Financial instruments (finance 1)

“Financial Instruments”

Financial Instruments:FUNDS

SURPLUS SPENDING

UNITS

DEFICIT SPENDING

UNITS

1. Stocks2. Bonds3. Notes4. Certificates of deposit5. Pre-need plans6. Treasury bills7. Life insurance plans8. Banker’s acceptance

1. Stocks• A security that signifies ownership in a corporation.

2 types:• Preferred- have preferential rights over the common stocks in terms of dividend distribution and liquidation of assets and are not entitled to vote.• Common- stocks are not secured by any real assets of the corporation but they have certain voting rights or corporate matters.

2.Bonds

• A debt investment in which an investor loans money to an entity (corporate/governmental) that borrows the funds for a defined period of time at a fixed interest rate.

• Ex. Corporate bonds, municipal bonds, treasury bonds

3.Notes

• A financial security that generally has a longer term than a bill, but a shorter term than a bond.

4. Certificate of Deposit• Savings certificate entitling the bearer to

receive interest.

5. Pre-need Plans

• Denoting a scheme in which one pays in advance for a service or facility

• Ex. Educational plans

6. Treasury Bills• A short term debt obligation backed by govt.

with a maturity of less than 1 year.

7. Life Insurance Plans

• a contract between an insured and an insurer who promises to pay a designated beneficiary a sum of money (the "benefits") in exchange for a premium, upon the death of the insured person.

• Ex. Philamlife , Insular Life

8. Banker’s Acceptance

• A short term debt instrument issued by a firm that is guaranteed by a commercial bank.

“Differences Among Financial Instruments’

from 100 peso up to billions of opening savings account.

1. Denomination

2. Maturity

The period of time for which a financial instrument remains outstanding.

Insurance policies – matures upon the death of the SSU.

3. Claim Against Issuer

SSUs that hold ownership claims participate in the management company and there's no specific date when the

SSU can get back his invested funds.

To convert his ownership claim:a) to sell his claims to an interested SSU;

b) to get his share of the proceeds of the DSU after liquidation.

2 types of claims:

*Ownership claims – A holder of stock (a shareholder) has a claim to a part of the corporation's assets and earnings. 2 types: 1) preferred 2) common

*Debt Claims - liabilities of the issuing DSU which must be settled down on given dates.

Interest rates – the amount paid for the use of borrowed funds.

4. Collateral

• credit quality of any financial instrument is dependent on the type of collateral backing up.

interest rates paid by DSUs on borrowed funds may change before maturity as well as the securities be repriced.

5. Terms to Repricing

• Fixed-coupon (rate) bonds – those whose coupon rates are fixed throughout their maturities.

• Variable or floating coupon (rate) bonds -- are those whose coupon rates may change before maturity.

refers to financial instrument whether they are highly

marketable or not.

6. Marketability

Highly marketable financial instrument also referred to as “liquid securities”.

Factors that can lower the cost of trading :

a) When the issuer of the instrument is well known, information costs tends to be lower;

b) When the amount of the issue is large, economy is affected resulting to lower search and transaction costs;

c) When the instrument has few unique characteristics, the costs of analyzing and monitoring are lower.

Debt instruments may differ on how they are paid interests.

7. Form of Interest Payment

2 forms are:

a) by coupons , or

b) by a periodic addition to the principal amount.

Instruments will then be different from one another according to the type of option adapted

Following options are:

a) Call options – these permit the issuer to redeem the instrument before the maturity;

b) Put options – these permit the investor to sell back to the issuer before maturity;c) Convertibility options – these permit the investor to convert from one instrument to another.

8. Options

Financial instruments may differ in terms of “currency denomination”.

9. Currency

An example that may be provided is the 180 million worth of Euro and yankee bonds to be issued by IMPSA Asia Ltd., to partly finance the 450 million Caliraya-Botocan-Kalayaan project.

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…………….Thank you…………

Cherry Remedios