Investment and Portfolio Management Institutional Investors:

Midterms Reviewer
 Institutional investors are entities
TOPIC 1: Investment such as investment companies,
commercial banks, insurance
Definition of Investment: companies, pension funds, and other
 Investment is the employment of financial institutions.
funds with the aim of getting a return. Types of Investing
 It is a general term that refers to the
use of money in the hope of making Direct Investing (through financial markets):
more money.
 Involves raising equity capital or
 In finance, it is the purchase of a
borrowing in financial markets.
financial product or other item of
value with an expectation of favorable  It involves buying securities or stocks
future returns. directly from the issuer or through an
intermediary like a broker.
 It involves purchasing an asset, giving
a loan or keeping funds in a bank Indirect Investing (through financial
account with the aim of generating institutions):
future returns.
 Involves borrowing from financial
Concepts of Investment institutions.
Economic Investment:  It also involves investing in mutual
funds, exchange-traded funds (ETFs),
 Economic investment is the addition or other pooled investment vehicles.
to the capital stock of the society.
 It is an increase in building, Direct Transactions:
equipment, and inventory.  Direct transactions involve borrowing,
 Capital stock of the society refers to partnership contracts, or other forms
goods which are used in the of direct investing in assets like real
production of other goods. estate or private equity
Financial Investment: Investment Objectives
 Financial investment is the allocation Investment objectives refer to the
of monetary resources to assets that goals that an investor wants to achieve
are expected to yield some gain or through investing their capital. The following
return over a given period of time. are the common investment objectives:
 It involves the exchange of financial
claims such as shares and bonds, real Tangible Objectives:
estate, etc. These are specific and concrete goals that an
 It involves contracts written on pieces investor wants to achieve through investing,
of paper. such as buying a car or a house.
Types of Investors Intangible Objectives:
Individual Investors: These refer to non-material goals that an
 Individual investors are individuals investor wants to achieve through investing,
who are investing on their own. such as social status or security.
 They are sometimes called retail Financial Objectives:
investors.
These are objectives related to the financial Investors want to protect their financial needs
aspects of investing, such as safety, against financial risks at all times.
profitability, and liquidity.
Return:
Personal or Individual Objectives:
Investors want a balance of risk and return
These objectives are related to the personal that is suitable to their personal risk
characteristics of an individual, such as family preferences.
commitments, status, dependents,
educational requirements, income, Value for Money:
consumption, and provision for retirement. Investors want to minimize the costs of
Investors' approach to achieving their managing their assets and their financial
investment objectives can be classified into needs.
the following categories: Peace of Mind:
a. Short-Term High-Priority Objectives: Investors do not want to worry about the day-
These are high-priority objectives that an to-day movements of markets and their
investor wants to achieve in a short period, present and future financial security.
such as buying a house. Speculation and Investment
b. Long-Term High-Priority Objectives: Investment and speculation are two different
These refer to long-term needs, such as approaches to investing in financial
investing for post-retirement or education of instruments. Investment involves putting
a child. money into assets with the expectation of
receiving a return on investment in the future.
c. Low Priority Objectives: Speculation, on the other hand, involves
taking high risks in the hope of making large
These objectives have a low priority in capital gains in a short period of time.
investing, such as provision for tour, domestic
appliances, etc. Definition of Speculation
d. Money-Making Objectives:  Speculation involves taking high risks
to achieve large capital gains in a
These refer to maximizing wealth by investing short time span.
in shares of companies that provide capital
 It is not necessarily a form of
appreciation apart from regular income from
gambling, as speculators make
dividends.
informed decisions based on market
Importance of Investment Objectives: information and analysis.
 Speculation includes buying, holding,
Investors' priorities regarding selling and short selling of stocks,
investment objectives vary based on their age bonds, commodities, currencies, real
and the amount of capital they have. However, estate collectibles, derivatives or any
every investor has common objectives related valuable financial instrument.
to investing their capital, such as:  More sophisticated investors use a
Lifestyle: hedging strategy in combination with
their speculative investment to limit
Investors want to ensure that their assets can potential losses.
meet their financial needs over their lifetimes.  SPECULATOR - the person who
speculates.
Financial Security:
Differences between Investors and Investment Environment
Speculators
Definition: includes all types of investment
Investors: opportunities, vehicles, or alternatives
available in the market for investors.
 Longer planning horizon
 Not willing to assume high risk Types of investment vehicles: financial assets
 Seek modest rate of return and real (physical) assets.
 Use their own funds and eschew
Investment Alternatives
borrowed funds
I.Short Term Investment Vehicles
Speculators:
Definition: have a maturity of one year or less;
 Short planning horizon traded in the money market.
 Willing to assume high risk
 Look for high rate of return Examples:
 Rely more on hearsay, tips, technical
Certificate of Deposit: debt instrument issued
charts, and market psychology
by bank that indicates a specified sum of
 Normally resort to borrowings to
money has been deposited at the issuing
supplement their personal resources
depository institution.
Elements of investments:
Treasury Bills (T-bills): securities
Return: the reward for investors that includes representing financial obligations of the
current income and capital gain/loss government.

Risk: the chance of loss due to variability of Commercial Paper: name for short-term
returns unsecured promissory notes issued by
corporation.
Time: an important factor that affects
expected returns and risk for each investment Banker’s acceptances: vehicles created to
facilitate commercial trade transactions
Liquidity: the ability of an investment to be
converted into cash when needed Repurchase Agreement (repo): the sale of
security with a commitment by the seller to
Tax Saving: certain investments provide tax buy the security back from the purchaser at a
exemption, which increases return on specified price at a designated future date.
investment
II. Fixed Income Securities
Investment attributes:
Definition: return is fixed up to some
Financial objectives: safety and security of redemption date or indefinitely; may be
principal amount, profitability through stated in money terms or indexed to some
interest, dividend, and capital appreciation, measure of the price level.
and liquidity
Examples:
Period of investment: short term (up to 1
year), medium term (1-3 years), long term (3 Long-term debt securities: described as long-
years and above) term debt instruments representing the
issuers contractual obligation (example:
Risk in investment: a normal feature of every bonds).
investment, can be liquidity, inflation, market,
business, political risk. Objective of investor Preferred Stocks: equity security, which has
should be to minimize risk and maximize infinite life and pay dividends. Known as
return. hybrid security because of having the
attributes for both equity and fixed-income Unregulated private investment partnerships,
securities. limited to institutions and high-net-worth
individuals.
Note: Long-term debt securities represent
contractual obligations of issuers (e.g. bonds). Take concentrated speculative positions and
Preferred stocks are equity securities with can be very risky.
fixed dividends and attributes of both equity
and fixed-income securities. Investment Management Process

III. Common Stock The process of managing money or funds that

describes how an investor should make
Represents ownership interest of decisions.
corporations or equity of stockholders.
Holders entitled to vote at general meetings Five-Step Procedure:
and receive declared dividends. Popular 1. Setting of Investment Policy - includes
among investors with long-term horizon. setting investment objectives and constraints,
IV. Speculative Investment Vehicles which influence investment management.
Setting investment objectives is the most
High risk and high investment return. important objective and should be stated in
Primary concern is anticipating and profiting terms of both risk and return.
from expected market fluctuations.
2. Analysis and Evaluation of Investment
Gain is the positive difference between selling Vehicles - involves examining various types of
and purchasing prices. investment vehicles and selecting financial
assets to invest in. Technical analysis involves
Examples: Options, Futures, Commodities analyzing market prices to predict future
traded on exchanges. price movements, while fundamental analysis
V. Other investment tools evaluates the intrinsic value of a financial
asset.
a. Investment Companies/Investment Funds
3. Formation of Diversified Investment
Receive money from investors with common Portfolio - involves addressing issues of
objective of pooling funds and investing in selectivity, timing, and diversification.
securities.
Selectivity focuses on forecasting price
Two types: Open-end Funds (Mutual Funds) movements of individual assets, while timing
and Close-end Funds (Trusts). involves macro forecasting of price
movements of particular types of financial
b. Insurance Companies
assets.
Assume risks of adverse events in exchange
Diversification involves forming an investor's
for insurance premiums.
portfolio for decreasing or limiting
Three types: Life Insurance, Non-life investment risk.
Insurance (Property-Casualty Insurance), and
4. Portfolio Revision - periodic revision of the
Reinsurance.
previous three stages to ensure optimal
c. Pension Funds portfolio management. Periodic revision of
investment objectives and portfolios is
Accumulate asset pools over employee's necessary due to changes in financial
working years and pay retirement benefits. markets, tax laws, and security regulations.
d. Hedge Funds 5. Measurement and Evaluation of Portfolio
Performance - involves determining how the
portfolio performed in terms of return and Current Account - a type of account where
risk. Appropriate measures of return and risk withdrawals are made by issuing checks,
and benchmarks are needed for evaluating while deposits are made with deposit slips. It
portfolio performance. is often called a checking account and does
not earn interest. A current account is useful
BENCHMARK – the performance of for paying a large sum of money, such as
predetermined set of assets, obtained for down payments, that can't be paid in cash,
comparison purposes. It may be a popular credit card, or using an e-wallet.
index of appropriate assets-stock index, bond
index. Time Deposits - an interest-bearing bank
account that has a date of maturity, such as a
NOTE: It is important to point out that certificate of deposit (CD). The money in a
investment management process is a time deposit must be held for the fixed term
continuing process influenced by changes in to receive interest in full. Time deposits pay a
investment environment and changes in higher interest rate than regular savings
investor’s attitude as well. accounts, but fixed interest rates do not
TOPIC 2: Bank Accounts and Credit Securities generally keep pace with inflation.

Bank Account Money Market Deposit Account (MMDA) - a

type of account that pays a higher rate of
Bank accounts are financial accounts interest than a checking and savings account.
maintained by banks or other financial It often requires a higher minimum balance to
institutions that record financial transactions start earning interest, but pays higher rates
between the bank and a customer. When for higher balances.
opening a bank account, one must consider
the minimum balance required, interest rates, Trust Investments - cash entrusted to a
limitations as to withdrawals, the bank's trustee bank for investment in chosen items
reputation, and insurance coverage. such as treasury bills, loans, stocks, and bonds
for the benefit of the designated beneficiary.
Philippine Deposit Insurance Corporation The investor is called the trustor or grantor.
(PDIC) insures deposits up to P 500,000 per
account to promote and safeguard the a. Retail basis: Individuals with minimum
interests of the depositing public. Before placement of P 100,000.
opening a bank account, it is advisable to b.Big investors: Minimum placement
inquire about the minimum balance, interest ranges from P 1,000,000 to P 4,000,000.
rates, and withdrawal limitations. *Not insured with PDIC but under the
There are different types of bank accounts, supervision of Bangko Sentral ng Pilipinas.
including: Securities
Savings Account - a type of account that Written evidences of ownership, interest,
allows deposits and withdrawals to be made participation or indebtedness of a person or
at any time. It is used to take care of minor enterprise. Securities can be bought from
emergency requirements, small deposits, and primary market (seller is the issuing entity)
withdrawals intended to be made anytime or secondary market (seller is a party other
during the month. Savings accounts have than the issuing entity).
account minimums and may charge a fee if
the balance falls below a certain threshold.
Withdrawals can be made through ATM or
electronic transfers.
Classification of Securities Markets:
Money market: trading of short-term value up to maturity is the interest earned by
securities like treasury bills and commercial the investor.
papers.
Junk bonds - are high yielding bonds issued
Capital market: trading of long-term by companies with very low credit rating so
securities like bonds and shares of capital that there is higher risk from default in the
stock. payment of interest and principal.
Credit Securities: evidences of indebtedness Bond Quotations: Premium and Discount
issued by an entity to borrow from the public.
Bonds are quoted as a percentage of their par
Factors to Consider in Investing in Credit or face value.
Securities:
If the bond is quoted at more than 100%, it is
 Interest rate selling at a premium, and if it is quoted at less
 Date of maturity or call than 100%, it is selling at a discount.
 Value of the security
The effective rate on a short-term bond
 Yield on the security
investment is calculated by dividing the
 Credit rating of the issuing party, annual interest by the purchase cost.
trustee, and underwriter (if any)
Yield on bonds refers to the effective rate at
Commercial Papers: promissory notes issued which an investor is earning on their
by big firms with unquestionable credit investment, and bond value refers to the price
standing and reputation, can be short or long- at which investors would be willing to buy to
term. realize their desired yield or rate of return.
Bonds: certificates of indebtedness with fixed Effects of purchase price on bond yield
interest rate and maturity date. Bonds can be
a long-term or short-term investment, A. Bonds Acquired at Face Value
depending on their listing in the stock
exchanges. Yield is equal to the nominal rate of interest

Classification of Bonds: Illustrative problem with a 9% effective rate

and a P50,000 face value bond
As to the issuing party: Government bonds
and commercial bonds. B. Bonds Acquired at a Discount

As to security: Mortgage bonds, equipment Yield is higher than the nominal rate of
trust bonds, collateral trust bonds, debenture interest
bonds. Investor receives periodic interest and 100%
As to maturity of principal: Straight bonds, of face value at maturity date
serial bonds, convertible bonds, callable or Illustrative problem with a 10% yield, a
redeemable bonds, noncallable or non- P50,000 face value bond, and a purchase price
redeemable bonds. of P48,105 (discount of P1,895)
As to transferability: Bearer bonds, coupon C. Bonds Acquired at a Premium
bonds, registered bonds (registered as to
principal only or fully registered). Yield is lower than the nominal rate of
interest
Zero coupon bonds - are those on which there
is no periodic payment of interest. They are Investor receives periodic interest based on
issued at a discount so that the increase in face value and does not recover the premium
at maturity
Illustrative problem with a 8.37% yield, a a. SDT-Bills and SDT Bonds: Minimum
P50,000 face value bond, and a purchase price investment of P5,000 and Scripless securities
of P51,246 (premium of P1,246)
b. US Dollar Savings Bonds: Future project
Bonds Acquired at Interest Date and Between under the SIP
Interest Dates
Generally intended for Filipinos employed
A. Bonds Acquired at Interest Date abroad.
Price paid applies only to the bonds because
all interest has already been paid
B. Bonds Acquired Between Interest Dates
Payment applies first to any accrued interest
and the remainder to the bonds
Government Securities: debt instruments
issued by the government. Risk-free due to
full government guarantee
Types of Government Securities
a. Treasury Bills
Maturity of less than a year
Offered in 91, 182, and 364-day terms
Minimum investment of P100,000 (P5,000
under the SIP)
b. Treasury Bonds
Maturity of more than one year
Offered in five maturity periods
Classified into regular bonds, progress bonds,
ERAP bonds, and small denominated (SDT)
bonds
Minimum investment of P100,000 (P5,000
under the SIP)
Small Investor Program (SIP)
Institute by the Bureau of Treasury to sell
SDT-bills, SDT bonds, and US Dollar Savings
Bonds
Aimed at deepening the capital market and
expanding the base of government security
investors
Types of SIP Securities