This document provides an introduction to investments, including the concepts of investment, financial instruments like stocks, bonds, mutual funds, and non-financial instruments. It defines key terms like common stock, preferred stock, callable bonds, convertible bonds, and bond valuation. Examples are given to illustrate calculating discount on bonds when market price is lower than face value and premium on bonds when market price is higher.

1. INTRODUCTION TO INVESTMENTS
ALONA A. DICIANO

2. CONCEPT OF INVESTMENT
INVESTMENT
• Accounting-assets held by the business
• Economics-tangible or physical assets
• Finance-amount if money invested in
financial assets.

3. CONCEPT OF INVESTMENT
INVESTMENT - money which is committed
with an intention to earn a return over a
period of time.
TYPES
1.Financial Instruments
2.Non-Financial Instruments

4. FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENT is a
contract that provides financial
assets to one party and, at the same
time, entails financial liability or
equity to another.

5. FINANCIAL INSTRUMENTS
1. Stocks or equity instruments
 Is a share in the ownership of a
company.
 It represents a claim on the
company’s asset and earnings.

6. FINANCIAL INSTRUMENTS
Two main types of stock:
• Common Stock - represent
ownership in a company and a
claim (dividend) on a portion of
profits. In long term, by means of
capital growth, yields higher
returns than almost every other
investment.

7. FINANCIAL INSTRUMENTS
Two main types of stock:
• Preferred Stock – represents some
degree of ownership in a company
but usually doesn’t come with the
same voting rights. Guaranteed a
fixed dividend. In event of
liquidation, are paid-off before the
common shareholder.

8. FINANCIAL INSTRUMENTS
2. Bonds or Debt Instrument
- Is an unconditional promise to
pay:
a. a specified sum of money at a
determinable future time
b. Its periodic interest is based on
the agreement.

9. FINANCIAL INSTRUMENTS
Classification of Bonds:
• Term Bonds– have a single
maturity date.
• Serial Bonds- those that have
series of maturity dates. These
bonds are payable on
installments.

10. FINANCIAL INSTRUMENTS
Classification of Bonds:
• Callable Bonds– are bonds that
can be called in or redeemed by
the issuing company prior to the
date of maturity.

11. FINANCIAL INSTRUMENTS
Classification of Bonds:
• Convertible Bonds installments
are those that offer the
bondholder the right to convert pr
exchange the bonds prior to their
maturity date with shares of stock.

12. FINANCIAL INSTRUMENTS
3. Cash equivalents
 Include short-term and highly
liquid investments that are
readily convertible into cash.
Ex:Treasury bills of the BSP, time
deposits, or money market
instruments.

13. FINANCIAL INSTRUMENTS
4. Trade Accounts
- Represent the right to collect
money in the near future. They
include accounts receivable and
notes receivable arising from
sales of goods or services.

14. FINANCIAL INSTRUMENTS
5. Mutual Funds
 Refer to money pooled together by
people and kept and handled by a
professional manager. It is a collection
of stocks or bonds. You don’t need the
time or the experience in choosing
sound investment when you invest in it.

15. FINANCIAL INSTRUMENTS
6. Insurance Funds
 Refers to money collected and pooled
by insurance companies from the
premiums paid by the insured policy
holders and used as a protection or
hedge against uncertain risks. It usually
provides a higher return on investment
because of high risk involved.

16. FINANCIAL INSTRUMENTS
7. Bank Deposits
 These are money placed into a
banking institution for safekeeping.
Bank Deposits are of different types
but the most popular of them are:
Savings account, Checking or Current
account, and Time deposit account.

17. FINANCIAL INSTRUMENTS
Savings account provides a low fixed
rate of return but provides the
convenience of availability.
Checking account, also, has a very low
rate of return but a depositor can issue
checks from his account to pay various
expenditures instead of delivering bills
or coins as payment.

18. FINANCIAL INSTRUMENTS
Time deposit account usually requires a
minimum amount of deposit with a fixed
term to maturity but with higher return
compared to savings and checking
account. The time depositor cannot
withdraw from his account before the
fixed date, but sometimes Time deposits
are pre-terminated.

19. FINANCIAL INSTRUMENTS
Deposits with banks are insured with
the Philippine Deposit Insurance
Corporation (PDIC) up to P500,000 per
depositor for every bank. Depositors
need to determine the bank’s overall
financial position and performance
before transacting with them.

20. FINANCIAL INSTRUMENTS
CAMELS rating system was developed in
assessing the overall condition of the bank
1. Capital adequacy
2. Asset quality
3. Management indicators
4. Earnings quality
5. 5. Liquidity
6. 6. Sensitivity to risk factors

21. FINANCIAL INSTRUMENTS
A bank may be graded with a CAMELS
rating of 1 as the highest and 5 as the
lowest rating possible. The depositor
may ask the bank for the CAMELS
rating assessed by the Bangko Sentral
ng Pilipinas (BSP).

22. FINANCIAL INSTRUMENTS
7. Currencies
 generally accepted form of money,
including coins and paper notes,
which is issued by a government
and circulated within an economy.

23. NON-FINANCIAL INSTRUMENTS
1. REAL PROPERTIES
 Are non-financial instruments that
represents hard or fixed assets
usually attached to the soil.
Includes: land, building or
machinery.

24. NON-FINANCIAL INSTRUMENTS
2. INVENTORIES
 Are products that are intended for
sale but remain unsold at the end
of the period. No economic or
financial benefits are gained unless
inventories are sold and collection
is made.

25. NON-FINANCIAL INSTRUMENTS
3. PATENTS
 Are intangible non-financial
instruments granted by the
government. They represent exclusive
rights of a business to manufacture the
invested product for a specific period
of time. Its life is 20 years and can be
extended.

26. NON-FINANCIAL INSTRUMENTS
4. GOLD BULLION
 Is a precious commodity which
carries a high market value most
especially when the market is
volatile. Companies consider
investing in gold when the values of
some products in the market
depend on the value of gold.

27. Investment Scams usually involve getting
you to put up money for a questionable
investment – or one that doesn’t exist at all.
A sign of scam can be ‘High returns and low
risk’, ‘Hot tip or insider information,’
Pressure to buy now,’ or ‘Seller not
registered to sell investments.’

28. Valuation of Bonds
Valuation refers to the value of the bonds at the time of
investment. It is the amount that the investor is willing to
pay the issuing company. The value of the bonds at the time
of investment is equal to the present value of all future cash
flows. The expected cash flows are coming from:
a. The regular payment of interest based on nominal rate;
and
b. The payment of the principal at the time at the bond’s
maturity

29. Valuation of Bonds
If the nominal rate appearing on the face of the bond is
lower than its effective interest rate (or the effective rate is
higher than the nominal rate), the purchase price or market
price of the bond is lower than the face value.
Discount on bonds – the difference between the market
price and the face value of the bond. It indicates gain on the
part of the investor since he/she pays less than the face
value of the bonds at the time of investment and receives an
amount equal to the face value at the time of maturity.

30. If the nominal rate of the bond is higher than the
effective rate (or the effective rate is lower than the
nominal rate), the market price of the bond is higher
than the face value.
Bond Premium-the difference between the market price
and the face value of the bond. It is a loss to the investor
since the amount of money to be received in the future is
equal to the face value is less than the amount of money
invested.

31. Illustration on Investment in Bonds
Yvonne acquires bonds with ₽3,000,000 face
value dated January 1, 2018. The bonds have a
life of 3 years and earn an interest of 6% payable
annually on December 31. The bonds are
acquired at a cost of ₽ 2,845,300 which will yield
an 8% interest rate.
Required: Compute the discount on Bonds

32. Illustration on Investment in Bonds
Answer: Since the market price is lower than the
face value, the discount is computed as follows:
Face value of the bonds ₽ 3,000,000
Market Price 2,845,000
Bond Discount 154,700

33. Illustration on Investment in Bonds
On January , Nicanor has acquired bonds with ₽
3,000,000 face value for ₽ 3,210,500. The bonds
bear an interest of 8% payable semi-annually on
June 30 and December 31. The life the bonds is
four years. The bonds will yield an effective
interest rate of 6%.
Required: Compute the premium on bonds.

34. Illustration on Investment in Bonds
Answer: Since the purchase price of the bond
amounting to ₽3,210,500 is higher than its face
value ₽ 3,000,000, there is premium of ₽ 210,500.
The premium of ₽ 210,500 on bond investment
represents a loss for Nicanor since he has invested
₽3,210,500 but will receive only ₽ 3,000,000 at the
time of maturity.