FINANCIAL
MARKETS P-1
CHAPTER 2
LEARNING OUTCOMES

EXPLAIN THE MEANING OF FINANCIAL MARKETS;

DIFFERENTIATE PRIMARY MARKET FROM
SECONDARY MARKET; PRIMARY SECURITY FROM
SECONDARY SECURITY;

DISCUSS FULLY THE DIFFERENCE BETWEEN MONEY
MARKET AND CAPITAL MARKET;
FINANCIAL MARKETS

FINANCIAL MARKETS ARE STRUCTURES THROUGH
WHICH FUNDS FLOW.

A PLACE OR A MECHANISM IN WHICH
BORROWERS, SAVERS, AND FINANCIAL
INTERMEDIARIES TRADE SECURITIES.
FINANCIAL CLAIM – ENTITLES A CREDITOR TO RECEIVE
PAYMENT FROM A DEBTOR IN CIRCUMSTANCES
SPECIFIED IN A CONTRACT BETWEEN THEM, ORAL
OR WRITTEN.
FINANCIAL MARKETS
FINANCIAL MARKETS ARE CLASSIFIED INTO:
1.
A. PRIMARY MARKET
B. SECONDARY MARKET
2.
A. MONEY MARKET
B. CAPITAL MARKET
PRIMARY MARKETS
PRIMARY MARKETS

THE MARKET IN WHICH A FINANCIAL CLAIM IS INITIALLY
SOLD TO AN INVESTOR BY A BORROWER.

THE MARKET FOR PRIMARY SECURITIES.
PRIMARY SECURITIES – ORIGINAL OR NEW ISSUES OF SECURITIES
INVOLVING EITHER EQUITY SECURITIES (STOCKS) OR DEBT
SECURITIES (BONDS).
UNDERWRITER – GUARANTEES THE SALE OF THE ISSUES, BUT DOES
NOT INTEND TO HOLD THE SHARES OR BONDS IN HIS OWN
ACCOUNT.
PRIMARY MARKETS
Figure 2.1 Primary Markets involving Direct Selling
Deficit Units
Borrowers/Users of funds;
Corporations issuing
new/original issues of
stocks or bonds
Securities flow
Funds flow
Surplus Units
Initial supplier of funds;
Households and
businesses (investors)
PRIMARY MARKETS
Figure 2.2 Primary Markets involving an Intermediary
Deficit Units
Borrowers/Users of funds;
Corporations issuing
new/original issues of
stocks or bonds
Securities flow
Funds flow
Underwriters
Investment/
Merchant
banks
intermediary
Surplus Units
Initial supplier of funds;
Households and
businesses (investors)
PRIMARY MARKETS
INVESTMENT BANKS PROVIDE THE FOLLOWING
SERVICES:

PROVIDE FUNDS IN ADVANCE

GIVE ADVICE TO ISSUING CORPORATIONS

ATTRACT THE INITIAL PUBLIC PURCHASERS OF THE
SECURITIES

ACT AS A MARKET ANALYST AND ADVISOR

ABSORB THE RISK AND COST OF CREATING A
MARKET FOR THE SECUTIES.
PRIMARY MARKETS

PRIMARY MARKET ISSUES ARE GENERALLY FOR
PUBLIC OFFERINGS OR PUBLICLY TRADED
SECURITIES LIKE STOCKS OF COMPANIES ALREADY
SELLING STOCKS IN THE STOCK MARKET.

FIRST TIME ISSUES FOR THE PUBLIC ARE CALLED
INITIAL PUBLIC OFFERINGS (IPO).

PRIMARY MARKET SALE CAN ALSO TAKE THE FORM
OF PRIVATE PLACEMENT, PARTICULARLY FOR
CLOSED CORPORATIONS.
SECONDARY MARKETS

SECONDARY MARKETS ARE MARKETS FOR
CURRENTLY OUTSTANDING SECURITIES, REFERRED
TO AS SECONDARY SECURITIES.

TRANSACTIONS IN THE STOCK AND BOND MARKET
ARE SECONDARY MARKET TRANSACTIONS.

SHARES HELD BY THE PUBLIC ARE TERMED
OUTSTANDING SHARES OR SECURITIES.
SECONDARY MARKETS
Figure 2.3 Secondary Market Transactions
Financial Markets
(owners of outstanding
securities: investors)
Funds flow
Securities
Brokers
Dealers
Securities flow
Other Suppliers of
funds (buyers of
outstanding securities:
investors)
SECONDARY MARKETS
SECONDARY MARKETS EXISTS FOR THE PURPOSE OF:

MARKETABILITY OR EASY SELLING/TRANSFER OF
OWNERSHIP.

LIQUIDITY OR EASY CONVERTIBILITY TO CASH OF
SECURITIES.
SECURITIES DEALER – IS A FINANCIAL INSTITUTION
WHICH PRINCIPAL BUSINESS IS TO BUY AND SELL
SECURITIES, WHETHER REGISTERED OR EXEMPT FROM
REGISTRATION FOR THE DEALER’S OWN ACCOUNT OR
THE CLIENT’S.
SECONDARY MARKETS
THE SECURITIES EXCHANGE SERVES THE FOLLOWING
PURPOSES:
1.
PROVIDES MARKETABILITY BY ALLOWING SAVERS
TO SELL THEIR SECURITIES IMMEDIATELY.
2.
PROVIDES LIQUIDITY BY RAISING CASH ANY TIME.
3.
PROVIDES VALUATION BY SERVING AS A MEANS
FOR DETERMINING CURRENT VALUES OF SHARES
AND ULTIMATELY OF COMPANIES.
MONEY MARKETS

IT COVERS MARKETS FOR SHORT-TERM DEBT
INSTRUMENTS, USUALLY ISSUED COMPANIES WITH
HIGH CREDIT STANDING.

IT CONSISTS OF A NETWORK OF INSTITUTIONS AND
FACILITIES FOR TRADING DEBT SECURITIES WITH A
MATURITY OF ONE YEAR.

THEY ARE MARKETS IN WHICH COMMERCIAL
BANKS AND OTHER BUSINESSES ADJUST THEIR
LIQUIDITY POSITION BY BORROWING, LENDING OR
INVESTING FOR SHORT PERIODS OF TIME.
MONEY MARKETS
SHORT TERM – MEANS A PERIOD OF ONE YEAR OR
LESS. (DEBT SECURITIES)
EX. TREASURY BILLS
MMMF’s, MMDA’s, CP’s
MEDIUM TERM – ONE TO THREE YEARS.
LONG TERM – 3+ YEARS OR MORE. (EQUITY
SECURITIES)
MONEY MARKETS
OPEN MARKET TRANSACTION – IS AN ORDER PLACED
BY AN INSIDER AFTER ALL APPROPRIATE
DOCUMENTATION HAS BEEN FILED, TO BUY OR SELL
RESTRICTED SECURITIES OPENLY IN AN EXCHANGE.
INTERBANK CALL MARKET – A MONEY MARKET IN
WHICH TEMPORARY CASH SURPLUSES ARE SET UP IN
AN AUCTION HOUSE.
MONEY MARKETS
INTERBANK CALL LOANS – ARE CREDITS OF ONE BANK
TO ANOTHER FOR A PERIOD NOT EXCEEDING 4 DAYS.
DEPOSIT SUBSTITUTES – ARE ALTERNATIVE WAYS OF
GETTING MONEY FROM THE PUBLIC OTHER THAN
TRADITIONAL BANK DEPOSITS. THEY ARE
BORROWINGS BY COMMERCIAL BANKS FROM THE
PUBLIC THROUGH OTHER BANKS OR MONEY MARKET.
MONEY MARKETS
REPO RATE – IS THE RATE AT WHICH THE CENTRAL
BANK OF A COUNTRY LENDS MONEY TO
COMMERCIAL BANKS IN THE EVENT OF ANY
SHORTFALL OF FUNDS.
REPURCHASE AGREEMENT (REPO) – IS A SALE OF
SECURITIES FOR CASH WITH A COMMITMENT TO
REPURCHASE THEM AT A SPECIFIED PRICE AT A FUTURE
DATE.
LIBOR (LONDON INTERBANK OFFERED RATE) – IT IS THE
BENCHMARK INTEREST RATE THAT BANKS IN THE
LONDON MONEY MARKET ARE PREPARED TO LEND
TO ONE ANOTHER FOR OVERNIGHT, 1 MONTH, 3MONTH, 6-MONTH, AND 1 YEAR LOANS.
MONEY MARKETS
THE PHILIPPINE GOVERNMENT ISSUES TWO KINDS OF
SECURITIES:
TREASURY BILLS (T-BILLS) – GOVERNMENT SECURITIES
WHICH MATURE IN LESS THAN A YEAR. 91-DAY, 182DAY, 364-DAY
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
QUOTED EITHER BY THEIR YIELD RATE, WHICH IS THE
DISCOUNT, OR BY THEIR PRICE BASED ON 100 POINTS
PER UNIT.
MONEY MARKETS
THE PHILIPPINE GOVERNMENT ISSUES TWO KINDS OF
SECURITIES:
TREASURY BONDS (T-BONDS) – GOVERNMENT
SECURITIES WHICH MATURE BEYOND ONE YEAR.
2-YEAR, 5-YEAR, 7-YEAR, 10-YEAR AND 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 SEMIANNUALLY.
MONEY MARKETS
AUTOMATED DEBT AUCTION PROCESSING SYSTEM
(ADAPS) – IS AN ELECTRONIC MODE BY WHICH THE
NATIONAL GOVERNMENT SELLS GOVERNMENT
SECURITIES TO A NETWORK OF GOVERNMENT
SECURITIES ELIGIBLE DEALERS (GSED’s) W/C ARE
LINKED TO THE BTR USING BRIDGE INFORMATION
SYSTEM (BIS).
GSED – IS A SEC LICENSED SECURITIES DEALER
BELONGING TO A SERVICE INDUSTRY
SUPERVISED/REGULATED BY THE GOVERNMENT.
MONEY MARKETS
GSED’s HAS MET THE FOLLOWING:
1.
P100M UNIMPAIRED CAPITAL AND SURPLUS
ACCOUNT
2.
THE STATUTORY RATIOS PRESCRIBED FOR THE
INDUSTRY
3.
IT HAS THE INFRASTRUCTURE FOR AN ELECTRONIC
INTERFACE.
MONEY MARKETS
OTC (OVER-THE-COUNTER) NON-FORMALLY
ORGANIZED MARKETS ARE ANOTHER MODE OF
ORIGINATING GS FOR SPECIFIC INVESTORS, NAMELY,
THE GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS (GOCC), TEI, LGU.
RoSS IS THE OFFICIAL REGISTRY OF ABSOLUTE
OWNERSHIP, LEGAL, OR BENEFICIAL TITLES OR
INTEREST IN GS (T-BILLS AND T-BONDS).
MONEY MARKETS
YIELD – IS THE INCREMENT OR INTEREST ON AN
INVESTMENT IN GS. IT IS THE DISCOUNT EARNED ON TBILLS OR THE COUPON PAID TO THE HOLDER OF TBONDS.
COMPETITIVE BID – 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
OUTBIDDING OTHER GSEDs IN THE PRIMARY MARKET
AUCTION OF GS.
NON-COMPETITIVE BID – 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.
MONEY MARKETS
PRICE DISCRIMINATION OR ENGLISH AUCTION
-
IS 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. (RATE MUST
BE DIVISIBLE BY ONE-EIGHTH OF 1%.)
MONEY MARKETS
SETTLEMENT OF TRADES – IS THE PAYMENT PROCESS
BOTH IIN THE PRIMARY AND THE SECONDARY
MARKETS FOR GS TRADED.
PRICE OF A GS – IS THE VALUE BASED ON 100 POINTS
PER UNIT.
T-BILLS – DISCOUNT RATE
T-BONDS – COUPON RATE
- PRICE
WTAX – 20% ON THE DISCOUNT
DISCOUNT YIELD OF T-BILLS
Dy =
𝑷𝒇 −𝑷𝒑
𝑷𝒇
𝒙
𝟑𝟔𝟎
𝒕
WHERE:
Dy = Discount yield
Pf = Face value of T-bill
Pp = Purchase price of the T-bill
t = Term of the T-bill
DISCOUNT YIELD OF T-BILLS
Assume a 182-day P10,000 T-bill maturing on
Oct. 5, 2016 purchased for P9,846.67.
Dy =
Dy =
𝑃𝑓 −𝑃𝑝
𝑃𝑓
𝑥
360
𝑡
𝑃10,000 −𝑃9,846.67
𝑃10,000
𝑥
360
180
Dy = 0.01533 x 1.978
Dy = 0.03032 or 3.032%
COUPON PAYMENT ON TBONDS
K = Pf
(𝑖)
𝑚
WHERE:
K = COUPON
Pf = FACE VALUE OF THE T-BOND
i = COUPON RATE
m = NUMBER OF CONVERSIONS PER YEAR
COUPON PAYMENT ON TBONDS
ASSUME A P100,000 BOND WITH A COUPON
RATE OF 4.69% PAYING INTEREST SEMIANNUALLY.
K = Pf
(𝑖)
𝑚
K = P100,000
(4.69%)
2
K = P100,000 x 0.2345
K = P2,345
AMOUNT OF TAX FOR
DISCOUNT OR COUPON
T = D(r) OR K (r)
WHERE:
T = Tax
D = discount
K = Coupon
r = Tax rate
AMOUNT OF TAX FOR
DISCOUNT OR COUPON
Computing for the total withholding tax using the
discount and coupon of the previous examples.
T = D(r) OR K (r)
T = (P153.33)(20%) + (P2,345)(20%)
T = P30.67 + P469
T = P499.67
MONEY MARKETS
ABBREVIATIONS TO REMEMBER:
IMM – INTERNATIONAL MONETARY MARKET
CME – CHICAGO MERCANTILE EXCHANGE
LIBOR – LONDON INTERBANK OFFERED RATE
CPI – CONSUMER PRICE INDEX
ADAPS – AUTOMATED DEBT AUCTION PROCESSING
SYSTEM
MONEY MARKETS
ABBREVIATIONS TO REMEMBER:
GSED – GOVERNMENT SECURITIES ELGIBLE DEALER
GOCC – GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS
BIS – BRIDGE INFORMATION SYSTEM
TEI – TAX-EXEMPT INSTITUTIONS
LGU – LOCAL GOVERNMENT UNITS
MONEY MARKETS
ABBREVIATIONS TO REMEMBER:
ROSS – REGISTRY OF SCRIPLESS SECURITIES
OTC – OVER-THE-COUNTER
RDDA – REGULAR DEMAND DEPOSIT ACCOUNT
PHILPASS – PHILIPPINE PAYMENT AND SETTLEMENT
SYSTEM
DVP – DELIVERY-VERSUS-PAYMENT
SUMMARY
•
FINANCIAL MARKETS ARE STRUCTURES WHICH FUNDS
FLOW. THEY ARE THE INSTITUTIONS AND SYSTEMS THAT
FACILITATE TRANSACTIONS IN ALL TYPES OF FINANCIAL
CLAIMS.
•
A FINANCIAL CLAIM ENTITLES A CREDITOR RO RECEIVE
PAYMENT FROM A DEBTOR IN CIRCUMSTANCES
SPECIFIED IN A CONTRACT BETWEEN THEM, ORAL OR
WRITTEN.
•
PRIMARY MARKETS ARE MARKETS IN WHICH USERS OF
FUNDS RAISE FUNDS THROUGH NEW ISSUES OF
FINANCIAL INSTRUMENTS SUCH AS STOCK 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.
SUMMARY
•
PRIMARY MARKET ISSUES ARE GENERALLY FOR PUBLIC
OFFERINGS OR PUBLICLY TRADED SECURITIES LIKE
STOCKS OF COMPANIES ALREADY SELLING STOCKS IN
THE STOCK MARKET OR STOCK EXCHANGES. FIRST-TIME
ISSUES FOR THE PUBLIC ARE CALLED INITIAL PUBLIC
OFFERINGS OR IPOs.
•
RATHER THAN A PUBLIC OFFERING, PRIMARY MARKET
SALES CAN TAKE THE FORM OF A PRIVATE PLACEMENT,
PARTICULARLY FOR CLOSED CORPORATIONS, THAT IS,
CORPORATIONS WHOSE STOCKS ARE ONLY SOLD TO
FAMILY MEMBERS, OR A FEW CLOSE FRIENDS, RELATIVES,
AND SOME OTHER PRIVATE INDIVIDUALS.
SUMMARY
•
SECONDARY MARKETS ARE MARKETS FOR CURRENTLY
OUTSTANDING SECURITIES REFERRED TO AS SECONDARY
SECURITIES. ALL TRANSACTIONS AFTER THE INITIAL ISSUE
IN THE PRIMARY MARKET ARE DONE IN THE SECONDARY
MARKETS. SECONDARY MARKETS ONLY TRANSFER
OWNERSHIP, BUT DO NOT AFFECT OUTSTANDING SHARES
OR SECURITIES IN THE MARKET.
•
MONEY MARKETS 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 ONLY WITH A MATURITY ON ONE YEAR OR
LESS.
SUMMARY
•
BANKS WITH TEMPORARY CASH SURPLUSES LED
COMMERCIAL BANKS TO SET UP THE MONEY MARKET AS
AN AUCTION HOUSE FOR EXCESS RESERVES. IT IS CALLED
THE INTERBANK CALL MARKET, A MONEY MARKET.
•
THE PHILIPPINE GOVERNMENT ISSUES FOUR KINDS OF
GOVERNMENT SECURITIES (GS): CASH MANAGEMENT
BILLS, TREASURY BILLS, TREASURY NOTES, AND TREASURY
BONDS.
•
T-BILLS ARE GOVERNMENT SECURITIES WHICH IN LESS
THAN ONE YEAR. THERE ARE THREE TENORS OF T-BILLS:
91-DAY, 182-DAY, 364-DAY BILLS.
•
T-BONDS ARE GOVERNMENT SECURITIES WHICH MATURE
BEYOND 1 YEAR. AT PRESENT, THERE A 5 MATURITIES OF
BONDS: 2-YEAR, 5-YEAR, 7-YEAR, 10-YEAR AND 20-YEAR.
REFERENCES
CAPITAL MARKETS, FIRST EDITION
NORMA DY LOPEZ-MARIANO, PhD.
REX BOOK STORE, INC. (RBSI) 2017