chapter 2 FAR

• Investment instruments, also known as financial instruments, provide the holder with the promise of earning a return from the investment
• The time value of money concept states that a dollar today is worth more than a dollar in the future
• Future value of money refers to the value of the current asset at a future date based on an assumed growth rate
• Present value of money refers to the current value of a future amount of money, or a series of payments, evaluated at an appropriate discount rate
• Money market instruments are short-term financing instruments aiming to increase the financial liquidity of businesses
• Types of money market instruments:

  • Treasury bills: issued by the Philippine government
  • Commercial Paper: short-term promissory note by large, established firms
  • Repurchase agreements: involve temporary sale of high-quality, easily liquidated assets
  • Certificate of deposits: time deposits offered by banks with a fixed interest rate
• Bond market instruments are financial tools used to raise capital, transferring capital from savers or investors to issuers for projects or operations
• Types of bond market instruments:

  • Corporate bonds: issued by corporations for financing
  • Municipal bonds: issued by municipalities, states, and governmental organizations for public works projects
  • Government bonds: used by governments and agencies to obtain funds
  • Emerging market bonds: debt securities issued by organizations in developing nations
  • Mortgage-backed bonds: debt securities secured by a pool of mortgages, primarily issued by government-sponsored enterprises
• Share market instruments refer to various financial assets traded on stock exchanges, where shares of public listed companies are traded daily
• Types of share market instruments:

  • Equities: represent ownership in a company
  • Debt securities: represent loans made by investors to governments or corporations
  • Mutual funds: pool money from multiple investors to invest in a diversified portfolio
  • Exchange-traded funds: hold a diversified portfolio of assets and are traded on stock exchanges
• Derivative market instruments derive their value from fluctuations in the value of underlying assets like commodities, bonds, stocks, currencies, and stock market indices
• Types of derivative market instruments:

  • Options: give the buyer the right to buy or sell an underlying asset at a specific price during a specific period
  • Futures contracts: standardized contracts allowing the holder to buy or sell the underlying asset at an agreed price on a specific date
  • Forwards contracts: similar to futures contracts, with the holder obligated to carry out the contract as agreed
  • Swaps: involve two parties exchanging financial obligations, like interest rate swaps and credit default swaps
• Real investment refers to money invested in tangible and productive assets like machinery, land, or factories
• Investment vehicles help investors choose suitable investment strategies for gaining returns in the future as income and capital gains
• Two categories of investment vehicles:

  • Direct investments: specific asset class holdings like stocks, bonds, or rental real estate
  • Indirect investments: hold direct investments chosen by professional portfolio managers, including ETFs, REITs, mutual funds, and closed-end funds
• Foreign investments involve capital flows between countries, granting foreign investors ownership stakes in domestic companies and assets
• Two types of foreign investment:

  • Foreign direct investments: physical investments made by a company in a foreign country
  • Foreign indirect investments: involve buying stakes in foreign companies that trade on a foreign stock exchange (Foreign portfolio investment)