FINMAR - 8

MONEY MARKETS

money market

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Interest bearing bank deposits that cannot be withdrawn without penalty before a specified date.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