money market
involves the sale of large volumes of very short-term debt products
Short-term
Sold in Large Denominations
Low Default Risks
Highly Liquid
Low Returns on Investment
CHARACTERISTICS OF THE MONEY MARKET
Commercial Paper
Unsecured, short-term (90 to 9 months) note issued by a company to raise short-term cash and is sold on a discounted basis
Commercial Paper
Are often issued by company to finance working capital requirements (daily operating requirements)
Banker’s Acceptance
A promissory note issued by a non-financial firm to a bank in return for a loan. The bank resells this note in the money market at a discounted price guaranteeing payment
very low
The risk of default for a banker’s acceptance
Treasury Bills
Highly liquid (one year or less) securities issued by the Bureau of Treasury that is default risk free and has little interest rate risk and is sold on a discounted basis
Treasury Bills
sold by the government to cover current government budget deficit and to refinance maturing government debt.
Government Agency Notes
Issued by the national government agencies and government sponsored corporations other than the Bureau of National Treasury
Local Government Notes
Issued by provincial or local governments
Interbank Loans
Short-term, unsecured loans extended from one bank to another to which it is not affiliated.
Time Deposits
Interest bearing bank deposits that cannot be withdrawn without penalty before a specified date.
Repurchase Agreements
Sale of securities by one party to another with a promise to repurchase the securities at a specified price and on a specified date in the future
haircut
means that the collateral for the repo is slightly less than its actual market value and reflects the underlying risk of the collateral.
Reverse Repurchase Agreement
An agreement involving the purchase of securities by one party from another with the promise of selling them back at a given future date
Repurchase Agreement
a repurchase agreement where one sells a bond and agrees to buy it back at a future date.
Reverse Repo
the person who buys that bond and agrees to sell it back
CAPITAL MARKET
A financial market where long-term (more than one year) debt and equity instruments are being traded such as bonds, stock,s and mortgages.
National and Local Governments
Issues long term notes and bonds to pay for national debt and to finance capital projects.
Corporation
issues both stocks and bonds to finance capital investment expenditures and fund other investment opportunities.
PRIMARY MARKET
where securities are created and new stocks and bonds are sold to the market for the first time. The issuer of the security directly recieves the proceeds of the sale.
SECONDARY MARKET
where the sale of previously issued securities take place.
Organized Exchange
An individual investor can sell securities of another investor without the presence of the original issuer
Over-The-Counter
Trading securities that are not listed in the stock exchange market directly between investors or through agents such as broker-dealers
BONDS
A long-term promissory note issued by a firm.
PAR VALUE
the face value (amount to be paid) that is returned to the bondholder upon maturity
MATURITY
the amount of time the issuer returns the par value to the bondholder (basically pay the loan) and terminates the bond
COUPON INTEREST RATES
the percentage of the par value of the bond that the issuer will pay the bondholder until maturity (basically annual interest payments)
INDENTURE
a legal contract issued to lenders that defines the commitments and responsibilities of the seller and buyer
INDENTURE
the agreement between the issuer and the bond trustee that represents the bondholders
CURRENT YIELD
the ratio of the annual interest payment to the bond’s market price
YIELD TO MATURITY
the overall interest rate earned by an investor who buys a bond at the market price and holds it until maturity
Competitive sale
the bonds are advertised for sale and investors can purchase the bonds through competitive bidding or directly negotiating with the bond issuer
Negotiated sale
a single underwriter (investment bank) is chosen to have exclusive rights over the bonds. The underwriter then sells the bonds to investors, wherein the terms of the bonds are tailored to meet the demands of not only the investors but also the original issuer.
Best Effort Underwriting Basis
the underwriter does not agree to purchase all the securities from the issuer and only acts as an agent that does its best effort to sell the securities to investors
generally less expensive
payments are limited to interests
do not have voting rights
Flotation costs of bonds are generally lower
bond advantages
Debt interest payments may result to bankruptcy
Debt produces fixed charges
Debt must be repaid at maturity
Indenture covenants limit the firm’s financial flexibility
bond disadvantages
CREDIT QUALITY RISK AND BOND RATINGS
The chance that the issuer will not be able to make timely payments and involves a judgement about the future risk potential of the bond provided by rating agencies.
DEBENTURE
a type of bond that is not backed by any collateral that often has a maturity of ten years and is only backed by the firm’s reputation
INCOME BONDS
only the face value of the bond is promised to be paid and interest payment is only paid if earned; non-payment of interest does not lead to bankruptcy
SUBORDINATED DEBENTURES
claims are honored only after secured and unsubordinated debentures are satisfied.
MORTGAGE BONDS
A bond secured by a real property where the value of the property is greater than the bonds issued.
VARIABLE BONDS
interest payment changes with market conditions
JUNK BONDS
bonds rated BB or below
EUROBONDS
bonds denominated in another currency
TREASURY BONDS
backed by the government and is considered the safest fixed-income investment in the world.
ORDINARY EQUITY SHARES
A form of long-term equity instrument that represents ownership interest of the firm
Ordinary Shares
entitle the holder to voting rights which can be exercised through proxy voting under the rule of SEC
Ordinary Shares
has no maturity. It is neither callable nor convertible but can be purchased in secondary markets.
Ordinary Shareholders
are called residual owners because they get income after preferred shares and is accountable for a limited liability.
PAR VALUE
stated value of a single share at issuance and any excess is called Additional pain-in capital, capital surplus, or Capital in excess of par
AUTHORIZED SHARE
The maximum number of shares that a corporation may issue without amending its charter.
ISSUED SHARES
The number of authorized shares sold
OUTSTANDING SHARES
shares that are held by the public (shareholders)
TENDER OFFER
A formal offer to purchase shares of a corporation
Right to vote
Right to receive dividends
Right to share in residual assets
Right to transfer their ownership
Right to examine the corporate bonds
Pre-emptive right
RIGHTS OF SHAREHOLDERS
PREFERRED SHARES
Shares that has preferrence over ordinary shares when it comes to dividends and distribution of corporate shares in the case of liquidation but has no voting rights.
PREFERRED SHARES
usually intended to be permanent, therefore, they do not have a defined maturity date.
PAR VALUE
The face value that appears on the stock certificate
DIVIDENDS
percentage of the par value of the share that is fixed and paid quarterly but is not guaranteed by the firm
Cumulative Dividends
dividends that is carried forward in succeeding years
Non-Cumulative Dividends
dividends that is lost in succeeding years if not paid
CONVERTIBLE PREFERRENCE SHARES
owners can convert PS with OS
PARTICIPATING FEATURES
entitles the holder to profit beyond what is declared, this does not apply to preferred shares because they’re return is limited.
CALL PROVISION
gives the issuing firm the right to call the PS for redemption