INVESTMENT BANKS

FIRST METRO, BDO CAPITAL, UNICAP

 UNDERWRITES AND DISTRIBUTES NEW INVESTMENT

SECURITIES AND HELP BUSINESSES OBTAIN FINANCING

 HELP CORPORATIONS DESIGN SECURITIES THAT ARE

CURRENTLY ATTRACTIVE TO INVESTORS

 LEVY THEIR SECURITIES FROM THE CORPORATION

 RESELL THEM TO SAVERS

 DOES NOT ACCEPT M1 DEPOSITS:ONLY DEPSOSIT

SUBSTITUTES
 UNIVERSAL BANKS

 WIDER RANGE OF FINANCIAL SERVICES INCLUDING

EQUITY INVESTMENTS

 BPI, BDO, METROBANK, PNB ALLIED

 COMMERCIAL BANKS
 TRADITIONAL DEPARTMENT STORE OF FINANCE

 BANK OF COMMERCE, PBCOM

 DEVELOPMENT BANKS
 PROVIDE FUNDS TO PIONEERING VENTURES AND
MISSIONARY BUSINESS
INSURANCE COMPANIES
 LIFE INSURANCE
 ORDINARY LIFE: AKA TRADITIONAL
 TERM LIFE: PURE LIFE INSURANCE WITH NO SAVINGS
ELEMENT ATTACHED
 WHOLE LIFE: PROTECTION OVER ENTIRE LIFETIME
 ENDOWMENT LIFE:COMBINES PURE WITH SAVINGS
 VARIABLE LIFE: NONTRADITIONAL : INVESTS FIXED
PREMIUM PAYMENTS IN MUTUAL FUNDS OF STOCKS,
BONDS, MONEY MARKET INSTRUMENTS
INSURANCE COMPANIES
 UNIVERSAL LIFE AND VARIABLE LIFE ALLOWS BOTH
THE PREMIUM AMOUNTS AND THE MATURITY LIFE
CONTRACT TO BE CHANGED BY THE INSURED

 GROUP LIFE COVERS A LARGE NUMBER OF INSURED

PEOPLE UNDER ONE POLICY

 CREDIT LIFE PROTECT LENDERS AGAINST THE DEATH

OF THE BORROWER

 ANNUITIES REVERSE OF LIFE INSURANCE ACTIVITIES

THAT INVOLVE DIFFERENT METHODS OF
LIQUIDATING A FUND
INSURANCE COMPANIES
 PRIVATE PENSION FUNDS ALTERNATIVE PENSION
FUNDS COMPARED TO COMMERCIAL BANKS
 ACCIDENT AND HEALTH INSURANCE PROTECTS
AGAINST MORBIDITY AND ILL HEALTH
 NONLIFE
 FIRE INSURANCE AND ALLIED LINES PROTECTS
AGAINST THE PERILS OF FIRE, LIGHTNING, AND
REMOVAL OF PROPERTY DAMAGED IN A FIRE
 HOMEOWNERS MULTIPLE PERIL; PROPERTY AND
LIABILITYINSURANCE
INSURANCE COMPANIES
 COMMERCIAL MULTIPLE PERIL

 MARINE INSURANCE: INLAND AND OCEAN MARINE

 AUTOMOBILE LIABILITY AND PHYSICAL DAMAGE

 LIABILITY INSURANCE OTHER THAN AUTO

 REINSURANCE

 PRE NEED INSURANCE: MEMORIAL SERVICES,

EDUCATION, AND TRAVEL
 SECURITIES FIRMS AND
INVESTMENT BANKS
 SECURITIES FIRMS AND INVESTMENT BANKS
UNDERWRITE SECURITIES AND ENGAGE IN RELATED
ACTIVITIES SUCH AS TRADING AND MARKET
MAKING

 DISCOUNT BROKER: A STOCKBROKER THAT

CONDUCTS TRADES WITHOUT INVESTMENT ADVISE

 IPO INITIAL OR FIRST TIME PUBLIC OFFERING OF

DEBT AND EQUITY

 PRIVATE PLACEMENT SECURITIES PLACED WITH A

FEW INVESTMENT INVESTORS
 SECURITIES
 MARKET MAKING INVOLVES CREATING A
SECONDARY MARKET IN AN ASSET

 TRADING :

 1. PURE TRADING INVOLVES PURCHASES OF LARGE

BLOCKS TO FACILITATE SMOOTH FUNCTIONING OF
THE SECONDARY MARKETS IN SUCH SECURITIES

 2. PURE ARBITRAGE ENTAILS BUYING AN ASSET IN

ONE MARKET AT ONE PRICE AND SELLING IT
IMMEDIATELY IN ANOTHER MARKET AT A HIHGER
PRICE
 SECURITIES
 3. RISK ARBITRAGE INVOLVES BUYING BLOCKS OF
SECURITIES IN ANTICIPATION OF SOME INFORMATION
RELEASE

 4. PROGRAM TRADING IS ASSOCIATED WITH SEEKING A

RISK ARBITRAGE BETWEEN CASH MARKET PRICE AND
FUTURES MARKET PRICE OF THAT INSTRUMENT

 5. DAY TRADING IS TRADING ON A DAILY BASIS AND

INVOLVES BUYING AND SELLING OF STOCKS

 BACK OFFICE AND OTHER SERVICE FUNCTIONS INCLUDE

CUSTODY AND ESCROW SERVICES, CLEARANCE AND
SETTLEMENT SERVICES AND RESEARCH AND ADVISORY
 FINANCE COMPANIES
 MAKE LOANS TO INDIVIDUALS AND CORPORATIONS

 DO NOT ACCEPT DEPOSITS AND RELIES ON SHORT-

AND LONG-TERM DEBTS

 SWAPS

 FACTORING PURCHASE ACCOUNTS RECEIVABLES

FROM CORPORATIONS AT A DISCOUNT

 CAPTIVE FINANCE COMPANYPROVIDE FINANCING

FOR PURCHASE OF PRODUCTS OF THE MOTHER
COMPANY (TOYOTA FINANCIAL SERVICES)
 MUTUAL FUNDS
 POOL FINANCIAL RESOURCES OF INDIVIDUALS AND
COMPANIES AND INVEST IN A DIVERSIFIED
PORTFOLIO OF ASSETS.

 PROVIDE OPPORTUNITIES FOR SMALL INVESTORS TO

DIVERSIFY RISKS

 ENJOY ECONOMIES OF SCALE BY INCURRING LOWER

TRANSACTION COSTS AND COMMISSIONS

 MARKED-TO-MARKET: ADJUSTING ASSET AND

BALANCE SHEET VALUES TO REFLECT CURRENT
MARKET PRICES
 MUTUAL FUNDS
 NAV THE NET ASSET VALUE OF A MUTUAL FUND IS EQUAL
TO THE MARKET VALUE OF THE ASSETS IN THE MUTUAL
FUND PORTFOLIO DIVIDED BY THE NUMBER OF SHARES
OUTSTANDING

 OPEN-ENDED MUTUAL FUNDS WHERE THE SUPPLY OF

SHARES IN THE FUNDS ARE NOT FIXED BUT CAN INCREASE
OR DECREASE DAILY WITH PURCHASES AND REDEMPTION
OF SHARES

 CLOSED-END INVESTMENT COMPANIES SUCH AS REAL

ESTATE INVESTMENT TRUSTS (REIT)ARE SPECIALIZED
INVESTMENT COMPANIES THAT INVEST IN SECURITIES
AND ASSETS OF OTHER FIRMS BUT HAVE A FIXED SUPPLY
OF SHARES OUTSTANDING THEMSELVES
 INVESTMENTS

 CAPITAL APPRECIATION

 DIVIDENDS

 INTEREST

 CAPITAL GAINS
 Government Regulatory
Bodies
 Banko Sentral ng Pilipinas (BSP) www.bsp.gov.ph

 History of the BSP, its functions and the different

departments together with the Monetary Board.

 Surf the site on supervision to identify the different banks

and nonbank institutions, their size and ranks

 Insurance Commission of the Philippines

www.insurance.gov.ph

 *History, functions, go to website for list of insurance

companies such as life, nonlife and preneed.
 Additional gov’t entities
 Philippine Deposit Insurance Corporation www.pdic.gov.ph

 Established ahead of other Asian counties in 1963.

 Deposits insured up to P 500,000. started at P 10, 000

 Anti Money Laundering Council (AMLC) is mandated to protect

and preserve the integrity and confidentiality of bank accounts
and to ensure that thePhilippines shall not be used as a money
laundering site for the proceeds of any unlawful activity such as
drugs, corruption, gambling, kidnapping, human trafficking. It
also extends cooperation in transnational investigations and
prosecutions of persons involved in money laundering activities
wherever committed. www.amlc.gov.ph
 Additonal entities
 Phil Stock Exchange www.pse.com.ph

 Capital market and bonds for primary and secondary

market. Website provides history, description of the buying
and selling positions, current trade., including tutorials and
the list of stockbrokers

 Securities and Exchange Commission (SEC)

www.sec.gov.ph

 Expanded by President Marcos by a PD into a quasi judicial

body then mandated to supervise both private and public
corporations in the Phil.
 TYPES OF INVESTMENT
ASSETS
 FIXED INCOME SECURITIES

 SHARES

 COMMON TRUST FUNDS

 UNIT INVESTMENT TRUST FUNDS

 MUTUAL FUNDS

 REAL ESTATE
 FIXED INCOME
SECURITY
 LOW RISK BUT LOW RETURNS

 OFFERS FIXED PERODIC RETURNS

 PRINCIPAL IS PROTECTED

 PROS: SAFE, LIQUID,ACCUMULATE FUNDS FOR

FUTURE

 CONS: LOW YIELD, PENALTIES, TAXABLE,

REINVESTMENT RISK
 MONEY MARKET
INSTRUMENTS
 PURELY SHORT TERM DEBT INSTRUMENT WITH
MATURITIES OF LESS THAN A YEAR

 LOW DEFAULT RISK

 COMMERCIAL PAPER

 TREASURY BILLS

 CASH AND DEPOSITS

 SHARES
 REPRESENT OWNERSHIP INTEREST IN A
CORPORATION

 ORDINARY OR PREFERRED SHARES

 VOLATILE INVESTMENT

 FIRST TO DEPRECIATE IN CASE OF MARKET CRASH

 PROS: LIQUID, OWNERSHIP, AND POTENTIAL HIGH

RETURNS

 CONS: VOLATILE, TAXABLE

 ORDINARY SHARES
 ENTITLED TO A SHARE IN THE COMPANY’S PROFITS
THORUGH DIVIDENDS
 WITH VOTING RIGHTS
 SECOND IN LINE TO RECEIVE DIVIDENDS
 NO FIXED DIVIDEND RATE
 IN A DISSOLUTION LAST IN LINE TO RECEIVE PAY-
OUT
 1ST IS GOVERNMENT, THEN WORKERS’ SALARIES AND
WAGES, THEN SECURED AND UNSECURED
CREDITORS
 PREFERRED SHARES
 SHAREHOLDERS HAVE A PRIORITY IN THE PAYMENT
OF DIVIDENDS

 DIVIDEND RATE IS FIXED

 SOMETIMES CUMULATIVE

 WITHOUT VOTING RIGHTS

 IN DISSOLUTION SECOND IN LINE TO RECEIVE

PAYMENTS
 SHARES
 PRIVATE COMPANIES

 PUBLIC COMPANIES
 COMMON TRUST FUND
 POOL OF CO-MINGLED FUNDS CONTRIBUTED BY
MANY INVESTORS. KEPT IN TRUST BY A TRUSTEE,
AND MANAGED BY A PROFESSIONAL FUND
MANAGER

 PROS: LIQUID, INSTANT DIVERSIFICATION, LOW SET

UP COST

 CONS: EXCLUSIVE, HIGH MINIMUM INVESTMENT

REQUIREMENT, TAXABLE
 UNIT INVESTMENT
TRUST FUND
 OPEN ENDED POOLED TRUST FUND OPERATED AND
ADMINSTERED BY A TRUST ENTITY AND MADE
AVAILABLE BY PARTICIPATION

 PROS: LIQUID, LOW INVESTMENT REQUIREMENT,

INSTANT DIVERSIFICATION

 CONS: FLUCTUATING RETURNS, FEES/LOADS,

TAXABLE
 MUTUAL FUND
 SIMILAR TO UITF IN MAKING INVESTMETN MUCH
SIMPLER, MORE ACCESSIBLE, AND MORE COST
EFFECTIVE FOR SIMILAR INVESTORS

 MEDIUM TERM ( NOT LESS THAN 3 YEARS)

 TOTAL FUND IS MANAGED BY SEPECIAL FUND

MANAGERS

 PRICES ARE RECALCULATED DAILY AND PUBLISHED

IN AT LEAST TWO NATIONAL NEWSPAPERS.

 PROS LIQUID, TAX FREE, CONS SAME AS UITF

 REAL ESTATE
 QUALITY OF THE LAND

 LOCATION, LOCATON, LOCATION

 VALUE OF BUILDINGS

 AGRICULTURAL, RESIDENTIAL, COMMERCIAL

 PROS: TANGIBLE, COLLATERAL, PERIODIC INCOME,

HIGH POTENTIAL RETURNS

 CONS: IMMOVABLE, NOT LIQUID, TAXABLE

 CONSIDERATIONS IN
INVESTMENT
 ACCEPTABILITY OF FUNDS ( EASILY TURNED TO CASH)

 LEVEL OF RISK TOLERANCE

 FUNDS AVAILABLE ( SOURCES AND AMOUNT

AVAILABILITY)

 TAXES

 INVESTMETN OBJECTIVES

 PERFORMANC OF INVESTMENT

 INVESTMENT HORIZON

 DIVERSIFICATION
 LEVEL OF RISK
TOLERANCE
 AGE

 FINANCIAL CONDITION

 INVESTMENT OBJECTIVES

 PERSONALITY
 INVESTMENT
OBJECTIVES
 COMFORTABLE STANDARD OF LIVING

 PROVIDE FOR DEPENDENTS

 IMPROVE FINANCIAL CONDITION

 PROVIDE FOR RETIREMENT

 PROVIDE EDUCATIONAL FUNDS

 PROVIDE CLEAN UP FUNDS

 PERFORMANCE OF
INVESTMENT
 ECONOMIC FACTORS

 COMPETENCIES OF MANAGEMENT TEAM

 INVESTED COMPANIES LEVEL OF COSTS

 PAST EXPERIENCE OF COMPANY

 LIFE CYCLE OF INVESTMENT

 DIVERSIFICATION
 PROCESS OF INVESTING IN DIFFERENT ASSET
CLASSES AND ACROSS DIFFERENT MARKET
ENVIRONMENTS

 PROVEN EFFECTIVE IN REDUCING RISKS WITHOUT

SACRIFICING RETURNS
 INVESTMENT
ACCOUNTS
 UNITIZED
 INVEST BY PURCHASING UNITS
 EACH INVESTMENT ACCOUNT HAS A UNIT PRICE
 MEASURED BY THE VALUE OF THE UNDERLYING
ASSET IT HOLDS
 PERFORMANCE REFLECTED BY NAV
 VALUED REGULARLY USUALLY DAILY OR WEEKLY
 INSURANCE COMPANIES NOT REQUIRED TO
DIVULGE FREQUENCY AND BASIS FOR VALUING
ASSETS
 TYPES OF INVESTMENT
ACCOUNTS
 CASH FUND

 BOND FUND

 EQUITY FUND

 MANAGED FUND

 PROPERTY

 SPECIALIZED FUND

 BALANCED FUND
 ADDITIONAL TERMS
 ACCOUNT VALUE: CURRENT VALUE OF YOUR TOTAL
INVESTMENT IN EACH FUND

 TOP UP: ADDITIONAL INVESTMENT/SINGLE INJECTIONS

USED TO PURCHASE ADDITIONAL UNITS

 FUND ALLOCATION: ALLOTMENT AND DISTRIBUTION OF

THE INVESTABLE AMOUNT IN THE AVAILABLE
INVESTMENT FUNDS

 FUND SWITCH: TRANSFER FROM ONE FUND TO ANOTHER

 PREMIUM HOLIDAY: CESSATION OF PREMIUM PAYMENTS

WITH A VIEW TO RESUME
 ADDITIONAL TERMS
 PARTIAL WITHDRAWAL
 FULL WITHDRAWAL
 DEATH BENEFIT 1 FULL WITHDRAWAL VALUE OR
ACCOUNT VALUE OF THE UNIT AND THE SUM
ASSURED (PROTECTION DRIVEN)
 DEATH BENEFIT 2 FULL WITHDRAWAL VALUE OR
ACCOUNT VALUE OF THE UNITS OR THE SUM
ASSURED WHICHEVER IS HIGHER ( INVESTMENT
DRIVEN)
 SMOOTHING:EARNINGS SMOOTHEN OVER TIME
 TYPES OF CHARGES
 POLICY FEE: ADMIN COST OF SETTING UP THE POLICY

 MORTALITY CHARGE/COST OF INSURANCE: COVERS

MORTALITY COST OF THE POLICY, DEPENDENT ON
AGE, RECURRENT CHARGE EFFECTED BY CANCELING
UNITS

 ASSET/ FUND MANAGEMENT FEE

 REDEMPTION/ WITHDRAWAL CHARGE

 BID OFFER SPREAD

 Types of Pricing
 Single pricing method

 Dual pricing method

 SINGLE PRICING
METHOD
 MISS CHUA PAYS A SINGLE PREMIUM OF P50,000 AND
THE UNIT PRICE AT THE TIME IS P1.5012. THE
INSURANCE COMPANY DEDUCTS AN INITIAL
CHARGE OF 5% AND A MORTALITY CHARGE OF 1.6%
BOTH AS A PERCENTAGE OF SINGLE PREMIUM. THE
INITIAL CHARGE AND MORTALITY CHARGE ARE
DEDUCTED BEFORE THE PREMIUM IS ALLOCATED
 SOLUTION
 1. ADD THE CHARGES OF INITIAL CHARGES P 2,500 (
5% X P50,000) AND MORTALITY CHARGE P800 (1.6% X
50.000)

 2. SUBTRACT CHARGES FROM PREMIUM P46,700 (

50,000-3,300)

 3. COMPUTE FOR THE NUMBER OF UNITS OF

CHARGES 31, 108.4466 UNITS (46,700 /1.5012)
 Dual Pricing Method
 Two prices are quoted---

 Offer price is the cost per unit when the client buys form the
company

 Bid price is the cost per unit when the client sells to the
company

 Bid-offer Spread is the difference between offer price and

bid price expressed as a percentage of he offer price. One
price can be worked out from the other if the bid offer
spread in percentage is known.
 Type of transaction
 Offer price is used for

 Single premium

 Top-ups

 When switching between/ among funds

 Type of Transaction
 Bid price is used when

 Partial and full withdrawal

 When investment is valued

 Redeeming for a fund switch

 Payment for charges

 Death benefit
 Formulae to remember

 No of units=single premium / unit price

 Bid price=offer price (1-spread) or BO1S

 Offer price=Bid price/(1-Spread %) or OB/IS

 Full withdrawal value=number of units X Bid price at the

time of withdrawal

 Yield=(Full withdrawal value/single premium)1/n-1

 Accumulation of fund=X (1+i)n

 Dual Pricing Method
 A policy owner pays a single premium of P 50, 0000 and the
offer price at that time is P 1.5011. The company’s bid-offer
spread is 4%. The insurance company deducts an initial
charge of 5% and a mortality charge of 1.6% both as a
percentage of single premium. Deductions of both initial
and Mortality charges are down after allocation. Determine
the number of units net of charges.
 Dual Pricing Method
 Given:

 5% Initial charge

 1.6% mortality charge

 P 50, 000 Initial Investment

 P 1.5011 Offer price

 4% bid-offer spread
 Dual Pricing Method
 1) We calculate first the number of units allocated without
changes
 No. of units allocated= single premium/offer price
 No of units allocated= P 50, 000/P1.5011
 No of units allocated without charge=33,308
 Because the initial and mortality charges are deducted by
cancelling units after the single premium is invested, we add
the charges then convert into units using the bid price since
the policyholder in effect is cancelling units to pay for the
initial and mortality charges
 Dual Pricing Method
 Bid price = offer price (1-spread%)= P1.5011(1-4%)=P1.4411

 2) Calculate for the number of units to cancel:

 Initial charge (5%x single premium) P 2,500

 + Mortality charge (1.6% x single premium) 800

 Total P 3,300

 Total charges

 Total charges in units=Total charges/bid price=P3,300/1.4411=

2,289.9174 units

 Number of units net of charge is 31,018.0826

 Why are financial
intermediaries special?
 Financial intermediaries are singled out for special
regulation attention. Advocates agree and argue that FI
provide special functions or services and that major
disturbances to or interferences with these functions can
lead to negative externalities.

 Negative externalities are actions by an economic agent

imposing costs on other economic agents.
 FI Specialness
 Covenant refer to legal clauses in a bond contract that require the
issuer of bonds to take or avoid certain actions.
 Liquidity is the ease of converting an asset into cash.
 Price risk is the risk that the sale price of an asset will be lower
than the purchase price of the asset.
 Asset Transformer is an FI issues financial claims that are more
attractive to household savers than the claims directly issued by
corporations
 Primary securities are securities issued by corporations and
backed by real assets of those corporations.
 Secondary securities are securities issued by FIs and backed by
primary securities.
 FI Specialness
 Agency costs are costs relating to the risk that the owners
and managers of firms that receive savers’ funds will take
actions with those funds contrary to the best interests of the
savers.

 Delegated monitor is an economic agent appointed to act on

behalf of smaller agents in collecting information and
investing funds on their behalf or both

 Diversify is the ability of an economic agent to reduce risk

by holding a number of securities in a portfolio.
 FI Specialness

Redlining is the procedure by which a banker refuses to make

loans to residents living inside given geographical boundaries.

Net regulatory burden is the difference between the private

costs of regulations and the private benefits for producers of
financial services

Outside Money is that part of the money supply directly

produced by the government or central bank such as notes and
coins.

Inside money is that part of the money supply produced by the

private banking system.
 The changing dynamics of
specialness
 Trends in the Philippines

 Increased competition due to ASEAN integration as well as

Korean, Japanese and Chinese FI inroads

 International Trends

 Local banks can internationalize due to BPO and OFW

economic phenomena

 Future trends

 FINTECH changes in the banking set up due to technology

 Risks of Financial
Intermediation
 1. Interest Rate Risk

 2. Market Risk

 3. Credit Risk

 4. Off balance sheet risk

 5. Technology and Operational Risk

 6. Foreign Exchange risk

 7. Country or sovereign risk

 8. Liquidity Risk

 9. Insolvency Risk

 10. Other risks and the interaction of risks

 Measuring Risk

 Interest rate risk is incurred by an FI when the maturity of

its assets and liabilities are mismatched. Refinancing risk is
the cost of rolling over or re-borrowing funds will rise above
the returns being earned in an asset investment. Re-
investment risk is when returns of funds to be invested will
fall below the cost of funds.

 Market risk is incurred in the trading of assets and liabilities

due to changes in interest rates, exchange rates, and other
asset prices.

 Credit risk is when the promised cash flows from loans and
securities held by FIs may not be paid in full.
 Measuring risks
 Firm specific risks is the risk of default of borrowing firm
associated with specific types of project risk taken by the
firm.

 Systematic credit risk is the risk of default with general

economy wide or macroeconomic conditions affecting all
borrowers

 Off balance sheet risk is the risk incurred by a FI due to

activities related to contingent assets and liabilities

 Technology risk is incurred by an FI when technological

investments do not produce the cost savings anticipated
 Measuring Risk
 Operational risk is the risk that existing technology or support
systems may malfunction or break down.

 Foreign exchange risk is the risk that exchange rate changes can affect
the value of the FIs assets and liabilities located abroad.

 Sovereign risk is the risk that repayments from foreign borrowers

may be interrupted because of interference from foreign governments.

 Liquidity risk is the risk that a sudden surge in liability withdrawals

may leave an FI in a position of having to liquidate assets in a very
short period of time and at low prices. (fire sale)

 Insolvency risk is when an FI may not have enough capital to offset a

sudden decline in the value of its assets relative to its liabilities

 Other risks and interaction of risks

 Managing risk

 1. Liability and liquidity management

 2. Deposit insurance and other liability guarantees

 3. Capital Adequacy

 4. Product expansion

 5. Geographical diversification

 6. Product expansion

 7. Futures and Forwards

 8. Options, Caps, floors and collars

 9. Swaps, loan sales and new credit risks management techniques

 10. Securitization