UNIT 1

ANSWERS FROM THE QUESTIONS

1. On this car loan transaction, the investor is the bank (who will pay the car distributor the full price of
the car) and the borrower is the buyer (who will pay the bank on an installment basis).
2. Yes, the holder of a debt instrument is considered as the investor. He is then entitled to receive a
fixed peso amount depending on the terms of the instrument.
3. Yes, the present value of the expected cash flows of a financial asset (a stream of cash payments over
time) is used as the basis in determining the financial asset price. Even if the said cash flows are not
known with certainty.
4. Expected rate of return = Cash flow – Cash price/Cash price
= P22,000 – P20,000/P20,000
= 0.10

Hence, the rate of return would be 10%.

5. The three risks associated with financial assets are:
 Purchasing power risk/Inflation risk – the risk which is attached to the potential purchasing
power of the expected cash flow
 Credit risk/Default risk – the risk that the issuer or borrower will default on the obligation
 Foreign-exchange risk – the risk that the exchange rate will change adversely (e.g. the financial
asset whose cash flow is not denominated in Philippine Peso might result in less Peso)
6. Yes, they are similar because financial assets are also called financial instruments and securities. They
are intangible assets in which the typical benefit or value is a claim to future cash.
7. The difference between the two kinds of financial instruments are: Debt instruments are fixed-income
investments while equity instruments earn depending on the amount of the earnings of the issuer.
8. Yes, the characteristics of the debt and equity instruments issuer determine the degree of certainty of
expected cash flows. If one of the parties never default on the debt instrument that was issued, the cash
flow is known with certainty. On the other hand, the holders of the equity instruments are uncertain as
to both the amount and timing of dividend payments which are related to company profits.
9. Yes, a financial market is a physical place for the exchange or trading of financial assets.
10. Yes, entities in any country seeking to raise funds are already allowed to transact with other
countries. This is because of the globalization of financial markets throughout the world which
integrates into an international financial market.

CASE
1. The type of financial instrument that was issued by the Republic of the Philippines is a debt
instrument.
2. Maturity date.
3. The issuer of the financial instrument is the Republic of the Philippines.
4. The original terms of 91, 182, and 364 days described the length of time to maturity of a debt
instrument or it is the initial length of a debt. Moreover, it means that the debt instrument is short-term
since its maturity date is one year or less.
5. Minimum placement is an initial deposit. Meaning, based on the given case, the P500,000.00 face
amount is the required amount for opening an account.
 UNIT 2

ANSWERS FROM THE QUESTIONS

1. No, the two-year bond is considered a short-term debt instrument. It is considered then as a medium-
term instrument wherein its maturity is more than one year up to ten years. Moreover, a debt
instrument is short-term if its maturity is less than a year.
2. Yes, the stockholders of a corporation are considered as residual claimant of the business enterprise.
Since the corporation must pay all its debt holders first before it pays its equity holders. Besides, the
issuer of the equity instrument is only obligated to pay the holder an amount based on earnings.
3. Yes, bonds are considered as fixed income securities. They are kinds of debt instruments in which it
requires fixed peso or dollar payments to the investor.
4. Financial markets are classified according to maturity to claim. These are the money market (short-
term debt instruments) and the capital market (long-maturity financial assets).
5. Yes, there are money market instruments traded overnight. A money market is a financial market that
trades debt securities or instruments with maturities of one year or less (which could between from
overnight to one year).
6. No, capital markets included trade equity (stocks) and debt instruments (bonds) with maturities of
more than one year, not less than one year.
7. Primary markets are markets in which the borrowers such as corporations raise funds through new
issues of financial instruments (stocks and bonds) which are sold to the investors.
8. Yes, the fund users (borrowers) such as corporations can raise funds through new issues of financial
instruments in the primary market. This happens when the fund users have new projects or expanded
production needs but do not have sufficient internally generated funds to support these needs.
9. Secondary markets are markets in which the financial instruments such as stocks are subsequently
traded (rebought and resold) when such stocks are already issued in the primary markets.
10. No, the Philippine Stock Exchange does not only trade equity instruments. Aside from stocks, it is
where debt instruments (e.g. bonds) and other securities are purchased and sold.

CASE
1. Stock exchange
2. Secondary market
3. Primary market
4. Equity market
5. Money market
6. Debt market
7. Capital market
8. Primary market
9. Secondary market
10. Stock exchange
11. Equity market
12. Stock exchange
13. Capital market
14. Equity market
15. Stock exchange
16. Money market
17. Stock exchange
18. Over-the-counter-market
19. Primary market
20. Stock exchange
 UNIT 3

ANSWERS ON THE QUESTIONS

1. Yes, the characteristic of the money market is the buying and selling of debt instruments
maturing in one year or less.
2. Money-market fund pools money-market securities allowing investors to diversify risk among
the various company and government securities held by the fund.
3. A fixed rate is determined by market conditions at the time they are issued while the
adjustable-rate (variable rate) instrument is which the rate will change from time to time
according to procedures laid down at the time the instruments are sold.
4. In most cases, the life or maturity of a short-term commercial paper is greater than 90 days
but less than nine (9) months. Besides, this maturity is dictated by regulations.
5. A commercial paper has a life or maturity greater than 90 days but less than nine (9) months
while a bankers’ acceptances usually have a maturity of less than six (6) months. Another, the
commercial paper enabled the investor to raise cash or money while the bankers’ acceptances
usually tied to the sale or storage of specific goods such as an export order (international trade).
Also, unlike commercial papers, bankers’ acceptances are not issued at all by financial-industry
firms and they do not bear interest.
6. Treasury bills (t-bills) are securities with a maturity of one year or less, issued by a national
government such as the Fixed Rate Treasury Bills issued by the Philippine Government through
the Bureau of Treasury. Treasury bills issued by the government in its currency are also generally
considered as the safest of all possible investments in that currency.
7. The government agency notes are issued by entities such as Land Bank of the Philippines, Home
Mutual Development Fund, or Pag-ibig Fund to the heavy borrowers in the money market such
as the national government agencies and government-owned or controlled corporations while
the local government notes are issued by provincial or local government and by agencies of these
governments.
8. International agency papers are issued by the World Bank, Asian Development Bank, and other
organizations owned by member governments. Besides, these organizations often borrow in
many different currencies, depending upon interest and exchange rates.
9. A repurchase agreement (repo) is a combination of two transactions, in the first transaction, a
securities dealer (e.g. bank) sells securities it owns to an investor agreeing to repurchase the
securities at a specified higher price at a future date. On the second transaction, the repo is
unwound as the securities dealer buys back the securities from the investor after days or months
later.
10. Trading in money-market instruments occurs almost entirely over computer systems such as
the COL Fund Source of the COL Financials. The money-market instrument dealers (e.g. banks,
non-banks) sign contracts with one another or with a central clearinghouse, committing
themselves to complete transactions on the terms agreed.

CASE 1
a.) The financial instrument which is indicated in the case is a Commercial Paper.
b.) The type of this instrument is a Money Market Instrument since it is short term, low risks,
unsecured, and highly liquid.
c.) The types of floatation costs that are generally involved are underwriter’s commission,
brokerage fees, publishing costs, and advertising costs.
d.) The method helped the company by providing short-term funds which could be required for
working capital needs or some seasonal changes to meet expenses on the issuance of shares.
e.) The two money market instruments which are issued at discount and redeemed at par are
Commercial Paper and Treasury Bills.

CASE 2
a.) The financial asset which is indicated in the case is a Treasury Bill.
b.) This instrument was issued by BPI-AMTC on behalf of the Philippine Government.
c.) The instrument is called a zero-coupon bond because there is no interest rate written on the
face of the instrument. Hence, the instrument is issued at discount and it can be redeemed at
par.
d.) T-91 denotes the maturity period of the Treasury bill which is 91 days.
 UNIT 4

ANSWERS TO THE QUESTIONS

1. Yes, the word “bond” means a contract, agreement, or guarantee.
2. The prospectus or official statement lays out in detail:
 the financial condition of the issuer
 the purpose for which the debt is being sold
 schedule for the interest and principal payments required to service the debt
 the security offered to bondholders in the event the debt is not serviced as required
3. The role of underwriters in the sale of bonds is they are responsible for arranging the syndicate
and for allocation a proportion of the bonds to each of the member firms.
4. Yes, there are issuers of bonds that sell directly to investors. New technology has made it
practical for some issuers to sell their bonds directly to the investor over the internet, without
the intermediation of underwriters or dealers. The national and sub-national governments are
more common issuers of these bonds.
5. The trading infrastructure for fixed income financial instruments in the Philippines is the
Philippine Dealings and Exchange Corporation (PDEx).
6. A callable bond is a bond that may be called in for redemption before the maturity date.
Besides, the issuer may reserve the right to call the bonds at a particular date and that call obliges
the owner to sell the bonds to the issuer for a price that usually exceeds the current market price.
7. An investor earns from buying zero-coupon bonds through non-payments to reinvest until the
bond matures and therefore has greater certainty about the return on investment.
8. Yes, a convertible bondholder can exchange his instrument for another security at his option.
It is usually the issuer’s common shares. Moreover, the prospectus for a convertible issue
specifies the conversion ratio (the number of shares for which each bond may be exchanged) and
conversion value (the price of the common shares for which it may be traded).
9. The basic properties of bonds are:
 Maturity – the date on which the bond issuer will pay the principal (pay value of the bond)
and will redeem the bond
 Coupon – the stated annual interest rate as a percentage of the price at issuance (pay
value)
 Current yield – the effective interest rate for a bond at its current market price, not par
value
 Yield to maturity – the annual rate the bondholder will receive if the bond is held to
maturity
 Duration – a number expressing how quickly the investor will receive half of the total
payment due over the bond’s remaining life, with an adjustment for the fact that
payments in the distant future are worthless (less purchasing power) than payments due
soon
 Ratings of risk – used by the issuer which are coming from one or more private rating
agencies before issuing bonds in the financial markets
10. The ratings of well-known rating agencies are used by investors in investigating the issuer’s
ability to service the bonds, including such matters as financial strength, the intended use of the
funds, the political and regulatory environment, and potential economic changes. Moreover,
these can be used to determine the probability of default (default risk) and setting bond prices.

CASE
a.) Price change = Duration x Value x Change in yield
= 7.8 x P5,000,000.00 x (0.05 – 0.048)
= 7.8 x P5,000,000.00 x (0.002)
= P78,000.00
b.) New market value of the bond = Value + Price change
= P5,000,000.00 + P78,000.00
= P5,078,000.00

c.) Price of the bond = P5,078,000.00/50,000

= 101.56

d.) Price change = Duration x Value x Change in yield

= 10 x P5,000,000.00 x (0.05 – 0.048)
= 10 x P5,000,000.00 x (0.002)
= P100,000.00

New market value of the bond = Value + Price change

= P5,000,000.00 + P100,000.00
= P5,100,000.00

Price of the bond = P5,100,000.00/50,000

= 102

Percentage increase in the bond price = 102 – 100

= 2%

e.) Price change = Duration x Value x Change in yield

= 3 x P5,000,000.00 x (0.05 – 0.048)
= 3 x P5,000,000.00 x (0.002)
= P30,000.00

New market value of the bond = Value + Price change

= P5,000,000.00 + P30,000.00
= P5,030,000.00

Price of the bond = P5,030,000.00/50,000

= 100.6

Percentage increase in the bond price = 100.6 – 100

= 0.6%
 UNIT 5

1. The Dutch East India Company founded the first shareholder-owned business in 1602.
2. The main function of equity markets is raising capital. However, firms can likewise raise capital
through loans or venture capital.
3. The common types of equity or equity instruments are Common stocks or Ordinary shares,
Preferred stock or Preference shares, Convertible preferred stock, and Stock warrants.
4. A Floatation or an Initial Public Offering (IPO) is the process by which a firm sells its shares to
the public and it may occur for several reasons. One of them is the firm may require additional
capital to take advantage of new opportunities.
5. When a firm whose shares are publicly traded sells additional shares, it is called Additional
Listing in the Philippines. This secondary offering also occurs when one or more investors holding
a large proportion of a firm’s shares offers those shares for sale to the public.
6. The approaches or methods when selling shares are:
1. In the case of good-quality issuers, the investment banker usually serves as the
underwriter who commits its capital to purchase from the issuer and resell them to the
public, or in some cases, the underwriter sells the shares by tender.
2. An investment bank distributes the shares on a best-effort basis. It is simply committing
to use its best efforts to sell the shares on behalf of the issuer.
3. All-or-none offering. This is a best-efforts offering undertaken on the condition that all
shares are sold at the offer price and if some shares remain unsold, the entire offering is
canceled.
7. The Philippine Stock Exchange Index or PSEi is the benchmark measuring the performance of
the Philippine stock market. The PSEi include 30 common stocks of the top 30 listed companies
in the stock exchange wherein these companies comprising the PSEi represent the general
movement of the stock market in the Philippines.
8. The factors affecting the prices of shares in the financial market are firm earnings, cash flow,
dividends, asset value, analysts’ recommendations, inclusion in an index, interest rates, bond
returns, global economic news, and fads.
9. The dividend yield can be determined by dividing the annual dividend per common share by
the current price per share.

Dividend yield = Annual Dividend per Common Share/Current Price per Share

10. The key numbers used by investors in deciding which shares to buy are price/earnings ratio,
return on equity, return on capital, and total return.

CASE
1. Yes, Ayaland Land is part of the Philippine Stock Exchange Index (PSEi). To be considered as a Blue Chip
Company, it must be proven to have a track record and a daily high usage volume trades. One of the
specific criteria they need to meet is to have a free float level of 12%, in which in this case, the Ayaland
Land has a free float level of 54.33%. Another factor is the market capitalization of the said company
amounted to P572.275 billion, an outstanding shares of 14.730 million, and a current share price of
P38.95.2. The Price/Earnings Ratio of the Ayaland Land is 9.02%
2. Price /Earnings Ratio = Current share price/Reported earnings per share
= P38.95/432 (6.366/14.730)
= 0.0902 or 9.02%

Thus, the price /earnings ratio of Ayala Land is 9.02%.

3. The technical term for the ALI code is “ticker”. On the internet, information about share prices
can also be obtained by using “ticker” symbols and in this case, ALI stands for Ayaland Land, Inc.

4. The possible factors that caused the 52-week price range difference of Ayala Land are:
 current earnings and future estimated earnings
 announcement of dividends
 employee layoffs due to pandemic
 a change of management
 economic factors such as inflation

5. If I am an investor, I will invest in the stocks of Ayala Land because first of all, Ayala Land is the
largest and most diversified real estate company in the country generating a billion-peso net
income annually from its various core businesses. They are also considered as a Blue Chip
Company by the PSEi and they have strategies to target a net income amid this pandemic, which
will give reasonable assurance to the potential investors that they will earn on their equity
investments even the economic status of the country is still unstable. Moreover, the market data
and valuations as of November 18, 2020, of the said company clearly shows that there’s a big
return of investment and capital once I purchase several stocks from them, hence, investing in
the Ayala Land, Inc. is a wise idea.
 UNIT 6

1. The four different markets in a foreign exchange market are the spot market, the futures
market, the options market, and the derivatives market.
2. The widely used currency derivatives include:
 Forward contracts – are agreements similar to future contracts, providing for the sale of
a given amount of currency at a specified exchange rate on an agreed date.
 Foreign-exchange swaps – involve the sale or purchase of a currency on one date and the
offsetting purchase or sale of the same amount on a future date with both dates agreed
when the transaction is initiated.
 Forward rate agreements – allow two parties to exchange interest-payments obligations
and if the obligations are in different currencies there is an exchange-rate component to
the agreement.
 Barrier options and collars – are derivatives that allow a user to limit its exchange-rate
risk.
3. The players in the foreign exchange market are the exporters and importers, investors,
speculators, and governments.
4. The most widely traded currency is the US dollar, which has accounted for 40-45% of all trading
since the first comprehensive survey in 1989.
5. The Herstatt Risk (named after the well-known failure of the German bank Herstatt) arises
when the trading occurs across many time zones. It is the risk associated with the settlement of
foreign exchange transactions. Besides, it is also the possibility that one party fails to deliver on
the terms of a contract at the agreed-upon time.
6. Exchange rates change because they may be extremely volatile and moving in response to the
latest news such as the defeat of proposed legislation, the election of a particular politician, or
the release of an unexpected bit of economic data.
7. Covered interest arbitrage affect the exchange rates by changing a domestic currency that
carries a lower interest rate to a foreign currency that offers a higher rate of interest. Higher
interest rates offer lenders in an economy a higher return relative to other countries. Thus, higher
interest rates attract foreign capital and cause the exchange rate to rise. Likewise, the opposite
relationship exists for decreasing rates.
8. Under the gold standard system, a country’s money supply is directly linked to the gold
reserves owned by its central bank, and notes and coins can be exchanged for gold at any time.
9. In a floating-rate system, exchange rates are not the target of monetary policy. Governments
and central banks use their policies to achieve other goals, such as stabilizing domestic prices or
stimulating economic growth and allow exchange rates to move with market forces.
10. Exchange rate information can be obtained from banks, electronic information systems such
as Reuters and electronic currency-trading systems, daily newspapers, and websites. Likewise in
our country, Reference Exchange Rate Bulletin is issued daily by the Banko Sentral ng Pilipinas
(BSP).

CASE
a.) If invested in the Philippines:
Initial capital = P500,000,000
 Philippine interest rate = 5%
Capital after 1 year = P500,000,000 x 1.05
= P525,000,000

b.) If invested in the United States:

Initial capital = P500,000,000 @ P48.27/US$1 = US$10,358,400.66
Philippine interest rate = 6.5%
Capital after 1 year = US$10,358,400.66 x 1.065 x 48.00
= 11,031,696.71 x 48.00
= P529,521,441.88

c.) I will advise investing the available funds in the United States. It is guaranteed to earn a higher profit
in the US than in the Philippines, with a significant difference of P4,525,441.88.
 UNIT 7

1. A derivatives market is a part of the financial markets that started to grow in recent years
particularly the over-the-counter market for derivatives, which are transactions negotiated
privately between two parties known as counterparties, without the intermediation of an
exchange.
2. The two basic categories of derivatives are forwards and options. Forwards are contracts that
set a price for something to be delivered in the future while Options are contracts that allow,
but do not require, one or both parties to obtain certain benefits under certain conditions.
3. When trading derivatives, the risks are counterparty risk, price risk, legal risk, and settlement
risk.
4. The types of derivatives include forwards, interest rate swaps, currency swaps, interest-rate
options, commodity derivatives, equity derivatives, credit derivatives, and synthetic securities.
5. Price risk is the risk that a derivatives dealer customizes its product to meet the needs of a
specific user. It is associated especially with the disadvantage of customized derivatives,
particularly when a user sells out its positions may be unable to obtain a good price, as there
may be few others interested in that particular derivative.
6. A forward contract is an agreement to set a price now for something to be delivered in the
future. It can also be designed with the specific size and expiration date the user desires.
7. Currency swaps involve exchanging streams of interest payments in two different currencies.
The values will depend upon what happens to the exchange rate between the two currencies
concerned during the life of the derivative.
8. A plain vanilla is the most basic or standard version of a financial instrument, usually options,
bonds, futures, and swaps.
9. The examples of derivative disasters are
• In 1993, Metallgesellschaft Company reported a $1.9 billion loss on its positions in oil
futures and swaps due to its hedge was not perfect causing its derivative position to lose value
more rapidly than its contracts to deliver oil in future value.
• In 1994, Procter & Gamble Company and Gibson Greetings both purchased highly
levered derivatives known as ratio swaps which resulted in huge users’ losses amounted to
$157m and $20m respectively.
• In 1997, many investors misjudged Thailand’s situation because the Thai central bank
reported holding large foreign-currency reserves, but its baht’s market value fell and the bank
suffered huge losses on its derivatives and its reserves were wiped out
• In 1998, several US and European banks reported significant derivative losses in Russia
after a sharp fall in the country’s currency led to the failure of several banks and caused local
counterparties to derivatives trades to default.
10. According to PFRS 9, derivatives (with certain exceptions) are carried at fair value with
changes recognized in profit or loss unless the entity has elected to apply hedge accounting by
designating the derivative as a hedging instrument in an eligible hedging relationship. Further, a
derivative is defined in PFRS 9 (Appendix A) as a financial instrument or other contracts that
possess all these three characteristics:
• its value changes in response to changes in the so-called ‘underlying’, i.e. the change in
a specified interest rate, financial instrument price, foreign exchange rate, etc.
• it requires no initial net investment or an initial net investment that is smaller than
would be required for other types of contracts with a similar response to changes in market
factors.
• it is settled at a future date.
Moreover, changes in the value of a derivative usually result from the fact that it has an
underlying notional amount, for example, a number of currency units or a number of shares.
 UNIT 8

1. Cryptocurrencies (comes from the Greek word ‘Kryptos’ which means hidden or private) or
virtual currencies are digital means of exchange that uses cryptography for security, which
makes it nearly impossible to counterfeit or double-spend. Moreover, it is created and used by
private individuals or groups for multiple benefits.

2. The guidelines issued by Bangko Sentral ng Pilipinas in 2017 was the Circular 944 or the
Guidelines for Virtual Currency Exchanges, requiring VC exchanges to obtain a certificate of
registration to operate as remittance and transfer company.

3. Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to
investors. This is similar to a pyramid scheme in that both are based on using new investors’
funds to pay the earlier backers.

4. The difference between a cryptocurrency from a virtual currency is, a cryptocurrency is a

type of virtual currency that uses cryptography which is a method of storing and transmitting
data in unreadable form so that only the intended receivers can read and process it. On the
other hand, a virtual currency is a type of digital currency created by a community of online
users that are stored in electronic wallets (e-wallets) and generally transacted online.

5. An E-Wallet is a type of electronic card which is used for transactions made online through a
computer or a smartphone. Moreover, E-wallet is a type of prepaid account in which a user can
store his/her money for any future online transaction such as to make payments for groceries,
online purchases, and flight tickets.

6. Fiat money or real currencies are the coins and paper money minted and printed by the
central bank of a country which is designated and circulated as legal tender in the country. It is
also used and accepted as a medium of exchange in the country. An example of it is the
Philippine Peso.

7. A bitcoin works through this process:

1.) A user sets up a Bitcoin wallet onto a mobile device personal or computer
2.) The user loads funds into the Bitcoin wallet
3.) Once Bitcoins are in the wallet, the user can initiate a Bitcoin transaction
4.) Upon initiation of the transaction, Bitcoin miners confirm and validate the
transaction through a validation process using a private key, public key and
transaction message
5.) Once validated, the transaction is effected and posted in the public ledger called the
blockchain is also known as digital ledger technology
8. The difference between a public key from a private key is, a public key is a sequence of
letters/numbers that everyone in the Bitcoin community can see while a private key is another
set of letters/numbers that are kept secret between/among the transactions.

9. The meaning of ICO is Initial Coin Offering. It is the cryptocurrency industry’s equivalent to an
Initial Public Offering (IPO). Further, a company looking to raise money to create a new coin,
app, or service launches an ICO as a way to raise funds.

10. The trading platform for cryptocurrencies approved by the Bangko Sentral ng Pilipinas is the
Philippine Digital Asset Exchange (PDAX) which was founded in 2017 in the Philippines. It was
approved by the BSP to operate as a virtual currency exchange.

Be confident and determined 