Fin1: Topic 6

• Financial instrument


  Any document that represents an asset to one party and liability to another, carrying a monetary value and legally enforceable
• Differences among financial instruments

  • Denomination
  • Maturity
  • Claim against issuer
  • Collateral
  • Terms to repricing
  • Marketability
  • Forms of interest payment
  • Options
  • Currency
• Ownership claims


  Stocks, including preferred and common
• Debt claims


  Liabilities which must be settled on given dates, with interest as the amount from the use of borrowed funds

  
• Debt claims may be collaterized by specific assets, and thus, they are higher order than those which are not
• Ownership claims have residual, but unlimited claim on the earnings after all other claims have been satisfied
• Fixed coupon (rate) bonds


  Bonds whose coupon rates are fixed throughout their maturities
• Variable or floating coupon (rate) bonds


  Bonds whose coupon rates may change before maturity
• Marketability


  The costs of trading financial instruments on the secondary market before maturity
• Types of options


  • Call options
  • Put options
  • Convertibility options
• Most financial instruments are denominated in pesos, while a few are in dollars and other currencies
• Financial instruments traded in the money market

  • Treasury bills
  • Commercial paper
  • Banker's acceptance
  • Repurchase agreements
  • Tax anticipated bills
  • Interbank call loans
  • Certificate of assignment
  • Certificate of participation
• Treasury bills


  Financial instruments with highly stable marketability, issued by the Philippine government on various maturities up to one year
• Commercial paper


  A short-term promissory note issued by a large, established firm with a strong credit rating, sold at a discount like treasury bills
• Banker's acceptance


  A form of payment that is guaranteed by a bank rather than an individual account holder, frequently used in international trade
• Letter of credit


  A letter issued by a bank to another bank to serve as a guarantee for payments made to a specified person under specified conditions
• Repurchase agreement


  A temporary sale of high-quality easily liquidated assets, such as treasury bills, accompanied by an agreement to buy back those assets on a specific future date at a predetermined price
• Tax anticipated bills


  Short term debt instruments issued by the government to cover temporary cash shortages, with tax-exempt interest earnings
• Cash management bills


  Short term securities sold by the Treasury Department when the government is experiencing a shortage of cash reserves
• Interbank call loans


  Borrowings between banks to remedy deficiencies in required reserves, often made on an overnight basis
• Certificate of assignment


  A financial instrument issued by a borrower transferring ownership of a batch of promissory notes to the lender

  
• Certificate of participation


  A form of credit instrument whereby banks can raise funds from other banks and other central bank approved financial institutions to ease liquidity
• Interest rate


  The rental price of money, usually expressed as an annual percentage of the nominal amount of money borrowed
• Simple interest


  A form of computing interest on an annual basis using the formula: Principal x Rate x Time
• Compound interest


  A method of calculating interest on the original capital invested and on interest earned on previous periods, using the formula: Total amount Due = P (1 + r)^n
• To the borrower, interest is

  The penalty paid for using income before it is earned
• To the lender, interest is

  The reward received from postponing consumption up to the maturity of the loan