KORBEL FOUNDATION COLLEGE, INC.

Purok Spring 1, Brgy. Morales, Koronadal City

Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

SUBJECT CODE: MNGT4

MODULE NO: Module 4 (Week 4)
SUBJECT NAME: FINANCIAL MARKETS
TOPIC: MONEY MARKETS AND CAPITAL MARKETS
Objectives:
At the end of the week, you should be able to:

1. Describe what money market is

2. Explain how "money market" works 3. Identify who the users of money market are
4. Explain how money market facilitates the development of a market for long-term securities 5. Enumerate and
describe the features of money market instruments

CAPITAL MARKETS

6. Describe what capital market is

7. Explain the role of the various capital market participants

8. Describe capital market trading

9. Explain the nature and trading process of corporate bonds

INTRODUCTION
The term "Money Market" refers to the network of corporations, financial institutions, investors and
governments which deal with the flow of short-term capital. When a business needs cash for a couple of months until a
big payment arrives, or when a bank wants to invest money that depositors may withdraw at any moment, or when a
government tries to meet its payroll in the face of big seasonal fluctuations in tax receipts, the short-term liquidity
transactions occur in the money market.

The money markets have expanded significantly in recent years as a result of the general outflow of money from
the banking industry, a process referred to as disintermediation. Until the start of the 1980s, financial markets in almost
all countries were centered on commercial banks. Savers and investors kept most of their assets on deposit with banks,
either as short-term demand deposits, such as cheque-writing accounts, paying little or no interest, or in the form of
certificates of deposits that tied up the money for years. Drawing on this reliable supply of low-cost money, banks were
the main source of credit for both business and consumers.

How it works?

The money market exists to provide the loans that financial institutions and governments need to carry out their
day-to-day operations. For instance, banks may sometimes need to borrow in the short term to fulfill, their obligations
to their customers, and they use the money market to do so.

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

Who uses the money market?

The primary function of the money market is for banks and other investors with liquid assets to gain a return on their
cash or loans. They provide borrowers such as other banks, brokerages, and hedge funds with quick access to short-term
funding. The money market is dominated by professional investors, although retail investors with P50,000 can also
invest. Smaller deposits can be invested via money market funds. Banks and companies use the financial instruments
traded on the money market for different reasons, and they carry different risks.

COMPANIES BANKS INVESTORS

a. When companies need to raise a. If demand for long-term loans and a. Individuals seeking to invest large
money to cover their payroll or mortgages is not covered by deposits sums of money at relatively low risk
running costs, they may issue from savings accounts, banks may may invest in financial instruments.
commercial paper-short term, then issue certificates of deposit, with Sums of less than P50,000 can be
unsecured loans for P100,000 or more a set interest rate and fixed-term invested in money market funds.
that mature within 1-9 months maturity of up to five years.

b. A company that has a cash surplus

may “park” money for a time in short-
term, debt-based financial
instruments such as treasury bills and
commercial paper, certificates of
deposits, or bank deposits.

WHAT MONEY MARKETS DO?

There is no precise definition of the money markets, but the phrase is usually applied to the buying and selling of debt
instruments maturing in one year or less. The money markets are thus related to the bond markets, in which
corporations and governments borrow and lend based on longer-term contracts. Similar to bond investors, money-
market investors are extending credit, without taking any ownership in the borrowing entity or any control over
management.

Yet the money markets and the bond markets serve different purposes. Bond issuers typically raise money to finance
investments that will generate profits or, in the case of government issuers, public benefits for many years into the
future. Issuers of money-market instruments are usually more concerned with cash management or with financing their
portfolios of financial assets.

A well-functioning money market facilitates the development of a market for longer-term securities. Money markets
attach a price to liquidity, the availability of money for immediate investment. The interest rates for extremely short-
term use of money serve as benchmarks for longer-term financial instruments. If the money markets are active, or
"liquid, borrowers and investors always have the option of engaging in a series of short-terin transactions rather than in
longer term transactions, and this usually holds down longer term rates. In the absence of active money markets to set
short-term rates, issuers and investors may have less confidence that longer-term rates are reasonable and greater
concern about being able to sell their securities should they so choose. For this reason countries, with less active money
markets, on balance, also tend to have less active bond markets.

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

TYPES OF MONEY-MARKET INSTRUMENTS

MONEY MARKET SECURITIES- are short-term instruments with an original maturity of less than one year.

Types of Money Markets

 Commercial papers
 Banker’s acceptances
 treasury bills
 repurchase agreements
 government agency notes
 local government notes
 interbank loans
 time deposits
 bankers acceptance
 papers issued by international organizations

Money market securities are used to "warehouse" funds until needed.

Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid.

Commercial paper
- is a short-term debt obligation of a private-sector firm or a government-sponsored corporation.

Bankers’ Acceptances
- Before the 1980s, bankers acceptances were the main way for firms to raise short-term funds in the money
markets. An acceptance is a promissory note issued by a non-financial firm to a bank in return for a loan. The bank
resells the note in the money market at a discount and guarantees payment. Acceptances usually have a maturity of less
than six months.

Treasury Bills
- Often referred to as T-bills, are securities with a maturity of one year or less, issued by national governments.
Treasury bills issued by a government in its own currency are generally considered the safest of all possible investments
in that currency. Such securities account for a larger share of money market trading than any other type of instrument.

Government Agency Notes

- National government agencies and government-sponsored corporations are heavy borrowers in the money
markets in many countries. These include entities sock as development banks, housing finance corporations, education
lending agencies and agricultural finance agencies

Local Government Notes

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

- Local government notes are issued by, provincial or local governments, and by agencies of these governments
such as schools authorities and transport commissions.

Interbank Loans
-Loans extended from one bank to another with which it has no affiliation are called interbank loans. Many of
these loans are across international boundaries and are used by the borrowing institution to re-lend to its own
customers.

Time deposits
-Time deposits, another name for certificates of deposit or CDs, are interest bearing bank deposits that cannot
be withdrawn without penalty before a specified date. Although time deposits may last for as long as five years, those
with terms of less than one year compete with other money-market instruments.

Repos
-Repurchase agreements known as repos, play a critical role in the money. markets. They serve to keep the
markets highly liquid, which in turn ensures that there will be a constant supply of buyers for new money-market
instruments.

-A repo is a combination of two transactions. In the first, a securities dealer, such as a bank, sells securities it
owns to an investor, agreeing to repurchase the securities at a specified higher price at a future date

CAPITAL MARKETS
-The capital market is a financial market in which longer-term debt (original maturity of one year or greater) and
equity instruments are traded Capital market securities include bonds, stocks, and mortgages Capital market securities
are often held by financial intermediaries such as insurance companies and pension funds, which have little uncertainty
about the amount of funds they will have available in the future.

Capital Market Participants

The primary issuers of capital market securities are the

1) National and local government, and

2) Corporations

The national government issues long-term notes and bonds to fund the nationa debt while local governments issue
notes and bonds to finance capital projects,

Corporations issue both bonds and stock to finance capital investmen expenditures and fund other investment
opportunities.

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

Capital Market Trading

Capital market trading occurs in either the primary market or the secondary market. The primary market is
where new issues of stocks and bonds are introduced. Investment funds, corporations, and individual investors can s
purchase securities offered in the primary market. You can think of a primary market transaction as one where the issuer
of the security actually receives the proceeds of the sale. When firms sell securities for the security actually receives the
proceeds of the sale. When finns sell securities for the very first time, the issue is an initial public offering (IPO).
Subsequent sales of a firm's new stocks or bonds to the public are simply primary market transactions (as opposed to an
initial one).

The capital markets have well-developed secondary markets. A secondary market is where the sale of previously
issued securities takes place, and it is important because most investors plan to sell long-term bonds before they reach
maturity and eventually to sell their holdings of stock as well. There are two types of exchanges in the secondary market
for capital securities: organized exchanges and over-the-counter exchanges. Whereas most money market transactions
originate over the phone, most capital market transactions, measured by volume, occur in organized exchanges. An
organized exchange has a building where securities (including stocks, bonds, options, and features) trade. Exchange
rules govern trading to ensure the efficient and legal operation of the exchange, and the exchange's board constantly
reviews these rules to ensure that they result in competitive trading.

A. BONDS

A bond is any long-term promissory note issued by the firm. A bond certificate is the tangible evidence of debt
issued by a corporation or a governmental body and represents a loan made by investors to the issuer.

Trading Process for Corporate Bonds

The initial or primary sale of corporate bond issues occurs either through a public offering, using an investment
bank serving as a security underwriter or through a private placement to a small group of investors (often financial
institutions). Generally, when a firm issues bonds to the public, many investment banks are interested in underwriting
the bonds. The bonds can generally be sold in a national market.

SELL BONDS SELL BONDS

CORPORATION UNDERWRITER INVESTORS

(Investmenr Bank)

PAYS BID PRICE PAYS BID PRICE

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

Illustrated in Figure 9-1. The investment bank guarantees the firm a price for newly issued bonds by buying the whole
issue at a fixed price (the bid price) from the bond-issuing firm at a discount from par. The investment bank then seeks
to resell these securities to investors at a higher price (the offer price). As a result, the investment bank takes a risk that
it may not be able to resell the securities to investors at a higher price. This may occur if a firm's bond value suddenly
falls due to an unexpected change in interest rates or negative information being released about the issuing firm. If this
occurs, the investment bank takes a loss on its security underwriting. However, the bond issuer is protected by being
able to sell the whole issue.

Other arrangements can be as follows:

1. Competitive Sale

The investment bank can purchase the bonds through competitive bidding against other investment banks or by
directly negotiating with the issuer.

2. Negotiated Sale

With a negotiated sale, a single investment bank obtains the exclusive right to originate, underwrite and
distribute the new bonds through a one-on-one negotiation process. With a negotiated sale, the investment bank
provides the origination and advising services to the issuers

3. Best Efforts Underwriting Basis

In their arrangement, the underwriter does not guarantee a firm price to the issuer.

The advantages and disadvantages of using bonds can be summarized as follows:

Advantages
1. Long-term debt is generally less expensive than other forms of financing because (a) investors view debt as a
relatively safe investment alternative and demand a lower rate of return, and (b) interest expenses are tax deductible.

2. Bondholders do not participate in extraordinary profits; the payments are limited to interest.

3. Bondholders do not have voting rights.

4. Flotation costs of bonds are generally lower than those of ordinary (common) equity shares.

Disadvantages
1. Debt (other than income bonds) results in interest payments that, if not met, can force the firm into
bankruptcy.

2. Debt (other than income bonds) produces fixed charges, increasing the firm's financial leverage. Although this
may not be a disadvantage to all firms, it certainly is for some firms with unstable earnings streams.

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

3. Debt must be repaid at maturity and thus at some point involves a major cash outflow.

4. The typically restrictive nature of indenture covenants may limit the firm's future financial flexibility.

Bond Features and Prices

-The various features of corporate bonds and some of the terminology associated with bonds follow:

 Par Value- The face value of the bond that is returned to the bondholder at maturity.
 Coupon Interest Rate - The percentage of the par value of the bond that will be paid out annually in the form of
interest. Formula is: Stated interest payment divided the Par value.
 Maturity- The length of time until the bond issuer returns the par value to the bondholder and terminates the
bond.
 Indenture- The agreement between the firm issuing the bonds and the bond trustee who represents the
bondholders.
 Current Yield- This refers to the ratio of the annual interest payment to the bond's market price.
 Yield to Maturity- This refers to the bond's internal rate of return. It is the discount rate that equates the present
value of the interest and principal payments with the current market price of the bond.

Formula is:

Approximate Yield= Annual Interest payment +(( Principal Payment- Price of the Bond)/ Number of Years to Maturity)
Number of Years to Maturity
.6 (Price of the bond)+ .4 (Principal Payment)

Credit Quality Risk

Credit quality risk is the chance that the bond issuer will not be able to make timely payments.

Bond ratings involve a judgment about the future risk potential of the bond provided by rating agencies such as
Moody's, Standard and Poor's and Fitch IBCA, Inc. Dominion Bond Rating Services. Bond ratings are favorably affected
by:

(a) A low utilization of financial leverage;

(b) Profitable operations;

(c) A low variability of past earnings:

(d) Large firm size;

(e) Little use of subordinated debt.

TYPES OF BONDS

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

A. Unsecured Long-Term Bonds

Debentures

These are unsecured long-term debt and backed only by the reputation and financial stability of the corporation.

Subordinated Debentures

Claims of bondholders of subordinated debentures are honored only after the claims of secured debt and
unsubordinated debentures have been satisfied.

Income Bonds

An income bond requires interest payments only if earned and non payment of interest does not lead to
bankruptcy. Usually issued during the reorganization of a firm facing financial difficulties, these bonds have longer
maturity and unpaid interest is generally allowed to accumulate for some period of time and must be paid prior to the
payment of any dividends to stockholders.

B. Secured Long-Term Bonds

Mortgage Bonds

A mortgage bond is a bond secured by a lien on real property. Typically, the market value of the real property is
greater than that of the mortgage bonds issued.

Mortgage bonds can further be subclassified as follows:

(a) First Mortgage Bonds

The first mortgage bonds have the senior claim on the secured assets if the same property has been pledged on
more than one mortgage bond.

(b) Second Mortgage Bonds

These bonds have the second claim on assets and are paid only after the claims of the first mortgage bonds have
been satisfied.

(c) Blanket or General Mortgage Bonds

All the assets of the firm are used as security for this type of bonds.

(d.) Closed-end Mortgage Bonds

The closed-end mortgage bonds forbid the further use of the pledged assets security for other bonds. This
protects the bondholders from dilution of their claims on the assets by any future mortgage bonds.

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

(e) Open-end Mortgage Bonds

These bonds allow the issuance of additional mortgage bonds using the same secured assets as security.

(f) Limited Open-end Mortgage Bonds

These bonds allow the issuance of additional bonds up to a limited amount at the same priority level using the
already mortgaged assets as security.

OTHER TYPES OF BONDS

1. Floating Rate or Variable Rate Bonds

- A floating rate bond is one in which the interest payment changes with market conditions. In periods of
unstable interest rates this type of debt offering becomes appealing to issuers and investors.

2. Junk or Low-Rated Bonds

- Junk or low rated bonds are bonds rated BB or below. The major participants of this market are new firms that
do not have and established record of performance, although in recent years junk bonds have been increasingly issued
to finance corporate buyouts. Since junk bonds are of sp culative grade, they carry a coupon rate of between 3 to 5 pc.
nt more than AAA grade long-term debt. As a result, there is now an active market for these new debt instruments.
Because of the acceptance of junk or low-rated bonds, many new firms without established performance records now
have a viable financing alternative to secure financing through a public offering, rather than being forced to rely on
more-costly commercial bank loans.

3. Eurobonds

-These are bonds payable or denominated in the borrower's currency, but sold outside the country of the
borrower, usually by an international syndicate of investment bankers. This market is denominated by bonds stated in
U.S. dollars.

- Eurobonds are also referred to as bonds issued in Europe by an American company and pay interest and
principal to the lender in U.S. dollars.

4. Treasury Bonds

Treasury bonds carry the "full-faith-and-credit" backing of the government and investors consider them among
the safest fixed income investments in the world. The BSP sells Treasury securities through public auctions usually to
finance the government's budget deficit. When the deficit is large, more bonds come to auction.

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

B. ORDINARY (COMMON) EQUITY SHARES

- Ordinary equity shares (traditionally known as ordinary equity share) is a form of long-term equity that
represents ownership interest of the firm.

Residual Owners

- Ordinary equity shareholders

FEATURES OF ORDINARY EQUITY SHARES

1. Par value/No par value

Ordinary equity share may be sold with or without par value. Whether or not ordinary equity share has any par
value is stated in the corporation's charter. Par value of ordinary equity share is the stated value attached to a single
share at issuance

2. Authorized, issued, and outstanding

Authorized shares is the maximum number of shares that a corporation may issue without amending its charter.
Issued shares is the number of authorized shares that have been sold

. Outstanding shares are those shares held by the public. Both the firm's dividends per share and earnings per
share are based on the outstanding shares. The number of issued shares may be greater than the number of outstanding
shares because shares may be repurchased by the issuing firm. Previously issued shares that are reacquired and held by
the firm are called treasury shares. Thus, outstanding share is issued share less treasury share..

3. No maturity

Ordinary equity share has no maturity and is a permanent form of long term financing. Although ordinary share
is neither callable nor convertible, the firm can repurchase its shares in the secondary markets either through a
brokerage firm a tender offer. A tender offer is a formal offer to purchase shares of a corporation.

4. Voting rights

Each share of ordinary equity generally entitles the holder to vote on the selection of directors and in other
matters. Shareholders unable to attend the annual meeting to vote may vote by proxy. A proxy is a temporary transfer
of the right to vote to another party. Proxy voting is done under the rules and regulations of the Securities and Exchange
Commissions, but proxy solicitations are the firm's responsibility. Not all ordinary equity shareholders have equal voting
power. Some firms have more than one class of share. Class A ordinary (common) equity share typically has limited or no
voting rights while Class B has full voting rights.

There are two common systems of voting:

a) Majority voting

Majority voting is a voting system that entitles each shareholder to cast one vote for each share owned. Majority
voting is used to indicate the ordinary (common) equity shareholders' approval or disapproval of most proposed
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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

managerial actions on which shareholders may vote. The directors receiving the majority of the votes are elected. If a
group controls over 50 percent of the votes, it can elect all of the directors and prevent minority shareholders from
electing any directors.

b) Cumulative voting

Cumulative voting is a voting system that permits the shareholder to cast multiple votes for a single director.
Cumulative voting assists minority shareholders in electing at least one director. Cumulative voting is required in some
jurisdictions for electing the board of directors.

5. Book value per share

-The accounting value of an ordinary equity, share is equal to the ordinary share equity (ordinary share plus
paid-in capital plus retained earnings) divided by the number of shares outstanding.

6. Numerous rights of stockholders

- Collective and individual rights of ordinary equity shareholders include among others:

a) Right to vote on specific issues as prescribed by the corporate charter such as election of the board of
directors, selecting the firm's independent auditors, amending the articles of incorporation and bylaws,
increasing the amount of authorized stock, and so forth.

b) Right to receive dividends if declared by the firm's board of directors.

c) Right to share in the residual assets in the event of liquidation.

d) Right to transfer their ownership in the firm to another party.

e) Right to examine the corporate banksf) Right to share proportionally in the purchase of any new issuance of
equity shares. This is known as the pre- emptive right.

VALUATION
- Ordinary or common equity share valuation is complicated by the uncertainty of future returns and/or
changes in the share's price.

C. PREFERRED SHARE

Preferred share is a class of equity shares which has preference over ordinary (common) equity shares in the
payment of dividends and in the distribution of corporation assets in the event of liquidation.

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

Preference means only that the holders of the preferred share must receive al dividend (in the case of a going
concern firm) before holder of ordinary (common) equity shares are entitled to anything. Preferred shares
generally have no voting privileges but it is a form of equity from a legal and tax stand point.

The issuance of preferred shares is favoured when the following conditions prevail:

1. Control problems exist with the issuance of ordinary share.

2. Profit margins are adequate to make of additional leverage attractive.
3. Additional debt poses substantial risk.
4. Interest rates are low lowering the cost of preferred share.
5. The firm has a high debt ratio, suggesting infusion of equity financing is needed.

PREFERRED SHARE FEATURES

The following are the major features of preferred share:

1. Par value

Par value is the face value that appears on the stock certificate. In some cases, the liquidation value per share is
provided for in the certificate.

2. Dividends

Dividends are stated as a percentage of the par value and are commonly fixed and paid quarterly but are not
guaranteed by the issuing firm.

3. Cumulative and Noncumulative dividends

Dividends payable to preferred shares are either cumulative or noncumulative; most are cumulative. If preferred
dividends are cumulative are not paid in a particular year, they will be carried forward as an arrearage

4. No definite maturity date

Preferred share is usually intended to be a permanent part of a firm's equity and has no definite maturity date.

5. Convertible preferred share

Owners of convertible preferred share have the option of exchanging their preferred share for ordinary
(common) equity share based on specified terms and conditions.

6. Voting rights

Preferred share does not ordinarily carry voting rights. Special voting procedures may take effect if the issuing
firm omits its preferred dividends for a specific time period.

7. Participating features

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

Participating preferred share entitles its holders to share in profits above and beyond the declared dividend,
along with ordinary (common) equity shareholders

8. Protective features

Preferred share issues often contain covenants to assure the regular payment of preferred share dividends and
to improve the quality of preferred share.

9. Call provision

A call provision gives the issuing corporation the right to call in the preferred share for redemption. As in the
case of bonds, call provisions generally state that the company must pay an amount greater than the par value of the
preferred share, the additional sum being termed a call premium.

10. Maturity

Three decades ago, most preferred share was perpetual - it had no maturity and never needed to be paid off.
However, today most new preferred share has a sinking fund and thus an effective maturity date.

PREFERRED SHARE VALUATION

Preferred share is share that has a claim against income and assets before ordinary share but after debt.

Thus, the intrinsic value of a share of preferred share (P.) is the sum of the present values of future dividends
discounted at the investor's required rate of return. This also can be determined using the following valuation model.

Po = D p / K p
where: Dp= Per cash dividend
Kp= Investors required rate of return on preferred share

COMPARATIVE FEATURES OF ORDINARY EQUITY SHARES, PREFERRED SHARES AND BONDS

- The characteristics of ordinary shares, preferred shares and bonds arecompared in the following table.

Ordinary Equity Shares Preferred Shares Bonds

(a) Ownership and control Belongs to ordinary equity Limited rights when Limited rights under default
of the firm shareholders through voting dividends are missed in interest payments

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

right and residual claim to

income

(b) Obligation to provide None Must receive payment Contractual Obligation

return before ordinary shareholder

(c) Claim to assets in Lowest claim of any security Bondholders and creditors Highest Claim
bankruptcy holder must be satisfied first

(d). Cost of distribution Highest Moderate Lowest

(e) Risk-return trade off Highest risk, highest Moderate risk, moderate Lowest risk, moderate
return( at least in theory) return return
(f) tax status of payment by Not deductible Not Deductible Tax deductible Cost =
corporation Interest Payment x (1- Tax
Rate)
(g) Tax status of payment A portion of Dividend paid Same as Ordinary shares Government Bond interest
to recipient to another corporation is is tax exempt
tax exempt
-

ASSESSMENT 4

Questions

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 KORBEL FOUNDATION COLLEGE, INC.
Purok Spring 1, Brgy. Morales, Koronadal City
Contact No. 228-1996/887-2051
Business Department
[email protected]
Lecturer: KRISE C. BALENA A.Y. 2 ND SEMESTER, 2020-2021

Money Markets

1. Explain the phrase "money market"

2. Describe how the money market mechanism works to bring providers and users of short-term fund together.
3. Explain how banks, companies and investors use financial instruments in the money market.
4. Give and describe the types of money-market instruments.

Capital Markets

5. Explain what capital market is.

6. Who are the primary issuers of capital market securities?
7. What does capital market trading occur?
8. What are the bonds? How are they traded?
9. Enumerate the advantages and disadvantages of issuing bonds as a source of long-term funds.
10. How is the bond's internal rate of return or yield to maturity determined?

REFERENCES:
Financial Markets and Institutions 2020 edition by Ma. Elenita Balatbat Cabrera, BBA,MBA,CPA,CMA and Gilbert
Anthony B. Cabrera, BBA, MBA, CPA

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