ASSIGNMENT 1 FINMARK
Instructions: Below is a mini-case for you to analyze and appropriately apply your
learnings, so far. Answer the questions based on the facts given in the case presented.
Always support your answers with explanations/justifications.
CASE
A financial instrument with the following features is sold by the Philippine National Bank.
 Issued by the Republic of the Philippines and thus carries its obligation to pay
investors on maturity dates.
 Original tenors are 91, 182 and 364 days. All expiration dates traditionally fall on a
Wednesday (unless said day is a holiday). Computation of selling price is based on
number of days remaining till the end of a series.
 Sold at a discount, with the interest paid in advance.
 Interest given to client is based on prevailing market rates and is subject to withholding
tax (currently at 20%) and Broker’s Commission.
 Minimum placement: Php 500,000.00 face value, subject to the availability of the
security.
 Settlement is on the next banking day after the transaction (T+1).
 Liquidity: If the client needs cash before the security matures, the client can sell the
financial instrument in the Fixed Income Market through PNB at the prevailing market
rate.
Questions:
(20 pts. each)
1. What type of financial instrument is being referred to above? An equity instrument or
a debt instrument?
ANSWER:
A debt instrument is far different from an equity instrument. First, in terms of
maturities, a debt instrument has an attached maturity date, while equity securities do not
have such. Second, in terms of fixed payments, debt securities are paid periodically with
a fixed amount, whereas equity securities are not paid regularly unless declaration of
dividends has been made by companies and these dividends are not the same with the
passage of time. Finally, in terms of being traded in the Fixed Income Market, debt
instruments are the only ones traded here and not equity securities. Therefore, using the
preceding statements as the bases, the financial instrument being referred to by the mini
case given above is an example of a debt instrument. This is because the instrument
sold by the Philippine National Bank bears an obligation to be paid on maturity dates,
impliedly requires fixed payments due to the presence of the interest and the allowed
trading of the said instrument to the Fixed Income Market.
2. What is the specific term used for this type of instrument?
ANSWER:
The specific term used for this type of instrument is a treasury bill. There are two
types of instruments issued by the Philippine government when it needs additional
financing to fund its operations. These two instruments are treasury bills and treasury
bonds. The former pertains to the peso-denominated short-term fixed income securities
that matures less than one year which are issued by the Republic of the Philippines
through its Bureau of Treasury. On the other hand, treasury bonds are long-term fixedinterest instrument that matures in the range of 2 to 25 years. In this regard, since the
above instrument has a maximum original tenor of 364 days which is equivalent to one
year, the instrument being pertained to is an example of a treasury bill as it matures for a
period of less than one year.
3. Who is the issuer of the financial instrument?
ANSWER:
The issuer of the treasury bills, which is the financial instrument being pertained
above, is the Republic of the Philippines through the Bureau of Treasury. The Philippine
National Bank does not act independently from the Philippine Government as it was the
latter which established the former. Typically, the term “issuer” is used to refer to individuals
issuing negotiable instruments and corporations issuing stocks. However, this is not limited
only to refer to issuing indivudals and crporations as governments can also be called as
issuer. Once one is classified as an issuer, it has the liability to settle obligations under the
terms of contract.In the case above, since it was stipulated that the Republic of the
Philippines carry an obligation to pay the bill on the maturity dates, hence, it is the ROP
which is the issuer of the financial instrument.
4. What is being described by the original tenors of 91, 182 and 364 days?
ANSWER:
The underlying concept of the phrase “original tenor” refers to the number of days
remaining before the expiration of a financial contract. It is worthy to note that the terms
tenor and maturity are not similar from each other, however, these are related. In the case
given above, the original tenor of the treasury bill is 91, 182, and 364 days which simply
means that the treasury bill has 91 days, 182 days and 364 days remaining before an
instrument reaches its maturity. This is very common to treasury bills because the
government, for example, has issued a 1-year T-Bill 9 months ago. Meaning, maturity of
treasury bill is one year, but there would only be a tenor of three months before the said
bill will expire.
5. What is the meaning of minimum placement? Explain.
ANSWER:
The minimum amount of price than an issuer is willing to offer for the sale of securities to
the investors of which the latter must bide is called the minimum placement. Regardless of
the number of placement rounds, this minimum amount must be bided by the investors.
Therefore, in this case, any sale transactions of the treasury bill offered below the minimum
placement, which is P500,000 face value is prohibited.