financial instruments and its differentiation for finance 1

1. “Financial
Instruments”

2. Financial Instruments:
FUNDS
SURPLUS
SPENDING
UNITS
DEFICIT
SPENDING
UNITS
1. Stocks
2. Bonds
3. Notes
4. Certificates of deposit
5. Pre-need plans
6. Treasury bills
7. Life insurance plans
8. Banker’s acceptance

3. 1. Stocks
• A security that signifies ownership in a
corporation.
2 types:
• Preferred- have preferential rights over the common
stocks in terms of dividend distribution
and liquidation of assets and are not
entitled to vote.
• Common- stocks are not secured by any real assets of
the corporation but they have certain
voting rights or corporate matters.

4. 2.Bonds
• A debt investment in which an investor loans
money to an entity (corporate/governmental)
that borrows the funds for a defined period of
time at a fixed interest rate.
• Ex. Corporate bonds, municipal bonds,
treasury bonds

5. 3.Notes
• A financial security that generally has a longer
term than a bill, but a shorter term than a
bond.

6. 4. Certificate of Deposit
• Savings certificate entitling the bearer to
receive interest.

7. 5. Pre-need Plans
• Denoting a scheme in which one pays in
advance for a service or facility
• Ex. Educational plans

8. 6. Treasury Bills
• A short term debt obligation backed by govt.
with a maturity of less than 1 year.

9. 7. Life Insurance Plans
• a contract between an insured and an insurer who
promises to pay a designated beneficiary a sum of
money (the "benefits") in exchange for a premium,
upon the death of the insured person.
• Ex. Philamlife , Insular Life

10. 8. Banker’s Acceptance
• A short term debt instrument issued by a firm
that is guaranteed by a commercial bank.

11. “Differences Among
Financial Instruments’

12. 1. Denomination
 from 100 peso up to billions of opening savings
account.
2. Maturity
 The period of time for which a financial instrument
remains outstanding.
 Insurance policies – matures upon the death of the
SSU.

13. 3. Claim Against Issuer
 SSUs that hold ownership claims participate in the
management company and there's no specific date when the
SSU can get back his invested funds.
To convert his ownership claim:
a) to sell his claims to an interested SSU;
b) to get his share of the proceeds of the DSU after
liquidation.

14. 2 types of claims:
*Ownership claims – A holder of stock (a shareholder) has
a claim to a part of the corporation's
assets and earnings.
2 types:
1) preferred
2) common
*Debt Claims - liabilities of the issuing DSU which
must be settled down on given dates.
Interest rates – the amount paid for the use of
borrowed funds.

15. 4. Collateral
• credit quality of any financial instrument is
dependent on the type of collateral backing
up.

17. 5. Terms to Repricing
 interest rates paid by DSUs on borrowed funds may
change before maturity as well as the securities be
repriced.
• Fixed-coupon (rate) bonds – those whose coupon rates
are fixed throughout their maturities.
• Variable or floating coupon (rate) bonds -- are those
whose coupon rates may change before maturity.

18. 6. Marketability
 refers to financial instrument
whether they are highly
marketable or not.
 Highly marketable financial
instrument also referred to as
“liquid securities”.

19. Factors that can lower the cost of trading :
a) When the issuer of the instrument is well known,
information costs tends to be lower;
b) When the amount of the issue is large, economy is
affected resulting to lower search and transaction
costs;
c) When the instrument has few unique
characteristics, the costs of analyzing and
monitoring are lower.

20. 7. Form of Interest Payment
 Debt instruments may differ on how they are paid interests.
2 forms are:
a) by coupons , or
b) by a periodic addition to the principal amount.

21. Instruments will then be different from one another according to
the type of option adapted
Following options are:
a) Call options – these permit the issuer to redeem the
instrument before the maturity;
b) Put options – these permit the investor to sell back
to the issuer before maturity;
c) Convertibility options – these permit the investor to
convert from one instrument to
another.
8. Options

22. 9. Currency
 Financial instruments may differ in terms of
“currency denomination”.
 An example that may be provided is the 180 million
worth of Euro and yankee bonds to be issued by
IMPSA Asia Ltd., to partly finance the 450 million
Caliraya-Botocan-Kalayaan project.

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…………….Thank
you…………