KYLA R.

DAYAWON BSA-2A
FINANCIAL MARKETS AND INSTITUTIONS

REVIEW QUESTIONS (CHAPTER 7)

1. Describe what financial markets are.

- A developed economy relies on financial markets and institutions for efficient transfer of funds
from savers to borrowers. Financial markets are the meeting place for people, corporations and
institutions that either need money or have money to lend or to invest or invest. In a broad context,
the financial markets exist as a vast global network of individuals and financial institutions that
may be lenders, borrowers, or owners of public companies worldwide.

2. Distinguish between public financial markets and corporate financial markets.

- Participants in public financial markets are the national, state and local governments that are
primarily borrowers of funds for highways, education, welfare and other public activities while
participants in corporate financial market are large corporations.
3. Distinguish between primary market and secondary market.
- Primary markets refers to original sale of securities by the governments and corporations. The
primary markets for securities are not well known to public because the selling to initial buyers
often takes place behind closed door. In a primary market transaction, the corporation or the
government is the seller and transaction raises money for the corporation or the government.
Secondary Market on the other hand after the securities are sold to the public (institutions and
individuals) they can be traded in the secondary market investors. Secondary market is popularly
known as stock market or exchange.

4. What are the basic function of financial markets? Explain them briefly.
- Financial markets (bond and stock markets) and financial intermediaries (banks, insurance
companies among others) have the basic function of getting people together by moving funds from
those who have surplus of funds to who have a shortage of funds. Well-functioning financial
markets and financial intermediaries are crucial to our economic health. Indeed, when the financial
system breaks down, as it gas in Europe and in Southeast recently, severe economic hardships
result.

5. What are the two principal sources of funds in the financial market? Explain them briefly.
- Debt Instrument. Issuing a debt instrument such as bond or a mortgage, which is a contractual
agreement by the borrower to pay the holder of the instrument fixed peso amounts at a regular
intervals (interest and principal payments) until a specified date (the maturity date), when a final
payment is made.
- Equity Instrument. Raising funds such as common or ordinary stock, which are claims to share in
the net income (income after expense and taxes) and the assets of the business. If you own one
share of a common stock in the company that has issued one million shares, you are entitled to 1
one- millionth of the firm’s net income and 1 one-millionth of the firm’s assets. In addition, owning
a stock means that you own a portion of the firm and thus have the right to vote on issues important
to the firm and to elect its directors.
6. Distinguish between the organized stock exchange and the over the counter exchange.
- The Organized Stock Exchange. The stock exchange will have a physical location where the stocks
buying and selling transactions take place in the stock exchange floor (e.g., Philippine stock
exchange, New York Exchange, Japan Nikkei, Shanghai Components, NASDAQ, etc.)
- The Over-the-Counter Exchange. Where the shares, bonds and money market instruments are
traded using a system of computer screens and telephones. The NASDAQ is an example in which
the dealers linked by the computer buy and sell stocks. Dealers attempts to match up the orders
they receive from the investors to buy and sell its stock. Dealers maintain an inventory of the stocks
they trade to help the balance and sell orders. Many stocks are traded over the counter although the
majority of the largest corporations have their shares traded at organized stock exchange.

7. What are the attributes of financial markets that investors as well as the creditors are looking for? Explain
them briefly.

 Liquidity, the ease with which trading can be conducted. In an illiquid market the investor may
have difficulty finding another party ready to make the desired trade, and the difference, or
“spread”, between the price at which a security can be bought and the price for which it can be sold,
may be high.
 Transparency, the availability of prompt and complete information about the trades and prices.
Generally, the less transparent the market, the less willing people are to trade there
 Reliability, particularly when it comes to ensuring that trades are completed quickly according to
the terms agreed.
 Legal procedures adequate to settle disputes and enforce contracts.
 Suitable investor protection and regulation. An excessive regulation can stifle a market. However,
trading will also be deferred if investors lack confidence in the available information about the
securities they may wish to trade, the procedures for trading, the ability of trading partners will
receive as owners of a security or commodity once a trade has been completed.
 Low transaction costs. Many financial-market institution are not tied to specific geographic
location, and the participants will strive to complete them in places where trading costs, regulatory
costs and taxes are reasonable.

8. What are the forces that brought about the major changes in the financial markets for the last two or three
decades?
- Technology. Almost everything about the markets has been reshaped by the forces of technology.
Abundant computing power and cheap telecommunications have encouraged the growth of entirely
new types of financial instruments and have a dramatically changed the cost structure of every part
of the financial industry.
- Deregulation. The trend towards deregulation has been worldwide. It is nit long since the authorities
everywhere kept tight controls on financial markets in the name of protecting consumers and
preserving financial stability.
- Liberalization. The reduction of regulations has been accompanied by general liberalization of rules
governing participation in the markets. Many of the conditions that once separated banks,
investment banks, insurers, investment companies and other financial institution have been lowere,
allowing such firms to enter to each other’s businesses.
- Consolidation. Liberalization has led consolidation, as firms merge to take advantage of economies
of scale or to enter other areas of finance. Financial crisis has led to further consolidation, as the
solvency of many major banks and investment banks led to forced mergers in 2008. However the
crisis also prompted law makers and regulators in some countries to force banks to provide safety
nets in their consumer banking operations, separating them from their trading and corporate
banking operations, so that consumer’s deposits will not at risks if other, riskier businesses produce
large losses.
- Globalization. Most of the important financial terms are now highly international, with operations
in all major financial centres. Many companies and governments take advantage of these global
networks to issue shares and bonds outside their home countries. Investors increasingly take
approach as well as, putting their money wherever they expect the greatest return for the risk
involved, without worrying about geography.
9. What benefits could be achieved in the code of ethics governing financial market activities would be
implemented and followed by the participants?
- The Code was designed to be generally principles-based which can be applied as a minimum
standard in trading across financial product markets. It is aimed to guide members in decision-
making when faced with ethical situations; and determining the nature of their responsibilities to
one another, to clients and the market. The Code of Ethics of the following associations were
used to sieve the common thread of trading and selling principles: ACI Philippines, Bankers
Association of the Philippines (BAP), Investment House Association of the Philippines (IHAP)
and MART. We also used as a reference the CFA Institute (Chartered Financial Analysts) Code
of Ethics and Standards of Professional Conduct. The Appendices provide copies of the
abovementioned codes used as a reference. It is to be made clear, however, that the Code does not
include trading conventions, and hence would not supercede the Trading Conventions of the
different associations pertinent to their specific product markets. It is important then that all
market practitioners observe the guiding principles embodied in this Code to continue to promote
greater professionalism in our treasury markets.

10. What is a stock exchange? What is its main purpose?

- Stock Exchange is an organized secondary market where securities like shares, debentures of
public companies, government securities and bonds issued by the municipalities, public
corporations, utility undertakings, port trusts and such other local authorities are purchased and
sold. In order to bring liquidity, the stocks are traded systematically in stock exchange.

- The purpose of stock exchange is to facilitate the exchange of securities between the buyers and
the sellers, thus providing a market place, virtual or real. The stock market does not have a
physical presence, it is a virtual market.

11. What does “listing of securities” means?

- Listing means admission of securities to dealings on a recognized stock exchange of any

incorporated company, central and stage governments, quasi-governmental and other financial
institution/corporations, municipalities, housing boards and so forth. The principal objectives of
listing is to provide liquidity and marketability to listed securities and ensure effective monitoring
if trading for the benefits of all participants in the market.

12. What is the implication of SEC granting a “Self-Regulation Organization” status to the Philippine
Stock Exchange?

- The Securities and Exchange Commission granted the PSE a Self-Regulation Organization status,
which meant that the bourse can implement its own rules and establish penalties om erring
trading participants and listed companies.