ATENEO J.G.

SCHOOL OF MANAGEMENT Finance & Accounting Department

Instructor : Alice Parlan

FINANCE 103 : PRINCIPLES OF FINANCE I.A Financial Markets & Financial Institutions SY 2013 2014 2nd Semester

What is a Financial Market?

Financial Market - a place where individuals and organizations wanting to borrow funds are brought together with those having surplus of funds; Varies depending on the maturity of the securities being traded and the types of assets used to back the securities Economic development is highly correlated with the level and efficiency of financial markets and institutions

Capital Formation Process: How Capital Is Transferred Between Savers & Borrowers
1. Direct Transfers of Funds occur when a business sells its stocks or bonds directly to savers, without going through any type of financial institution

2. Indirect Transfers through Investment Banks transfers goes through an Investment Bank, which underwrites securities of the firm and distributes it to savers (a pass-through) Primary Market Transaction - when Firms new securities are issued Investment Bank and the Firm receives the proceeds of the sale through

3. Indirect Transfers through a Financial Intermediary Banks, insurance companies, and mutual fund companies obtain funds from savers in exchange for its own (indirect) securities and, in turn, uses these funds to buy and hold firms (direct) securities

Sources: Brigham and Houston: Essentials of Financial Management, 12th Ed., Cengage Learning Asia 2010; Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT Finance & Accounting Department

Instructor : Alice Parlan

FINANCE 103 : PRINCIPLES OF FINANCE I.A Financial Markets & Financial Institutions SY 2013 2014 2nd Semester

Types of Financial Markets

1.1. Physical Asset Markets called tangible or real asset markets which are for products such as real estate, computers, cars, etc. 1.2. Financial Asset Markets deals with stocks, bonds, notes, mortgages, and other financial instruments; Deals also with derivative securities whose values are derived from changes in the prices of their underlying assets 2.1. Money Markets markets in which funds are borrowed or loaned for short periods; consists of short-term, highly liquid debt securities Definition: Short-Term is < or =1 year

Money Market Instruments: o Treasury Bills (T-Bills) o Bankers Acceptances o Short-Term Commercial Papers (STCPs) o Negotiable Certificates of Deposit (CDs) o Money Market Mutual Funds o Up to 1-Yr Time Deposits o Consumer Credit, including credit card debt

2.2. Capital Markets markets for corporate stocks and for intermediate- or long-term debt Definitions: Intermediate-Term is >1 year to 10 years Long-Term is >10 years

Capital Market Instruments: o Treasury Notes (FXTNs) o Treasury Bonds (T-Bonds) o Mortgages o Local / Municipal Bonds (Munis) o Long-Term Commercial Papers (LTCPs) o Corporate Bonds o Leases o Preferred Stocks o Common Stocks

3.1. Primary Markets - markets in which corporations raise capital by issuing new securities (stocks and bonds) Primary Markets: o o o Initial Public Offering (IPOs) issuance of new stocks or bonds between business firm and underwriter Bureau of Treasurys Auction of Govt Securities (GS) to eligible dealers (GSEDs) Issuance of Banks CDs to new investors / depositors

Sources: Brigham and Houston: Essentials of Financial Management, 12th Ed., Cengage Learning Asia 2010; Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT Finance & Accounting Department

Instructor : Alice Parlan

FINANCE 103 : PRINCIPLES OF FINANCE I.A Financial Markets & Financial Institutions SY 2013 2014 2nd Semester

3.2. Secondary Markets markets in which existing, already outstanding securities, are traded among investors after they have been issued by corporations; exists for mortgages, other types of loans and other financial assets Corporation, whose securities are being traded, is not involved in a secondary market transaction and therefore, does not receive funds from such sales Secondary Markets: o o o Listing and trading of IPO stocks in the stock exchange Selling of GS winning bids and trading of outstanding GS among GS dealers and between institutional/corporate/ individual investors Rediscounting of bank notes/ checks

4.1. Spot Markets markets in which assets are bought or sold for on the spot delivery (literally within a few days); sometimes called Cash Market Spot Markets: o o o Commodities - soybeans, rubber, raw sugar, etc. for physical delivery within a few days or weeks Metals gold, silver, platinum, copper, etc for physical delivery within current month Transacted Currencies / Foreign Exchange value dated today (T) and settled on T+1

4.2. Futures Markets markets in which participants agree today to buy or sell an asset at some future date; sometimes called Forward Markets Futures transaction can reduce, or hedge, the risks faced by both b uyer and seller Futures Market: o Commodities soybeans, rubber, raw sugar, etc traded using futures contracts for terms of 3-month, 6-month, 9-month, 1-year o Metals gold, silver, platinum, copper, etc traded using futures contracts for terms of 3-month, 6-month, 9-month, 1-year o Currencies / Foreign Exchange Forward Contracts

5.1. Private Market - where transactions are negotiated or worked out directly between 2 parties Examples : Private Debt Placements, Private Equity, Venture Capital, Merger & Acquisitions of Companies 5.2. Public Markets where standardized contracts are traded on organized exchanges Examples : Stock Exchanges, Bonds Market, Commodities / Metal Exchanges, Futures Exchanges, Foreign Exchange Market, Derivatives / Swap Market

Sources: Brigham and Houston: Essentials of Financial Management, 12th Ed., Cengage Learning Asia 2010; Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT Finance & Accounting Department

Instructor : Alice Parlan

FINANCE 103 : PRINCIPLES OF FINANCE I.A Financial Markets & Financial Institutions SY 2013 2014 2nd Semester

Physical Location Stock Exchanges vs. Electronic Dealer-Based Markets

Auction Market vs. Dealer Market (Exchanges vs. OTC) Over-the-Counter (OTC) Market pertain to all security markets, except organized exchanges; Does not occupy a physical location; Money market is an OTC market and most corporate bonds are also traded in this market NYSE vs. Nasdaq

Types of Financial Intermediaries

1. Commercial Banks traditional department store of finance serving a variety of savers and borrowers; mostly deals with deposits and loans from corporations or large businesses. Accept or create demand deposits, receive other types of deposits and deposit substitutes through which Central Bank can expand or contract money supply Power to accept drafts and issue letters of credit; discount and negotiate promissory notes, drafts, bills of exchange, and other evidences of debt Buy and sell foreign exchange and gold or silver bullion Acquire marketable bonds and other debt securities; and extend credit Top Commercial Banks in the Phils. (Source: BSPs Asset Ranking as of Jan 2013): 1) 2) 3) 4) 5) Bank of Commerce BDO Private Bank Phil. Bank of Communications Phil. Veterans Bank Robinsons Bank Corp.

2. Investment Banks - an organization that underwrites and distributes new investment securities and helps business obtain financing; sometimes referred to as Investment Houses. Investment bankers are also called underwriters, who generally guarantees that the firm will raise the needed capital Top Investment Houses in the Phils. (Source: IHAPs Membership Directory) : 1) 2) 3) 4) 5) BPI Capital Corp. First Metro Investment Corp. BDO Capital Corp. ATR Kimseng Capital Partners Phil. Commercial Capital, Inc.

Sources: Brigham and Houston: Essentials of Financial Management, 12th Ed., Cengage Learning Asia 2010; Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT Finance & Accounting Department

Instructor : Alice Parlan

FINANCE 103 : PRINCIPLES OF FINANCE I.A Financial Markets & Financial Institutions SY 2013 2014 2nd Semester

3. Universal Banks also called Expanded Commercial Banks. In addition to the function of an ordinary commercial bank, universal banks are also authorized to engage in underwriting and other functions of investment houses, and to invest in equities of non-allied undertakings Top Universal Banks in the Phils. (Source: BSPs Asset Ranking as of Jan 2013): 1) 2) 3) 4) 5) Banco de Oro Unibank, Inc. (BDO) Metropolitan Bank & Trust Co. (MBTC) Bank of Philippine Islands (BPI) Philippine National Bank (PNB) Rizal Commercial Banking Corp. (RCBC)

4. Financial Services Corporation large conglomerates that combine many different financial institutions within a single corporation; Started in one area of finance and have now diversified to cover the most of the financial spectrum Citigroup is an example of a Financial Services Corporation, which owns the following: - CitiBank (a commercial bank) - Citi Savings Bank (a savings & loan bank) - Citi Private Bank (wealth management firm) - Smith Barney (an investment bank and securities brokerage firm) - Citi Capital Advisors (financial advisory company)

5. Thrift Banks - composed of savings and mortgage banks, private development banks, stock savings and loan associations and microfinance thrift banks Thrift banks provide short-term working capital and medium- and long-term financing to businesses engaged in agriculture, services, industry and housing, and diversified financial and allied services, and to their chosen markets, especially small- and mediumenterprises and individuals Examples of Thrift Banks: 1) Savings & Mortgage Banks: - Malayan Bank Savings & Mortgage Bank - Banco Filipino Savings Bank 2) Private Development Banks: - Planters Development Bank - Luzon Development Bank 3) Stock Savings & Loan Associations: - Armed Forces & Police Savings & Loan Association, Inc. - Manila Teachers Savings & Loan Association, Inc.

Sources: Brigham and Houston: Essentials of Financial Management, 12th Ed., Cengage Learning Asia 2010; Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT Finance & Accounting Department

Instructor : Alice Parlan

FINANCE 103 : PRINCIPLES OF FINANCE I.A Financial Markets & Financial Institutions SY 2013 2014 2nd Semester

6. Rural Banks and Cooperative Banks / Credit Unions are differentiated from each other by ownership. While rural banks are privately owned and managed, cooperative banks are organized/owned by cooperatives or federation of cooperatives. More popular type of banks in the rural communities. Their role is to promote and expand the rural economy in an orderly and effective manner by providing the people in the rural communities with basic financial services. Rural and cooperative banks help farmers through the stages of production, from buying seedlings to marketing of their produce. Examples of Rural Banks: - Rural Bank of Caloocan, Inc. - Merchants Rural Bank of Talavera, Inc. - Banco San Juan Examples of Cooperative Banks: - Metro South Cooperative Bank - Five Star Savings & Credit Development Cooperative - Metro Manila Savings Cooperative

7. Trust Companies legal institutions that have trust functions similar to what the Trust Departments of Banks do Trust is a fiduciary relationship in which one person is the holder of the title of the property subject to equitable obligation to keep or use the property for the benefit of another Examples of Trust Companies: - Philippine Trust Company - MetroBank & Trust Co. Parties / Activities involved in Trust: - Trustor - a person, who owns properties, establishes a trust account with a trust corporation or trust department of a bank - Trustee - one in whom confidence is reposed as regards property for the benefit of another person - Trust Property - the property interest which the trustee holds subject to the rights of another - Beneficiary a person or institution for whose benefit the trust has been created - Trust Instrument (Agreement) - the document by which property interests are vested in the trustee and the beneficiaries, and the rights and duties of the parties (called the trust terms) are set forth

8. Pension Funds Companies handle retirement plans funded by corporations or government agencies for their workers and administered by the trust department of banks or by life insurance companies; These funds invests in stocks, bonds, mortgages, and real estate Example: SSS, GSIS, CALPERS

Sources: Brigham and Houston: Essentials of Financial Management, 12th Ed., Cengage Learning Asia 2010; Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT Finance & Accounting Department

Instructor : Alice Parlan

FINANCE 103 : PRINCIPLES OF FINANCE I.A Financial Markets & Financial Institutions SY 2013 2014 2nd Semester

9. Hedge Funds Companies - accept funds from large institutions and high networth individuals and use these funds to buy various securities; Set up for the purpose of hedging risks due to perceived differences in interest rates, regulations, market misalignments, etc Examples: Long-Term Capital Management (1998; now defunct), Businessman Investor.Com, a Filipino Hedge Fund 10. Mutual Funds Companies investment companies registered with the SEC that pool funds from savers, thereby reduce risks by diversification; depending upon the investment objectives, these funds are used to buy stocks, long-term bonds, short-term debt instruments by businesses or government With mutual funds, economies of scale is achieved in analyzing securities, managing portfolios, and buying / selling of securities, which the fund manager does Examples: Philam Asset Mgt, BPI Asset Mgt, First Metro Asset Mgt, Philequity Funds 11. Exchange Traded Funds (ETF) Companies similar to mutual funds and are often operated by mutual funds companies; ETFs buy a portfolio of stocks of a certain type and then sell their own shares to the public ETF shares are generally traded in the exchange, such that if an investor wants to invest in a particular market which the ETF caters to, then that investor can buy shares in an ETF that holds it Examples : Pro-Shares Ultra VIX Short-Term Fut ETF, Credit Suisse AGs Velocity Shares 3X Inver Brent Crude ETN, Direxion Daily Russia Bear 3X Shares 12. Private Equity Companies operate like hedge funds, but rather than buying some of the firms stocks, private equity players buy and then manage the entire firms that are not publicly traded; Most of the money used to buy target companies are borrowed

13. Venture Capital - provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. and unloading through an IPO or trade sale. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital. Examples: Equity Partners backing Aussie Farmers, Integral Capital Group for String Transport Systems

Sources: Brigham and Houston: Essentials of Financial Management, 12th Ed., Cengage Learning Asia 2010; Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT Finance & Accounting Department

Instructor : Alice Parlan

FINANCE 103 : PRINCIPLES OF FINANCE I.A Financial Markets & Financial Institutions SY 2013 2014 2nd Semester

14. Life Insurance Companies take savings in the form of annual premiums, which are invested long-term in bonds, stocks, real estate, and mortgages Insurance gives protection coverage for individuals / groups against death, disability, or old age and provides benefit payments to the beneficiaries of the insured Life Insurance companies also offer a variety of tax-deferred savings plans designed to provide living benefits when insured retires or provide accident & health benefits to the insured depending on insurance coverage Examples : PhilamLife, Phil. AXA, Insular Life, SunLife, ManuLife, etc.

Sources: Brigham and Houston: Essentials of Financial Management, 12th Ed., Cengage Learning Asia 2010; Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011