Financial Markets PDF

GROUP 2 EXAM 3 REPORTERS: LOBO SABELLANO CIRCULADO VILLEGAS ANTECRISTO QUIBADO BASILIO OMANGLAD CORTEZ DUMAYAC PALANG NON-REPORTER: RAMIRO FI...

GROUP 2 EXAM 3 REPORTERS: LOBO SABELLANO CIRCULADO VILLEGAS ANTECRISTO QUIBADO BASILIO OMANGLAD CORTEZ DUMAYAC PALANG NON-REPORTER: RAMIRO FINANCIAL CHAPTER 7 MARKETS  1 WHAT IS FINANCIAL MARKET? Financial Markets are the meeting place for people,corporations and institutions that either need money or have money to lend or invest.  2 Exist as a vast Global Network of Individuals and Financial Institutions Worldwide. Governments would not be able to borrow money, companies would not have access to the capital they need to expand, and Investors and individuals would be unable to buy and sell foreign currencies  PUBLIC FINANCIAL CORPORATE FINANCIAL 3 MARKET MARKET It is where companies raise National,State and Local capital and manage their Governments that are finances through activities primarily borrowers of funds like issuing stocks and for Highways, Education and bonds, obtaining loans, and Welfare and other Public Activities. engaging in financial transactions.  PRIMARY MARKET 4 The primary market refers to the sale of securities by a corporation to raise new funds through a new issue in financial markets. FINANCIAL MARKETS IN ACTION A firm may go to the markets and SECONDARY MARKET raise financial capital by either Once securities are sold to the public, borrowing money through a debt they are traded in the secondary market offering of corporate bonds or among investors. Prices fluctuate based on short term notes, or by selling expectations of a corporation's prospects, ownership in the company and financial managers receive feedback through an issue of common on their firm’s performance in this market. stock.  5 FUNCTIONS OF FINANCIAL MARKET Financial markets (bonds and stocks) and intermediaries (like banks and insurance companies) facilitate the transfer of funds from surplus to deficit holders. A well-functioning financial system is essential for economic stability, and its failure can cause severe economic difficulties.  6 FUNCTIONS OF FINANCIAL MARKET  7 WHAT FINANCIAL MARKETS DO? RAISING CAPITAL Firms need funds to build new facilities, replace machinery, or expand their operations. Financial instruments like shares and bonds facilitate this. Additionally, financial markets provide capital for individuals looking to buy homes, cars, or make credit card purchases. COMMERCIAL TRANSACTIONS Financial markets provide essential support for commercial transactions, offering long-term capital and facilitating payments for international sales. They also supply working capital to help firms pay employees when customer payments are delayed. PRICE SETTING Price setting for assets like gold or stocks is determined by what buyers are willing to pay. Markets facilitate price discovery, helping to establish the relative values of various items based on buying and selling activities. ASSET VALUATION Market prices effectively determine a firm's value and its assets, which is crucial for buyers, sellers, and regulators. An insurer might appear financially stable by using old purchase prices for its securities, but the critical issue for assessing solvency is the current market value if it needs to sell them for cash to meet claims. ARBITRAGE In countries with underdeveloped financial markets, commodities and currencies can have varying prices in different locations. As traders seek to profit from these differences, prices tend to converge, leading to greater economic efficiency. INVESTING Investing in stocks, bonds, and money markets allows individuals to earn returns on funds they don't need right away, helping to build assets for future income. RISK MANAGEMENT Futures, options, and other derivatives help manage risks, such as potential losses from currency fluctuations before receiving export payments. They allow markets to price risks, enabling firms and individuals to trade certain risks to minimize exposure while keeping others.  DEBT INSTRUMENT EQUITY INSTRUMENT Issuing a debt instrument, like a bond or mortgage, is a An equity instrument, like common common way to raise funds. stock, is another way to raise The borrower agrees to make funds, giving holders a claim to a regular fixed payments to share of the company's net the holder until a final income and assets. payment on a specified date.  Financial markets functions as both primary and 15 secondary market for debt and equity securities PRIMARY MARKET SECONDARY MARKET The primary market involves After securities are sold to the the initial sale of securities by public, they can be traded governments and among investors in the corporations. These secondary market, also known transactions, usually private, as the stock market or raise funds directly for the exchange. issuer. CHAPTER 7  TWO BROAD SEGMENT OF STOCK MARKET THE ORGANIZED STOCK EXCHANGE The organized stock exhange will have a physical location where stocks buying and selling transactions take place in the stock exhange floor. THE OVER THE COUNTER EXCHANGE Where shares,bonds and money market instruments are traded using a system of computer screens and telephones.  STOCK EXCHANGE Stock Exchange Is an organized secondary market where securities like shares, debentures of public companies, government securities and bonds issued by 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 a stock exchange. An entity (a corporation or mutual organization) which is in the business of bringing buyers and sellers of stocks and securities together. The stock market does not have a physical presence, it is a virtual market. Share brokers may be assembled in a place called the "trading ring" and bought and sold shares. Stock Exchange It regulates the company's behavior through requirements agreed upon by the company in order to be listed. This is called a listing agreement which ensures that the company provides all the information pertaining to its working from time to time, including events that affect its valuation, such as mergers, amalgamations and such other sensitive matters. Large volumes are possible in these markets because of two things 1. Ease of settlements. The shares that are traded in are received and delivered through an electronic entry in the books of buyers and sellers. 2. Guarantee of trades. Sellers get their money, buyers get their shares. Stock market is known as barometer of the company’s economy. The companies listed on stock exchanges collectively contribute to the country’s gross domestic product (GDP). THE PHILIPPINE STOCK EXCHANGE The Philippine Stock Exchange, Inc. (Filipino: Pamilihang Sapi ng Pilipinas; PSE: PSE) is the national exchange of the Philippines. The exchange was created in 1992 from the merger of the Manila Stock Exchange and the Makati Stock Exchange. Including previous forms, the exchange has been in operation since 1927. The main index for PSE is the PSE Composite Index (PSEi) composed of thirty (30) listed companies. The selection of companies in the PSEi is based on a specific set of criteria. There are also six additional sector-based indices. The PSE is overseen by a 15 member Board of Directors, chaired by Jose T. Pardo. THE PHILIPPINE STOCK EXCHANGE The Philippine Stock Exchange, Inc. (Filipino: Pamilihang Sapi ng Pilipinas; PSE: PSE) is the The Philippine Stock Exchange, Inc. (Filipino: national exchange of the Philippines. Pamilihang Sapi ng Pilipinas; PSE: PSE) is the national The exchange exchange of was created The the Philippines. in exchange 1992 from the merger was created ofin 1992 the Manila Stockof the from the merger Exchange and Manila Stock the Makati Exchange and the Makati Stock Exchange. Including previous Stock Exchange. Including previous forms, the forms, the exchange has been in operation since 1927. exchange hasforbeen The main index PSE isin theoperation PSE Composite since Index1927. The main (PSEi) index composed forof thirty PSE (30) is the listedPSE Composite companies. The Index selection of companies in the PSEi is based on a (PSEi) composed of thirty (30) listed companies. specific set of criteria. There are also six additional The selection sector-based of companies indices. in the The PSE is overseen by aPSEi 15 is based on a specific member set of criteria. Board of Directors, chaired by There are also six Jose T. Pardo. additional sector-based indices. The PSE is overseen by a 15 member Board of Directors, chaired by Jose T. Pardo.  Snapshot of PSE History 1927 1936 1998 2001 The Philippine Stock Exchange was formed on On Febtruary 3, 1936, In June 1998, the PSE was transformed December 23, 1992 from the the Securities and Securities and Exchange from a non-profit, non- merger of the Manila Stock Commission (SEC) Exchange Commission stock, member- Exchange (MSE) (established announced that it had granted the PSE a “Self- on August 12, 1927, based governed on Muelle de la Industria, “relinquished control of Regulatory Organization” (SRO) organization into a Binondo, Manila) and the the Manila Stock shareholder-based, Makati Stock Exchange Exchange.” status, which meant that (MkSE) (established on May the bourse can revenue earning 15, 1963, based in the implement its own rules corporation headed Makati Cental Business and establish penalties by a president and a District, within Ayala Tower One). Both exchanges traded on erring trading board of directors. the same stocks of the same participants (TPs) and companies listed companies. 2003 2010 2019 PSE introduced a new index that will On December 15, 2003 PSE launched its new trading help track the overall returns o the listed its own shares on system, PSEtrade, which was main index. The Total Return Index the exchange (traded acquired from the New Year (PSE, TRI), is part of the effort to under the ticker symbol Stock Exchange. create a broader investor base for PSE). the market. Potential Day Traders should be aware THE OVER-THE-COUNTER MARKET that: OTC trading requires a brokerage firm to Day trading is a high risk occupation - Day match a prospective buyer and a prospective traders typically suffer severe losses in their first months to trading, and many seller at a price acceptable to both. never graduate to profit-making status. Alternatively, the brokerage firm may purchase shares for its own account or sell shares that it Day trading is a stressful - Day traders must has been holding. watch the market nonstop during the day, concentrating on dozens of fluctuating Firms whose shares trade over the counter indicators in the hope of spotting market normally have few shareholders and little trends. equity outstanding. If a firm wishes to raise Day trading is expensive - Day traders pay larger amounts of capital in the equity market large sums in commissions, for training, and and to appeal to a broader shareholder base, for computers. it will seek to list its shares on a stock exchange.  DAY TRADING Is the buying and selling of shares, currency, or other financial instruments in a single day. The intention is to profit from small price fluctuations -- sometimes traders hold shares for only a few minutes. How it works? Investors typically buy or sell a share based on their analysis of economic or market trends, research into specific companies, or as part of a strategy to benefit from the regular dividends that companies issue. While day traders look for small movements in prices that they can exploit to make a quick profit Day traders favor shares that are liquid -- those are easy to buy and sell in the secondary market. They may hold shares only momentarily, buying at one price and selling when the price rises by a few cents, perhaps only minutes later. Day traders make profits by trading large volumes of shares in one transaction, or by making multiple trades during the course of the day.  POTENTIAL DAY TRADERS SHOULD BE KNOWLEDGEABLE OF THE FOLLOWING: Market Data The current trading information for each day-trading market. Day traders pay a premium for access to real-time data. Scalping A strategy in which traders hold their share of financial asset (knon as their “position”) for just a few minutes or even seconds. Margin trading A method of buying shares that involves the day trader borrowinga part of the sum needed from the broker who is executing the transaction. Bid-offer spread The difference between a price at whih a share is sold, and that at which it is bought.  Investors have many reasons to prefer financial markets to street-corner trading. Yet not all formal markets are successful, as investors gravitate to certain markets and leave others underutilized. The busier ones, generally, have important attributes that smaller markets often lack : Liquidity. The ease with which trading can be conducted. In an illiquid market an 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. Trading is easier and spreads are narrower in more liquid markets. Because liquidity benefits almost everyone, trading usually concentrates in markets that are already busy. Transparency. The availability of prompt and complete information about 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.  Investors have many reasons to prefer financial markets to street-corner trading. Yet not all formal markets are successful, as investors gravitate to certain markets and leave others underutilized. The busier ones, generally, have important attributes that smaller markets often lack : Legal procedures. Adequate to settle disputes and enforce contracts. Suitable investor protection and regulation. Excessive regulation can stifle a market. However, trading will also be deterred 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 and intermediaries to meet their commitments, and the treatment they will receive as owners of a security or commodity once a trade has been completed. Low transaction costs. Many financial market transactions are not tied a specific geographic location, and the participants will strive to complete them in places where trading costs, regulatory costs and taxes are reasonable.  CHAPTER 8: MONEY MARKETS AND CAPITAL MARKETS WHAT IS MONEY MARKET? It is a term which refers to the network of corporations, financial institutions, investors and governments which deal with the flow of short- term capital. It also deals with short-term liquidity when a business needs cash for a few months until a big payment arrives, when a bank invests money that depositors may withdraw anytime, or when a government meets payroll during seasonal tax fluctuations. It expanded significantly in recent years due to the outflow of money from the banking industry, known as disintermediation. Savers and investors previously kept most of their assets in banks as short-term demand deposits, like cheque-writing accounts with little or no interest, or in certificates of deposit that locked their money for years. HOW DOES IT WORK? The money market exists to provide loans that financial institutions and governments need for daily operations. For example, banks may borrow short-term through the money market to meet their obligations to customers. The money markets connect borrowers and investors directly, avoiding the higher costs of bank intermediation. They help borrowers meet short-term liquidity needs and manage irregular cash flows without relying on more expensive methods of raising funds. There is a distinct money market for each currency, as interest rates differ between them. These markets are interconnected, and investors or borrowers may switch currencies based on relative interest rates. However, most money market transactions take place in the investor’s home currency.  WHO USES THE MONEY MARKET? COMPANIES When companies need to raise money to cover their payroll or running costs, they may issue commercial paper, short-term, unsecured loans for P100,000 or more that mature within 1-9 months. BANKS If demand for long-term loans and mortgages is not covered by deposits from savings accounts, banks may then issue certificates of deposit, with a set interest rate and fixed-term maturity of up to five years. WHO USES THE MONEY MARKET? INVESTORS Individuals seeking to invest large sums of money at relatively low risk may invest in financial instruments. Sums of less than P50,000 can be invested in money market funds 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, certificate deposit or bank deposits.  WHAT MONEY MARKETS DO The money market is related to the bond market, where corporations and governments borrow on longer-term contracts. Like bond investors, money market investors extend credit without gaining ownership or control over the borrowing entity. A well-functioning money market supports the development of long-term securities markets by pricing liquidity, or the availability of money for immediate investment. Short-term interest rates act as benchmarks for longer-term financial instruments. Without active money markets to set short-term rates, issuers and investors may lack confidence in the fairness of long-term rates and may worry about their ability to sell securities.  TYPES OF MONEY-MARKET INSTRUMENTS Commercial Banker’s Treasury Government Local Paper Acceptance Bills Agency Notes Government Notes Interbank Loans Time Deposits Repo s  COMMERCIAL PAPER Many large companies have Is a short-term debt obligation of a private continual commercial paper sector firm or a government programmers, bringing new sponsored corporation. short-term debt on to market Only companies with good every few weeks or months. credit ratings issue This allows issuers to borrow commercial paper because money for long periods of investors are reluctant to time at short-term interest bring the debt of financially rates, which may be compromised companies. significantly lower than long- The commercial paper has term rates. The short-term a lifetime or maturity greater nature of the obligation than 90 days but less than lowers the risk perceived by nine months. investors. BANKER’S ACCEPTANCES Before the 1980s, banker’s 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. It is not issued at all by financial-industry firms and they do not bear interest instead an investor purchases the acceptance at a discount from face value and then redeems it for face value at maturity. Investors rely on the strength of the guarantor bank, rather than of the issuing company, for their security. Banker’s acceptance usually has 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. LOCAL GOVERNMENTS NOTES Are issued by provincial or local governments and by agencies of these governments such as schools authorities and transport commissions. The ability of governments at this level to issue money-market securities varies greatly from country to country. In some cases, the approval of national authorities is required, in others the local agencies are allowed to borrow only form banks and cannot enter the money market.  INTERBANK LOANS TIME DEPOSITS Loans extended form one bank to Time deposits another name for another with which it has no affiliation certificates of deposit, are interest are called interbank loans. They may be bearing bank deposit that cannot be used to help the borrowing bank withdrawn without penalty before a finance loans to customers, but often specified date. Time deposit may last for the borrowing bank adds the money to as long as five years. Large time deposits its reserves in order to meet regulatory are often used by corporations, requirements and to balance assets governments and money-market funds and liabilities. to invest cash for a brief period. Interest rates depend on length of maturity, with longer terms getting better rate.  REPOS Also known as repurchase agreements, it plays 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 short-term borrowing arrangement where a bank or financial institution sells government securities to another party, with an agreement to repurchase them at a higher price after a short time and essentially it is a collateralized loan.  CAPITAL MARKETS The capital market is a financial market where long- term debt or equity-backed securities are bought and sold. It provides a platform for raising funds for businesses, governments, and other entities, as well as offering investment opportunities for individuals and institutions. 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 MARKETS PARTICIPANTS National and local government Issues long-term notes and bonds to fund the national debt while local governments issue notes and bonds to finance capital projects such as local projects like road construction, schools, or hospitals. Corporations Issue both bonds and stock to finance capital investment expenditures and fund other investments opportunities. Corporations raise capital by issuing both equity and debt securities.  Primary Market The primary market is where new issues of stocks and bonds are introduced. Investment funds, corporations, and individual investors can all 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 proceds of the sale. When firms sell securities for the security actually receives the proceeds of the sale. When firms 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 Secondary Market Capital Market Trading A secondary market is where the sales of previously issued securities takes place, and it is important Occurs in either the primary market or the secondary because most investors plan to sell their holding of market stocks as well. There are two types of exchanges in the secondary market for capital securities: Capital markets are financial markets where buyers and organized exchanges and over-the-counter sellers trade stocks, bonds, currencies, and other assets. exchanges. Whereas most money market They encompass both the stock and bond markets, transactions originate over the phone, most capital facilitating entrepreneurship and enabling small businesses market transactions, measured by volume, occur in to grow into larger companies. organized exchanges. 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. Bonds are the most prevalent example of the interest only loan with investors receiving exactly the same two sets of cash flows; (1) the periodic interast payments, and (2) the principal (par value or face value) returned at maturity.  Trading Process for Corporate Bonds The initial sale of corporate bonds can happen via a public offering with an investment bank as an underwriter or through a private placement to select investors, typically financial institutions. Public bond issuances attract interest from multiple investment banks, and these bonds are usually sold in a national market. 1. Competitive Sale 2. Negotiated Sale 3. Best Efforts Underwriting With a negotiated sale, a Basis The investment bank can single investment bank purchase the bonds obtains the exclusive right In their arrangement, the through competitive to originate, underwrite and underwriter does not bidding against other distribute the new bonds guarantee a firm price to the investment banks or by through a one-on-one issuer. The investment bank directly negotiating with negotiation process. With a incurs no risk of mispricing the issuer. negotiated sale, the the security since it simply investment bank provides seeks to sell the securities at the origination and advising the best market price it can services to the issuers. get for the issuing firm. Advantages and Disadvantages of using Bonds Advantages Disadvantages Long-term debt is generally less Debt (other than income bonds) expensive than other forms of results in interest payments that, if financing because (a) investors view not met, can force the firm into debt as a relatively safe investment bankruptcy. alternative and demand a lower rate of return, and (b) interest expenses are tax deductible. Bondholders do not participate in Debt (other than income bonds) extraordinary profits; the payments produces fixed charges, increasing are limited to interest. the firm's financial leverage. Bondholders do not have voting rights. Flotation costs of bonds are generally lower than those of ordinary (common) equity shares.  As of September, 2019, the following are bond issuances by the government, business firms in the Philippines secured by Bond Funds and part of the Investment Portfolio of Mutual Funds: 1. ALFM Peso Bonds 2. Grepalife Bonds 3. Philam Bonds 4. Philequity Peso Bonds 5. Sun Life Prosperity Bonds 6. RCBC "Sustainability' Bonds 7. Robinsons Bank Fixed Rate Corporate Bonds PH 8. Samurai Bonds Ayala Land Inc. (PH) Bonds  Bond Features and Prices The various features of corporate bonds and some of of the terminology associated with bonds follows: Per Value Coupon Maturity Indenture Current Yield to Interest Yield Maturity Rate The face The The The agreement This refers This refers to value of percentage length of between the firm to the ratio the bond's the bond of the par time until issuing the bonds of the internal rate.of that is value of the the bond and the bond trustee annual return. It is the returned bond that issuer who represents the interest discount rate to the will be paid returns bondholders. It payment to that equates bondhold out the par provides the specific the bond's the present er at annually in value to terms of the loan market value of the maturity. the form of the agreement, including price. interest and interest. bondhold the description.of the principal Formula is: er and bonds, the rights of payments with Stated terminates the bondholders, the the current interest the bond. rights of the issuing market price payment firm and the of the bond. divided the responsibilities of the Par value. trustees. Determination of Bond Yield to Maturity Par value of bond: P1,000 Interest Rate: 10% Term: 10 Years Current Price: P900 What is the bond’s yield to maturity? 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. The poorer the bond rating, the higher the rate of return demanded in the capital markets.  Credit Ratings For the finance manager, bond ratings are extremely important. They provide an indicator of default risk that in turn affects the rate of return that must be paid on borrowed funds. An example and description of these ratings follows: Credit Ratings Credit Ratings  Types of Bonds A. Unsecured Long- Term Bonds Debentures Debentures are unsecured long-term debt, relying on the corporation's reputation and financial stability. Since they aren't backed by assets, bondholders are concerned about the issuer's ability to earn. To protect bondholders, the company may be restricted from taking on more secured debt that could limit assets. For the company, debentures allow it to borrow while still keeping some borrowing capacity for the future. Subordinated Debentures Claims of bondholders of subordinated debentures are honored only after the claims of secured debt and unsubordinated debentures have been satisfied.  Types of Bonds A. Unsecured Long- Term Bonds Income Bonds An income bond pays interest only if the company earns enough to do so, and not paying interest won’t cause bankruptcy. These bonds are often issued when a company is restructuring financially, have longer maturities, and allow unpaid interest to accumulate for a while. This unpaid interest must be paid before any dividends are given to shareholders  1 WHAT ARE MORTGAGES? CHARACTERISTICS OF THE RESIDENTIAL MORTGAGE MODERN MORTGAGE MORTGAGE MARKET Lenders has Has become very continued to competitive in refine the long- recent years. term loan to make it more desirable to borrow.  A. Mortgage Interest Rates 1. Current long-term market rates Long-term market rates are determined by the supply of the demand for long- term funds, which are in turned affected by a number of global, national, and region factors. 2. Term or Life of the mortgage Generally, longer-term mortgage have higher interest rates than short-term mortgage. 3. Number of Discount -Points Paid Discount points (or simply points) are interest payment made at the beginning of a loan. B. Loan Terms Mortgage loan contracts contain many legal and financial terms, most of which protect the lender from financial loss. C. Collateral One characteristic common to mortgage loans is the requirement that collateral, usually the real estate being financed, be pledge as security. D. Down payment To obtain a mortgage loan, the lender also requires to borrower to make a down payment of the property, that is, to pay a portion of the purchase price. E. Private mortgage insurance Private mortgage insurance (PMI) is an insurance policy that guaratees to make up any discrepancy between the value of the property and the loan amount, should be a default occur. F. Borrower Qualification Before granting a mortgage loan, the lender will determine whether the borrower qualifies for it. AMORTIZATION OF MORTGAGE LOAN Mortgage loan borrower generally agree to pay a monthly amount of principal and interest that will be fully amortized by its maturity. TYPES OF MORTGAGE LOANS Conventional mortgages These are originated by bank or other mortgage lenders but are not guaranteed by government or government controlled entities. Insured Mortgages These mortgages are originated by banks or other mortgages lenders but are guaranteed by either the government or government-controlled entities Fixed-rate Mortgages In fixed-rate mortgages, the interest rates and the monthly payment do not vary over the life of the mortgage. TYPES OF MORTGAGE LOANS Adjustable-Rate Mortgages (ARMs) The interest rate on adjustable-rate mortgage (ARMs) is tied to some market interest rate, (e.g., Treasury bill rate) and therefore changes over time. Graduated- Payment Mortgages (GPMs) these mortgages are useful for home buyers who expect their income to rise Growing Equity Mortgage (GEMs) In fixed-rate mortgages, the interest rates and the monthly payment do not vary over the life of the mortgage. TYPES OF MORTGAGE LOANS Shared Appreciation Mortgage (SAMs) In a Sam, the lender lowers the interest rate in the mortgage in exchange for a share of any appreciation in the real estate ( if the property sells for more than a stated amount, the lender is entitled to a portion of the gain). Equity Participating Mortgage (EPM) In EPM, an outside investor shares in the appreciation of the property. TYPES OF MORTGAGE LOANS Second Mortgages These are loans that are secured by the same real estate that is used to secure the first mortgage. Reverse Annuity Mortgage (RAMs) In a RAM, the bank advances funds to the owner on a monthly schedule to enable him to meet living expenses he thereby increasing the balance of the loan which in secured by the real estate.  PREFERRED SHARE VALUATION Is a share that has a claim against income and assets before ordinary share but after debt. It is considered as a hybrid security because it possesses characteristics of both debt and equity. Preferred share is also similar to ordinary (common) equity share because they do not have maturity and similar to debt in that both securities have fixed payments, dividends for preferred share and interest for debt. FORMULA: where: Dp D p - Per share cash dividend P0 = Kp - Investor’s require rate of Kp return on preferred share EXAMPLE: Federal Electric and Power Company has an issue of preferred share outstanding that pays a yearly dividend of 10.80. Investors require a 12% return on this preferred share. P0 = P 10.80 12% = P 90