FINANCIAL MARKETS

Part 1

A financial instrument with the following features is sold by the Philippine National Bank.

• Issued by the Republic of the Philippines and thus carries its obligation to pay investors on maturity dates.
• Original tenors are 91, 182 and 364 days. All expiration dates traditionally fall on a Wednesday (unless said day is a holiday). Computation of selling price is based on number of days remaining till the end of a series.
• Sold at a discount, with the interest paid in advance.
• Interest given to client is based on prevailing market rates and is subject to withholding tax (currently at 20%) and Broker's Commission.
• Minimum placement: Php 500,000.00 face value, subject to the availability of the security.
• Settlement is on the next banking day after the transaction (T+1).
• Liquidity: If the client needs cash before the security matures, the client can sell the financial instrument in the Fixed Income Market through PNB at the prevailing market rate.

Questions.

1.) What type of financial instrument is being referred to above? An equity instrument or a debt instrument?

2.) What is the specific term used for this type of instrument?

3.) Who is the issuer of the financial instrument?

4.) What is being described by the original tenors of 91, 182 and 364 days?

5.) What is the meaning of minimum placement? Explain.

Part 2

1.) A car loan transaction involves the car distributor/seller, the bank paying the car distributor the full price of the car, and the buyer who will pay the bank on installment basis. Who is the investor and who is the borrower?

2.) Is the holder of a debt instrument considered as the investor?

3.) Is the present value of the expected cash flows of a financial asset used as the basis in determining the financial asset price?

4.) If the price of the financial asset is P20,000 and at the end of one year, the total cash flow is P22,000, what then is the rate of return?

5.) What are the three risks associated with financial assets?

6.) Are financial assets similar to financial instruments or securities?

7.) What is the difference between a debt instrument from an equity instrument?

8.) Are the characteristics of the debt and equity instruments issuer determine the degree of certainty of expected cash flows?

9.) Is a financial market a physical place for exchange or trading of financial assets?

10.) Are entities in any country seeking to raise funds already allowed to transact with other countries?