FAR L6-L12

Financial markets serve as

the backbone of the economy, facilitating the movement of capital by allowing businesses to raise funds and providing a platform for buying, selling, and trading various financial instruments

These influences the pricing of assets such as stocks, bonds, commodities, and currencies, with factors like supply and demand, economic trends, and investor behavior playing key roles

Financial Market

Primary market involves

issuance of new securities and help companies raise capital

Secondary market deals with

buying and selling of securities among investors

Financial markets are segmented based on

types of assets

• stocks - equities

• bonds - debts

• commodities - physical goods

Analyzing markets, investor can

identify trends, manage risks, and make informed decisions

It’s essential for business to understand the function of each market to

optimize their capital structure, plan for future growth, and stay ahead of regulatory and economic shifts

Capital Market

• venues where savings and investments are traded

• suppliers who have capital (retail and institutional investors) and those who need capital (businesses, governments, people)

• buyers and sellers of financing meet

• composed of primary market and secondary market

• most common capital markets are stock market and bond market

Primary Market

• new issues market

• trading of new securities for the first time

• newly listed companies in stock exchange undergo IPO, first time that the stock is offered and sold to the general public

Secondary Market

• market for old securities

• buyers and sellers of shares conducts trade

• shares traded are already bought originally and not the first time that it will be traded in the public

Ask Price

• offer price

• lowest price a seller is willing to accept

Bid Price

• highest price a buyer is willing to pay for a security at a given time

Bid-ask spread

• difference between ask price and bid price

• represents the market maker’s profit

Money Market

• trading in short-term debt instruments/investment

• buy and sell of overnight reserves/commercial paper

• characterized by safety and liquidity

• at wholesale level, involves large-volume trades between FI and traders

• at retail level, MM mutual funds bought by individual investors and MM accounts opened by bank customers

• individual may invest in this by purchasing MM mutual fund, buying treasury bill, or opening a MM account at a bank

Overnight Lending Rate

interest rate that large banks use to borrow and lend from one another in overnight market

Money Market Instruments

1. Commercial paper

2. Repo

3. Treasury bills

Commercial paper

• short term unsecured promissory notes to raise cash

• credit worthy large companies - no collateral, only reputation

Repo

• repurchase agreements

• bank issues securities but promises at the same time to repurchase them later at a higher price

Treasury bills

• government issued financial instruments

• with duration of one year or less

Internal debt

money a government owes to its own citizen and domestic institutions, pwede pang mapakiusapan

External debt

money owed to foreign lenders, need bayaran once magdemand

Bond Market

• debt market, fixed income market, credit market

• trades and issues debt securities

• governments are the usual issuer of bonds to raise capital, pay debts, and fund infrastructural development expenses

• publicly traded companies also can issue bonds when additional financing (expansion & operational maintenance) are needed

  1. corporate bonds

  2. government bonds

  3. mortgage-backed bonds

Corporate Bonds

issued by corporations to raise money for various business reasons

Government Bonds

issued by national government thru the Treasury Office for government projects. Investors or bond holders get regular interest payments.

Mortgage-backed bonds

bonds issued with security of pooled mortgages on real estate properties that also serves as collateral

Forex Market

• foreign exchange market or currency market

• over-the-counter global marketplace that determines the exchange rate for currencies around the world

• able to buy, sell, exchange and speculate on currencies

• made up of banks, forex dealers, commercial companies, central banks

Realized gains/losses

gains or losses that have been finalized by selling an asset

Unrealized gains/losses

gains or losses that exist only on paper and hasn’t been sold yet

Time Value of Money

• money invested is worth more than its present value

• but the further into the future you look, the less certain the value of money becomes due to factors like inflation, risk, and uncertainty