardized, because the terms to each contract are
negotiated individually between the buyer and seller.

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Forwards and Futures 2

A futures contract is an agreement to transact involving the future exchange of a set amount of
assets for a price that is settled daily.
Futures contracts differ from forwards in that futures:
begin underline end underline

• are characterized by significantly less default risk.

• employ margin requirements and daily marking to market.
• margin requirement is a performance bond posted by a buyer and a seller of a futures contract.

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Futures Markets 1

Futures contract trading occurs in trading “pits” using an open-outcry auction among
exchange members.
• Floor brokers place trades for the public.
• Professional traders trade for their own accounts.
• Position traders take a position in the futures market based on their expectations about the
future direction of the prices of the underlying assets, and trade for their own account.
• Day traders take a position within a day and liquidate it before day’s end.
• Scalpers take positions for very short periods of time, sometimes only minutes, in an
attempt to profit from active trading.

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Futures Contracts 1

• A long position is the purchase of a futures contract.

• A short position is the sale of a futures contract.
• A clearinghouse is the unit that oversees trading on the exchange and
guarantees all trades made by the exchange traders.
• Open interest is the total number of the futures or option contracts
outstanding at the beginning of the day.

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Futures Contracts 2

An initial margin is a deposit required on futures trades to ensure that the terms of the
contracts will be met.
• Amount of the margin varies according to the type of contract traded and the quantity of futures contracts
traded.
• Minimum margin levels are set by each exchange.

The maintenance margin is the margin a futures trader must maintain once a futures position
is taken.
• If losses occur such that margin account funds fall below the maintenance margin, the customer is
required to deposit additional funds in the margin account to keep the position open.

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