Handouts 2: Monetary Policy and Central Banking PDF

**HANDOUTS 2**  **Name: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_** **Yr. & Section: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_** **Prepared by: Ms. Precious Pearl R. Manato** **Introduction:** More broadly speaking, all traded securities, f...

**HANDOUTS 2**  **Name: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_** **Yr. & Section: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_** **Prepared by: Ms. Precious Pearl R. Manato** **Introduction:** More broadly speaking, all traded securities, from futures to currency swaps, are ownership investments. Investors purchase them in order to share in the profits, or because they will increase in value, or both. Some of these investments, such as stocks, come with the right to a portion of the company\'s value. Others, such as futures contracts, come with the right to carry out a certain action that will benefit their owners. **Pre-test** **Direction: Answer this question briefly.** **As a beginner to become a business owner,** what types of securities that you can buy in the stock market that can help your business to be productive and stable especially in financial terms? **Lesson 1 [Money and Inflation: A Functional Relationship]** *Economists like to argue that money belongs in the same class as the wheel and inclined plane among ancient inventions of great social utility. Price stability allows that invention to work with minimal friction. ---Federal Reserve Chairman Ben S. Bernanke, February 24, 2006* In its broadest sense, money is anything generally accepted in exchange for goods and services. In other words, money is defined by the functions it serves in the economy. In fact, while money has taken many forms over the ages---cowry shells, furs, beads, even large stone wheels---useful forms of money share three basic functions. First, money is a store of value, which means that it holds its value over time. You can put money in a drawer today and spend it next year, when it will buy approximately the same amount of goods and services (minus inflation). Second, money is a unit of account, which means it is a standard measure of value. Listen to a conversation between two people about a recent purchase and you are sure to hear prices quoted in terms of money, not as hours worked or the equivalent value of the purchase in corn (or some other commodity). Third, money is a **medium of exchange**, which means it is generally accepted as a method of payment. I accept my pay check in U.S. dollars because I know dollars are readily accepted for payment at the grocery store, gas station, and nearly anywhere I want to buy goods and services. **Money Versus Barter** You might not think of it often, but money facilitates transactions in amazing ways. Think of conducting an economic transaction without money---a situation called barter. For barter to work properly, you would need to find someone with the good or service you want; in turn, that person would need to want to trade for what you have to offer. A difficult task to be sure. The situation in which two people want to barter with each other is known as the double coincidence of wants. Imagine an accountant who needs her car fixed. Under a barter system she would need to find someone who needed some tax advice in exchange for car repairs. She might find it difficult, and time consuming, to make such a transaction. Such searches for barter partners are inefficient and wasteful. So, how does money solve the double coincidence of wants problem? In an economy based on money, the accountant provides her accounting services to whoever is willing and able to pay money for them. She then uses the money she earned to pay for car repair services from a mechanic, who is more than willing to accept cash for car repairs. Both parties to the transaction are willing to exchange goods or services for money. In the end, everyone involved is more readily satisfied. Using money allows a more efficient outcome because it cuts down on search costs, and it allows workers to specialize in what they do best. **Money and Inflation** Even when you have money available to purchase goods and services, as in the accountant/ mechanic example, money's ability to serve its functions has limits. High rates of inflation, for example, make money less useful in many ways. First, when inflation rates are very high, the longer you hold money as cash, the more value it loses, so you attempt to spend it immediately rather than hold it. In this situation, money does not function as an effective store of value. In fact, if people expect high rates of inflation and the rate of their transactions increases as a result, inflation will increase even further. Second, if inflation rises to very high rates, money's usefulness as a unit of account diminishes. If prices are changing rapidly, communication between buyers and sellers becomes complicated. Comparing prices becomes complex if all prices are rising rapidly. Third, inflation reduces the usefulness of money as a medium of exchange. In the case of extreme inflation (hyperinflation), people may abandon the use of one currency for a more stable one   **[STOCKS AND BONDS]** **Stocks** are shares of ownership in a corporation. When you become a stockholder or shareholder of a company, you become part-owner of that company. **Securities**, on the other hand, are proof of one's ownership or indebtedness in a company. **Example of Securities** - Treasury bills - Commercial papers (short-term and traded in market) - Stocks and bonds (long-term and traded in capital market) **Securities,** are easily bought and sold in the stock market **WHAT ARE THE TYPES OF SECURITIES THAT I CAN BUY IN THE STOCK MARKET?** 1. **Common Stocks --** these are usually purchased for participation in the profits and control of ownership and management of the company. Holders of common stocks have voting rights. They are also entitled to an equal pro rata division of profits without preference or advantage over another stockholder. However, they have the last claim on dividends and are the last to collect in case of corporate liquidation. 2. **Preferred Stocks --** its name is derived from preference given to the holders of these stocks over holders of common stocks. Holders of preferred stocks are entitled to receive dividends, to the extent agreed upon, before any dividends are paid to the holders of common stocks. However, preferred stocks usually have a specified limited rate of return or dividend and a specified limited redemption and liquidation price. 3. **Warrants --** a corporation can also raise additional capital by issuing warrants. A warrant, normally issued on a detachable basis, allows its holders the right, but not the obligation, to subscribe to new shares at a set price during a specified period of time. It is usually provided free of charge and traded separately in the securities market. 4. **Philippine Deposit Receipts (PDRs) --** a PDR is a security which grants the holder the right to the delivery or sale of the underlying share, and to certain other rights. PDRs are evidences or statements nor certificates of ownership of a foreign/foreign-based corporation. 5. **Small-Denominated Treasury Bonds (SDT-Bonds) --** the SDT Bonds are long-term and relatively risk-free debt securities issued by the Bureau of Treasury (BTr) of the Republic of the Philippines. The bond is a certificate of indebtedness of the Republic of the Philippines to the owner of the SDT-Bonds. **WHERE CAN I BUY OR SELL SHARES OF STOCKS AND/OR BONDS?** - In the Philippines, the only operating stock exchange is the Philippine Stock Exchange (PSE). Its main function is to facilitate the buying and selling of stocks and other securities through its accredited trading participants. - Individual clients buy or hold government bonds through common trust funds/unit investment trust funds, mutual funds, or pension plans. **HOW ARE SHARES AND SDT-BONDS BOUGHT OR SOLD?** - If you wish to buy shares of stocks or SDT-Bonds, you must have a stockbroker who will do this for you. - A stockbroker is a person or a corporation authorized and licensed by the Securities and Exchange Commission (SEC) and PSE to trade securities. **WHAT IS THE MINIMUM AMOUNT NEEDED TO INVEST IN THE STOCK MARKET?** - Equity trading is done by board lot or round lot system. The Board Lot Table determines the minimum number of shares one can purchase or sell at a specific price range. - Therefore, the minimum amount needed to invest in the stock market varies and will depend on the market price of the security as well as its corresponding board lot. - Prices of stock move through a scale of minimum price fluctuations. **HOW CAN I PROFIT IN THE STOCK MARKET?** - **Capital Gains --** These are profits made due to an increase in the market price of a stock from the buying price. - **Cash Dividend --** A dividend given to shareholders in the form of cash. It is computed by multiplying the numbers of shares held by the cash dividend rate declared. - **Stock Dividend --** A dividend given to shareholders in the form of additional stocks. It is - **Stock Rights --** Stock rights offering is the option given to the present shareholders to buy additional shares of stock at a price lower than its market price. **[CREDIT SYSTEM]** **What is credit?** - Credit is defined in a couple of ways. One is the amount of money you are approved to borrow from a lending institution. With this approval comes an agreement to repay the charges, any additional fees that can or will be applied, and to abide by time restrictions**.** - Credit can also be classified as your borrowing reputation. It paints a picture of your payment history and provides the lender with information regarding the likelihood of your repayment, in other words, your risk factor. **Use of Credit** - When used responsibly, credit can be a convenient and effective financial tool. - From a simple credit card to an auto or home loan, credit is the American way of life. - Cashless transactions are soon becoming the way of the future, and credit cards are among the most prevalent. - Understanding credit is important in order to use credit to your advantage and to prevent the common financial pitfall -- debt. **Four Common Forms of Credit** - **Revolving Credit** - This form of credit allows you to borrow money up to a certain amount. - The lending institution sets a credit limit, or the most you can borrow. - In revolving credit, the borrower revolves the balance by rolling from month to month until it is paid in full. Interest charges typically occur for any revolving balance. - As the money is paid back, the difference between the maximum credit limit and the current balance is available to be borrowed. - This is the most common form of credit issued by credit cards, such as Visa, MasterCard, and store and gas cards. Credit cards are considered unsecure credit because there is no collateral securing the amount borrowed. - **Charge Cards** - This form of credit is often mistaken to be the same as a revolving credit card. - However, the major difference between a credit card and a charge card is the credit card can carry a balance, whereas the charge card must be paid in full each month. - If the balance is not paid on time and in full, penalty fees will be added. - American Express is an example of a well-known charge card. - This form of credit is advantageous against accumulating credit card debt. - **Installment Credit** - Installment credit involves a set amount borrowed, a set monthly payment and a set timeframe of repayment. Interest charges are pre-determined and calculated into the set monthly payments. - Common forms of installment credit agreements are home mortgages and auto loans. - Installment credit is also typically secure. - Secure credit requires security for the lender. - The borrower must provide collateral, something of value pledge in order to guarantee loan repayment. - If the borrower fails to repay, or defaults on the loan, the lender may confiscate the collateral. A home is an example of collateral on a mortgage, and a vehicle on an auto loan. If the borrower were to default, the home or vehicle would be repossessed. - **Non-Installment or Service Credit** - This form of credit allows the borrower to pay for a service, membership, etc. at a later date. - Generally, payment is due the month following the service, and unpaid balances will incur a fee, interest, and/or penalty charges. - Continued non-payment will result in service cancellation and can be reported to the credit bureau, affecting your credit score. - Service or non-installment agreements are very common in our everyday life. - Cell phone, gas and electricity, water and garbage are all examples of service credit. **[CREDIT MANAGEMENT]** - Credit management is the process of granting credit, setting the term its granted on, recovering this credit when its due and ensuring compliance with company credit policy. - The difference in the rate of interest that a bank charges on the amount lent and the rate it pays to the depositors is technically called spread or interest rate spread. - This spread bank has to use to meet all its overheads and interest on deposit but also provide for NPA.  **Types of Lending** - **Retail Lending --** It refers to the lending by banks to individual customers and SMEs. The ticket size of these advances would be small but the no. of accounts would be high. - **Wholesale Lending --** It refers to financing to corporate customer and institutional finance. Here, the size of advance is large and the no. of borrowers is relatively small. - **Directed Lending --** Banks are required to lend 40% of net bank credit to priority sectors which are necessarily mandated by govt. for development of economy. - **Normal Lending --** Loans and advances other than directed lending is termed as Normal Lending.  **6 C's of Borrower** - **Character --** the most important requirement for granting credit to a customer is his integrity. - **Capacity --** a perspective client for credit must have the knowledge of the business process for which loan is being granted. - **Capital --** bankers insist that the client has to bring some portion of total investment which is technically termed as margin. - **Collateral --** banks take collateral security in the form of mortgage of property, pledge of shares etc. as guarantee for loan repayment. - **Condition --** condition refers to macro-economic factors of country like political, stability, demand and supply, legal environment etc. - **Credit history --** Past records credit transactions of client. **Try This!** **ACTIVITY I** A. **Identify the following.** \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_1. A perspective client for credit must have the knowledge of the business process for which loan is being granted. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_2. Loans and advances other than directed lending is termed as Normal Lending. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_3. Banks take collateral security in the form of mortgage of property, pledge of shares etc. as guarantee for loan repayment. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_4. Process of granting credit, setting the term its granted on, recovering this credit when its due and ensuring compliance with company credit policy. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_5. Continued non-payment will result in service cancellation and can be reported to the credit bureau, affecting your credit score. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_6. This form of credit is advantageous against accumulating credit card debt. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_7. Are soon becoming the way of the future, and credit cards are among the most prevalent. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_8. It paints a picture of your payment history and provides the lender with information regarding the likelihood of your repayment, in other words, your risk factor. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_9. Is done by board lot or round lot system. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_10. A dividend given to shareholders in the form of additional stocks. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_11. Usually have a specified limited rate of return or dividend and a specified limited redemption and liquidation price. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_12. A security which grants the holder the right to the delivery or sale of the underlying share, and to certain other rights. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_13. Reduces the usefulness of money as a medium of exchange. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_14. Manage risk at a cost-lower expected returns. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_15. Shares of ownership in a corporation. B. **Essay.** 1\. How do you expect the global economy after this pandemic? \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 2\. How to start investing in the Philippine stock exchange? And how its works? \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ **Find this!** **Post-Test** **Direction:** Research the following: 1\. Find the lending companies and financing companies (At least 10) in the Philippines with Certificate of Authority (CA), subject amendment / updates. 2\. And search the relevant Laws and IRRs that protect to the companies. 3\. Cite the Procedures for registration, submission of SEC reportorial and other compliance requirements, and filling of complaints. ***"Out of the mountain of despair, a stone of hope."*** CONGRATULATIONS! You did a great job! See you on your Handouts 3!