POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Written Report
CASE STUDIES ON FUNDAMENTALS OF FINANCIAL MARKETS

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Submitted to:

Prof. Maria Luisa Oliveros

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Submitted by:
Domingo, Mary Shane P.
Evalarosa, Jereme O.
Garcia, Ma. Regine G.
Gigante, Kris Marielle

BSA 2-14

September 2019
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CHAPTER 1 CASES
CASE 1

BACKGROUND:
Hybrid Rice Corporation is a manufacturing company that produced rice and other agricultural
products, this corporation is under the industrial sector. The directors of the company wants to
improve their production by modernizing their plant and machinery, so the corporation is on
need of fund that will mature beyond one year. To weigh which approach will be better, to
approach directly the stock exchange or to approach first the consultant, the advantages and
disadvantages of the approaches should be considered.

ANALYSIS:
•Approaching the Stock Exchange
STOCK EXCHANGE
The stock exchange is key financial institution in any free-market economy. It lets individual
investors and investment firms exchange capital and move resources to places where there
are most needed. Stock exchanges can also serve as a savings tool.

ADVANTAGES
1. Economies of Scales.
2. Investor Protection
3. Secure Clearing
DISADVANTAGES
1. Brokerage Commissions Kill Profit Margin
2. Volatile Investments
3. Time Consuming
•Approaching the Consultant
ADVANTAGES
1. Act as quarterback of the financial team.
2. Helps in long-term planning.
3. Researches, examines and recommends investments and products.
DISADVANTAGES
1. Generates an additional expense.
2. May not be biased in recommendations.
3. May recommend more expensive products.
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For the Hybrid Rice Corporation, it will be better and advantageous if they will
approach the consultant first. The financial or investment consultant can help them by
providing advices to formulate financial strategies to fund the modernization of plant and
machinery. This type of consultant also provides information about taxes, investments and
insurance decisions. They may also direct the buying and selling of stocks and bonds for their
clients.

REQUIREMENTS TO BECOME A CONSULTANT:

Financial consultants have a bachelor's or graduate degree in finance. Some colleges
and universities offer degrees in financial consulting. Others offer more generalized degrees
for those wanting to enter this career path. Prospective financial consultants earn degrees in
finance, math, business or economics as preparation for the field.
Certifications, such as the Certified Financial Planner (CFP) credential help
consultants improve their professional standing and are looked on favorably by employers.
The Certified Financial Planner Board of Standards issues the certification, which requires
applicants to have three years of relevant experience and a bachelor's degree. In addition,
applicants must pass a comprehensive exam that covers key aspects of the financial planning
process. Furthermore, candidates for certification must adhere to a code of ethics and
complete 30 hours of continuing education every two years in order to remain current in the
ever-changing field of financial planning.
Consultants must be licensed and registered with their particular state and the
Securities Exchange Commission if they sell securities. The variety of licenses needed by
financial consultants depends on the products they wish to offer their clients. Those who sell
insurance products must also be licensed by a state board.

THE FINANCIAL SYSTEM

The Fund Demanders and Fund Lenders
Financial System is a system which allows the exchange of fund from the fund
provider to fund demander. Lenders are the parties that have excess funds, while the
borrowers are the parties who are willing to pay the required return to obtain additional
funds. In this case, the Hybrid Rice Corporation is the fund demander or the borrower for it is
needing funds that will be used in modernization of their plant and machinery. Hybrid Rice
Corporation wanted to issue new public shares as the source of their funds. These shares will
be purchased or subscribed by the potential investors – the fund providers or the lenders in
the financial system. The proceeds will be used by the company to improve the production.

Financial Intermediary
Financial intermediary is a special type of financial entity that acts as a third party to
facilitate the borrowing activity between lenders and borrowers. Since the Hybrid Rice
Corporation will be approaching a consultant, the intermediary will be the Investment Bank.
It will serve as the third party in transactions between the corporation and the investors
thorough IPO or Initial Public Offering. The investment bank will sell shares to the public in
exchange of the fee that will be paid by Hybrid Rice Corporation.
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Roles of Investment Banks:

1. Underwriting of new stock issues, handling mergers and acquisitions, and acting as a
financial advisor
2. Help corporations obtain debt financing by finding investors for corporate bonds.

Investment Banks in the Philippines

 ABCapitalOnline.com, Inc.
 Asian Alliance Investment Corporation
 First Metro Investment Corporation
 Navarro Amper & Co
 PNB Capital and Investment Corporation
 Punongbayan & Araullo
 SB Capital Investment Corporation

Financial Market /Financial Instrument/

Financial Market refers to the place where exchange of funds between lenders and
borrowers happens. In this case, the financial market will be the primary market for they will
raise funds by using new public issue of shares. Primary markets are when investors are able
to purchase securities directly from the issuer. Also, in the primary market, companies sell
new stocks and bonds to the public for the first time, such as with an initial public offering
(IPO) - often at a pre-determined or negotiated price.
Financial Instruments are the medium of exchange of contractual obligation of a
party, where such contract can be traded. In this case, the instrument is the new public issue
of shares. For the company to issue a public share, it should undergo IPO or Initial Public
Offering. It refers to the process of offering shares of a private corporation to the public in a
new stock issuance. It provides the companies with an opportunity to obtain capital by
offering shares through the primary market.

The steps to an IPO are the following:

1. Underwriters present proposals and valuations discussing their services, the best
type of security to issue, offering price, amount of shares, and estimated time frame
for the market offering.
2. The company chooses its underwriters and formally agrees to underwriting terms
through an underwriting agreement.
3. IPO teams are formed comprising underwriters, lawyers, certified public
accountants, and Securities and Exchange Commission experts.
4. Information regarding the company is compiled for required IPO documentation.
a. The S-1 Registration Statement is the primary IPO filing document. It has two
parts: The prospectus and the privately held filing information. The S-1 includes
preliminary information about the expected date of the filing. It will be revised
often throughout the pre-IPO process. The included prospectus is also revised
continuously.
5.Marketing materials are created for pre-marketing of the new stock issuance.
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a. Underwriters and executives market the share issuance to estimate demand

and establish a final offering price. Underwriters can make revisions to their
financial analysis throughout the marketing process. This can include changing
the IPO price or issuance date as they see fit.
b. Companies take the necessary steps to meet specific public share offering
requirements. Companies must adhere to both exchange listing requirements
and SEC requirements for public companies.
6. Form a board of directors.
7. Ensure processes for reporting auditable financial and accounting information
every quarter.
8. The company issues its shares on an IPO date.
a. Capital from the primary issuance to shareholders is received as cash and
recorded as stockholders' equity on the balance sheet. Subsequently, the
balance sheet share value becomes dependent on the company’s stockholders'
equity per share valuation comprehensively.
9. Some post-IPO provisions may be instituted.
a. Underwriters may have a specified time frame to buy an additional amount
of shares after the initial public offering date.
b. Certain investors may be subject to quiet periods.

Benefits and Advantages of IPO:

 The company gets access to investment from the entire investing public to raise
capital.
 Facilitates easier acquisition deals (share conversions).
 Increased transparency
 A public company can raise additional funds in the future through secondary
offerings
 Public companies can attract and retain better management and skilled employees
 IPOs can give a company a lower cost of capital for both equity and debt.
 Increase the company’s exposure, prestige, and public image.
Disadvantages of IPO:
 An IPO is expensive
 The company becomes required to disclose financial, accounting, tax, and other
business information
 Increased time, effort, and attention required of management for reporting.
 Fluctuations in a company's share price.
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CASE 2

BACKGROUND:
Specialty Paper Corporation is a large and creditworthy company operating in a
Philippine Valley. It is an export-oriented unit, dealing in exclusive embroidered paper.

PROBLEM:
1.The firm is unable to get an uninterrupted supply of raw materials.
2. The duration of production cycle has also increased.
3. The supplier of raw materials ask the company for advance payment.
4. The company is facing a liquidity crisis.

SOLUTION OF THE COMPANY'S CEO:

1. Bank Loan

What is a bank loan?

Bank loan is the extension of money from a bank to another party with the agreement that
the money will be repaid.

Eligibility requirements in doing a bank loan:

1. At least 21 years old
2. Filipino citizenship (some banks accept applications from foreigners living in the
Philippines)
3. Minimum gross income set by the bank
4. Proof that you are credible as a borrower, such as having a good credit history
5. Documentary requirements:
6. Valid government-issued IDs
7. Pay slips for the last 3 months
8. Latest income tax return
9. Certificate of employment
10. Audited financial statements in the last 2 to 3 years and SEC or DTI registration (for self-
employed people)

PROCESS IN TAKING A BANK LOAN:

1. Complete the application
Your lender will assist you to fill out a loan application.
2. Get preapproved
After reviewing your completed loan application, the lender can give you a preapproval
letter, a written letter that confirms the price of home you can purchase.
3. Processing
Your home mortgage specialist collects the necessary financial documents to process your
loan. The property is appraised to determine its fair market value.
4. Receiving approval
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The lender will review your application and financial information to make their lending
decision. If your application is declined, they may recommend steps you can take in order to
obtain financing.
5. Pre-closing
In this phase, sometimes referred to as “loan settlement,” your home mortgage consultant
will work with you to secure any required title insurance and real estate documents to protect
against other parties claiming ownership of the property.
6. Closing
The day and time when all final mortgage documents are signed and all necessary
payments are transferred to complete the purchase of a house. Also known as the settlement
date.
7. Loan servicing
The steps taken to maintain a loan from the time it’s closed until it’s paid off, for example
billing the borrower, collecting payments, and making contract changes. It’s not uncommon to
have loan servicing transferred between many companies during the life of a loan.

ADVANTAGES:
1. Keep control of the company. (Do not take any ownership position in businesses.)
2. Bank loan is temporary. (Once you has paid off the loan, there is no obligation anymore.)
3. Flexibility - you only worry about making your regular installments payment on time.
4. Tax benefits - what you have paid for your yearly interest will be deducted to your tax if you
use the bank loan for business reasons.

DISADVANTAGES:
1. Tough to qualify. (Very difficult to obtain unless a small business has a substantial track
record or valuable collateral such as real estate.)
2. Repayment Burden - must pay the periodic payments when they fall due. Those who fail to
do so, their assets will be seized. (Even if you have paid on later date, the bank can still report
you to the bureaus that can negatively affect your credit score.
3. Irregular Payment Amounts - variable interest rate, the rate changes with market conditions.
Thus, determining future payments will be difficult.
WHAT IS CREDITWORTHINESS?
Creditworthiness reflects a person's, company's, or entity's ability to pay back a debt. In
other words, how likely they are to repay a loan. High creditworthiness/rate tends to be more
likely to get a low interest rate on the loan.
Philippine Rating Services Corporation is the only domestic credit rating agency that is
accredited by the Securities and Exchange Commission and recognized by the Bangko Sentral
ng Pilipinas. It is also a founding member of the Association of Credit Rating Agencies in Asia
(ACRAA), which now counts thirty (30) domestic credit rating agencies in the Asian region
as its members. PhilRatings actively participates in the development of the Philippine capital
market by implementing a national credit rating system.
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THE RATING PROCESS:

PHILRATINGS' METHODOLOGY

GENERAL CREDIT RATING METHODOLOGY

When analyzing corporate issuers, two major areas are addressed: business risk and
financial risk. Both cover a range of broad categories. The following factors provide some
flavor as to the issues analyzed and evaluated, but these are by no means exhaustive.

BUSINESS RISK
1. Economic risk
PhilRatings reviews the risks arising from the over-all economy in which the company
operates and gauges how the dynamics of the economy affect the operations of the particular
company. Accordingly, the economy's strength, diversity, and volatility, as well as the
government's ability to manage the economy through boom and recessionary periods, are
evaluated. The analysis particularly focuses on the size, structure and growth prospects of the
economy, the extent to which it is open to external markets, and potential vulnerabilities.
2. Industry Risk
Industry risk covers many elements, and for any industry, there will be both positive and
negative factors. While it is difficult to say which factors will prevail, PhilRatings gauges the
dynamics of the industry and the extent to which those dynamics lead to more or less risk from
the investor's point of view. Accordingly, the analysis covers the structure of the industry, the
dynamics of competition, the regulatory and legislative framework, and the government's
philosophy with respect to the industry - i.e., market-oriented or interventionist.
3. Market Position
Market position analysis involves an assessment of the benefits or weaknesses stemming
from a company's market position (e.g., pricing power, quality of business, etc.). This involves
an evaluation of the company's market share in key business lines, and the real advantages
stemming from that market position, together with a review of the extent of competition in,
and vulnerability of, the market position.
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4. Business Diversification
Business diversification addresses the diversity of a company's products, business lines
and customer base, and the benefits or weaknesses (such as geographic or business
concentrations) that flow from them.
5. Management and Strategy
Managerial effectiveness and credibility are assessed through an evaluation of the
company's past performance and of the appropriateness of management's strategies within a
changing environment. Consideration is also given to the organizational structure and the
extent to which it enhances managerial efficiency, the quality and depth of both management
and the planning process (both financial and strategic). The analysis normally involves a
comparison of past performance to budget or plan.

FINANCIAL RISK
1. Earnings Generation
Key considerations are earnings levels, trends, and stability, as well as the fundamental,
core, long-term earnings power of the company. The analysis covers operating margins,
diversity and sustainability of income sources, cost structure, and the earnings outlook. The
company's ability to cover interest and other fixed charges is also considered.

2. Cash Flow and Liquidity

Cash flow and liquidity analysis involves an evaluation of the company's sources of funds
and its adequacy to meet debt service requirements. In assessing cash flow adequacy, the
company's future funding needs, such as for expansion of production facilities and acquisition,
are also considered.

3. Capital Structure/Leverage
Key considerations are the debt and equity mix, as well as the maturity profile of existing
indebtedness. The types of equity capital utilized are assessed, such as preferred shares that
may be redeemable and thus may constitute a future need for refinancing, and appraisal
increment in property which may be dissipated if asset values decline. In assessing leverage,
off-balance sheet items are also considered, such as operating leases, guarantees to other
companies, and contingent liabilities.

4. Financial Flexibility
Financial flexibility is a summation of all the preceding factors, since it is an evaluation
of a company's ability to meet unexpected demands on funds. Factors considered include:
● the company's ability to access various funding markets and raise capital from the public or
private sources, generally, and in a difficult environment
● the extent of internal reserves available to cover unexpected losses
● the franchise value of specific businesses
● assets where the market value is significantly greater then the book value
ability to sell; and
● the likelihood of support from private stockholders or the government
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5. Asset Quality
Credit risk across the entire spectrum of the institution's activities is evaluated (including
receivables, marketable securities, equity investments, on- and off-balance sheet counterparty
exposures, etc.) This involves an analysis of the structure of the balance sheet and the maturity
profile of the asset portfolio. Concentrations of credit and investment risk also are considered,
along with problem loans and provisioning policy.

THINGS TO BOOST CREDITWORTHINESS:

1. Pay your bills promptly.
2. Do not shift debts to other accounts.

QUESTIONS:
A. As a finance manager of the company, name and explain the alternative to bank
borrowing that the company can use to resolve the crisis.

1. Accounts receivable (AR) financing

Accounts receivable financing allows companies to receive early payment on their
outstanding invoices. A company using accounts receivable financing commits some, or all,
of its outstanding invoices to a funder for early payment, in return for a fee.

What are the three primary types of receivables finance?

1. Asset-based lending (ABL): Also known as a business line of credit or traditional
commercial lending, asset-based lending is an on-balance sheet technique and typically comes
with significant fees. Companies commit the majority of their receivables to the program and
have limited flexibility about which receivables are committed.

2. Traditional factoring: In factoring, different than reverse factoring, a business sells its
accounts receivable to a funder – but the initial payment is for less than the full amount of the
receivable. For example, a company may receive early payment for 80 percent of the invoice
amount minus processing fees. Compared to asset-based lending, companies have more
flexibility in choosing which receivables to trade, but funder fees can be high and credit lines
may be smaller. As with ABL, any factored receivables are recorded on the company’s balance
sheet as outstanding debt.

3. Selective receivables finance: Selective accounts receivables finance allows companies to

pick and choose which receivables to advance for early payment. Additionally, selective
receivables finance enables companies to secure advanced payment for the full amount of each
receivable. Financing rates are typically lower than other alternatives, and this method may not
count as debt based on the program structure. Because selective receivables finance stays off
the balance sheet, it does not impact debt ratios or other outstanding lines of credit.
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Qualification Criteria:
This type of financing is available to companies of all sizes, including start-ups. For your
business to qualify for accounts receivable financing:

1. Your customers must have good commercial credit

2. Your customers must pay invoices in net-30 to net-90 days
3. Your accounts receivable must be free of liens or encumbrances
4. Your company must not have serious problems
When a business sells its accounts receivable to a third party (known as a factor),
the terms offered by the factor essentially drive the circumstances under which the
arrangement can be used. In essence, a business sells its accounts receivable to a factor
in exchange for about 70% to 85% of the face value of each invoice, plus a fee that ranges
from 2% to 5% of the face amount of the invoice.

ADVANTAGES

1. Fast cash

With receivables financing, the application process is quick and less stringent than
traditional business loans. This is suitable if you need capital to meet your business’ short-term
needs, such as paying employees’ salaries, fulfilling deliveries, and purchasing inventory.

2. Improved cash flow

With this type of financing, you receive the loan right away, immediately improving cash
flow. With the cash advance, you have additional capital to answer your business’ needs, be it
buying more inventories, purchasing supplies, or what have you.

Disadvantages

1. Basis of interest is on the quality of clients

Unlike traditional business loans which base the interest rate on your and your business’
credit history, with receivables financing, the interest is determined by the quality of your
clients. This is understandable since you’re putting up the receivables – the money owed to
you by clients – as collateral. In an ideal setting, all your clients are reliable. If this were the
case, then this type of financing would be more advantageous than disadvantageous. However,
not all your clients will have deep pockets; others may be slow-paying and unreliable. This, in
turn, will affect the interest rate given to you.

2. Increased costs

Aside from the interest rate on the cash advance, there are additional costs to consider
with receivables financing. You’ll have to pay additional fees, which is usually a set percentage
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(between 1 to 4%) of your receivables. This will bring down your profit margins; however, if
you need the cash immediately, decreased profit margins would be better than lost sales due to
insufficient capital.

B. Would you consider Commercial Paper as one of your alternatives? Why?

Yes, commercial paper can be one of the alternatives of bank loan.

What is a Commercial Paper?

Commercial Paper is:

1. Unsecured form of promissory note that pays a fixed raye of interest.

2. Issued by large banks/corporations to cover short-term financial obligations.
3. Usually offered at a discount.
4. Can be a promissory
notes, drafts, check, certificate of deposit.
Who can issue Commercial Paper (CP)
Only financially secure and highly rated organizations can raise money through
commercial papers. New and moderately rated organizations are not in a position to raise
funds by this method.

Requirements
1. Sworn registration requirements in the prescribed form.
2. Board resolution.
3. Latest audited financial statements.
4. Committed credit line agreement with a bank.

Process of Issuance
1. Every company issuing the CP should appoint a scheduled bank as the issuing and paying
agent.
2. The authorized authority is required to satisfy itself about the satisfactory credit rating.
3. A resolution is required to be passed by the Board of Directors approving the issue and
authorizing the official to execute the relevant documents, as per RBI norms.
4. It should also verify the documents submitted by the issuing company and issue a certificate
that the documents are in order.
5. The issuer should disclose to its potential investors its financial position.
6. The issue has to be completed within two weeks of opening.

Advantages of Commercial Paper

1. Quick and cost effective way of raising working capital.
2. Cheaper than bank loan.
3. Good rating reduces the cost.
4. No collateral.
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Disadvantages of Commercial Paper

1. A company's access to the commercial paper market is only available as long as it is in
good financial condition.
2. Bad financial results or bad news can result in a lowering of a company's credit rating
or the company being put on watch by the credit agencies.
3. If a company cannot access the market, they cannot refinance the existing commercial
paper they have outstanding. This puts them in a crisis mode to sell assets or get bank
loans sufficient to retire the commercial paper when it comes due.

ADDITIONAL INFORMATION:

Standard & Poor's credit rating for Philippines stands at BBB+ with stable outlook.
China - A+
Germany - AAA
Hongkong - AA+
Indonesia - BBB
Peru - BBB+
AAA - Extremely strong capacity to meet financial commitments.
AA - Very strong capacity to meet financial commitments.
A - Strong capacity to meet financial commitments but susceptible to adverse economic
conditions and changes in circumstances.
BBB - Adequate capacity to meet financial commitments, but more subject to adverse
economic conditions.

CASE 3
BACKGROUND:
The corporation requires funds for its inventory, payment of salaries and wages,
payment of utilities, and other monthly operating expenses.

PROBLEM:
The company is experiencing a liquidity crisis.

ANALYSIS:
Property Corporation is having a liquidity crisis for its Operating Activities. Since the
case provides limited data, let us assume that it is a large and creditworthy corporation. Credit
ratings provide potential investors with information regarding the ability of the issuing firm to
repay the borrowed funds. On the other hand, even though the company is having a liquidity
crisis, it does not mean that it is going bankrupt. It is normal in corporations to have this kind
of problem since the patterns of their receipt from sales do not necessarily coincide with their
daily expenses. This kind of problem is the reason why there is a need for money markets. In
simple term, the need for money markets arises because the immediate cash needs of
individuals, corporations, and government do not necessarily coincide with their receipts of
cash, and at the same time, some individuals, corporations, and government have temporary
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idle cash that they wish to invest in a safe and interest-bearing asset. Thus, in this case we are
suggesting that the corporation should approach the money market.

What is a money market and how to approach it?

Based on Investopedia, money markets at retail level, includes money market mutual
funds bought by individual investors and money market accounts opened by bank customers.
However, just because it is called "money" markets does not mean that the money and currency
are the ones being traded there, because the securities that do trade there are short-term and
highly liquid, which are close to being money.
Money market transactions do not take place in any one particular location or building.
Instead, traders usually arrange purchases and sales between participantsover the phone and
complete them electronically. Because of this characteristic, money market securities usually
have an active secondary market. This means that after the security has been sold initially,
it is relatively easy to find buyers who will purchase it in the future. An active secondary market
makes money market securities very flexible instruments to use to fill short-term financial
needs.
Another characteristic of the money markets is that they are wholesale markets. This
means that most transactions are very large. The size of these transactions prevents most
individual investors from participating directly in the money markets. Instead, dealers and
brokers, operating in the trading rooms of large banks and brokerage houses, bring customers
together. Flexibility and innovation are two important characteristics of any financial market,
and the money markets are no exception. Despite the wholesale nature of the money market,
innovative securities and trading methods have been developed to give small investors access
to money market securities.

Characteristics of Money Market:

1. Have an active secondary market.
2. Wholesale market: transactions are very large, they are for large denominations and
take place between financial institutions and companies rather than individuals. Thus,
the duty of broker and dealers
3. Not subject to more regulations and governmental costs than the bank.
4. Originate over the phone and issued at primary market.

The financial instruments that could be raise here are:

1. Commercial Paper
A. Commercial paper is defined as evidence of indebtedness of any person with a maturity
of 365 days or less.
B. The issuance of commercial paper needs to be registered with the SEC and, hence, is
considered a publicly offered instrument that requires a rating from a Philippine credit
rating agency. The 2015 SRC IRR introduced the requirement of an issuer credit rating
rather than a credit rating for each issuance.
C. Commercial paper is considered a deposit substitute; consequently, interest due from
commercial paper is subject to a 20% final withholding tax for residents and a 30%
final withholding tax for nonresidents.
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D. Commercial paper comprises mostly floating rate debt instruments issued by leading
companies. Commercial paper is actively used in the Philippine capital market. Prior
to the enactment of the new Documentary Stamp Tax Act in February 2004, the private
sector preferred issues of commercial paper as a substitute for corporate bonds. These
earlier forms of commercial paper had maturities of up to 7 years.

Advantages of Commercial Papers:

1. It is often use to raise working capital requirements by means of raising short-term
cash.
2. It is much cheaper to invest with than a bank loan.
3. It is an unsecured loan, thus, the assets of the company is not pledge to the investors.

Disadvantages of Commercial Papers:

1. It has no strong secondary markets.
2. It is only available to high and creditworthy corporation (usually blue chip and
profitable companies).

Meanwhile, since money market instruments have an active secondary market, this
instrument could also be raised in this case:

1. Treasury Bills
If the corporation have an investment in government securities like treasury bills, the
corporation could trade this in the secondary market. It is backed by the Philippine
government, that is why treasury bills are virtually default risk free. In fact, treasury bills are
often referred to as the risk-free asset and usually the basis for interest rates. Further, because
of their short-term nature and active secondary market, it have little interest rate risk and
liquidity risk.

Advantages of Treasury Bills

1. It is considered to have little or practically no risk attached. All things being equal, you
will definitely get your money back with the promised interest.
2. They are very liquid (i.e. you can easily convert them to cash). This is however not
encouraged, unless you are in very desperate need of cash. Note that if you decide to
go for your money (i.e. sell your treasury bills) before the time elapses, you will not be
paid the full promised amount. In order words, the investment will be discounted.
3. No transaction cost is charged. Unlike other forms of investment where you are charged
a fee by the broker who purchases them for you.

Disadvantage of Treasury Bills

1. The interest rates which are paid on this security are always lower than the other
investment options on the market.
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CASE 4
BACKGROUND
Incorporated in 2000, Dairy Corporation is one of the leading manufacturers and
marketers of dairy-based branded foods in India. In the initial years, its operation was restricted
only to collection and distribution of milk. But, over the years it has gained a reasonable market
share by offering a diverse range of cheese, ghee, milk powders, etc. In order to raise capital
to finance its expansion plans. Dairy Corporation has decided to approach capital market
through a mix of Offer for sale and a public issue of shares.
A. Name and explain the types of financial market being approached by the
company.
Types of Financial Markets
Based on Instruments Traded
•Money Market - is defined as dealing in debt of less than one year. It is a means for
governments and corporations to keep their cash flow steady, and for investors to make
a modest profit. Money market investments are characterized by safety and liquidity.

•Capital Market - is where the organized trading of securities and investments of more
than one year takes place. It serve buyers and sellers of equity and debt instruments.

Based on Market Type

•Primary Market - is where companies issue a new security, not previously traded on
any exchange. A company offers securities to the general public to raise funds to
finance its long-term goals. The primary market may also be called the New Issue
Market (NIM). In the primary market, securities are directly issued by companies to
investors. Securities are issued either by a Public Offering, Private placement, Auction,
and Tap Issue.

•Secondary Market - is where existing shares, debentures, bonds, etc. are traded among
investors. Securities that are offered first in the primary market are thereafter traded on
the secondary market. The trade is carried out between a buyer and a seller, with the
stock exchange facilitating the transaction. In this process, the issuing company is not
involved in the sale of their securities.

Based on Country’s Perspective

•Internal Market – refers to the financial market operating in a certain country.

•External Market – refers to financial market where securities are offered to investors
in different country and are issued outside the regulatory jurisdiction of any single
country.
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

ANALYSIS
Since the company intends to raise capital to finance its expansion plans, based on
instruments traded, they are using the capital market approach which relates to financial
instruments that will mature beyond one year from the issuance date for the purpose of
allocating funds to its most productive use. In comparison, Capital markets offer higher-risk
investments, while money markets offer safer assets; money market returns are often low but
steady, while capital markets offer higher returns, thus, it’s more efficient in allocating
resources for expansion plans. Based on market type, on the other hand, they are using Primary
Market since it is aforementioned in the preceding situation that they will be using a mixture
of Offer for sale and a public issue of share. Since these underlie to the Public Offering, the
company must first, undergo an initial public offering or IPO. Upon applying in an IPO, the
company must, first, comply with the requirements provided by the Securities and Exchange
Commission. Since Dairy Corporation is overtaking in India, they need to comply with the
necessary requirements provided by SEC India. Lastly, Based on Country’s Perspective, Dairy
Corporation is evidently inclined in Internal Market since they are operating within the vicinity
of India only.

B. Identify the possible financial instruments to be raised for this.

ANALYSIS:
Stocks, Debentures, Bonds and, Fixed Deposits.

CASE 5
BACKGROUND
Juana Dela Cruz’ grandmother who was unwell, called her and gave her a gift packet. Juana
opened the packet and saw many crumpled share certificates inside. Her grandmother told her
that they had been left behind by her late grandfather. As no trading is now done in physical
form, Juana wants to know the process by adopting which she is in a position to deal with these
certificates.

A. Identify and state the process mentioned above.

The process being mentioned above is Dematerialization. It is a process through which
physical securities such as share certificates and other documents are converted into electronic
format

B. Give at least two reasons why dealing with shares in physical form had been
stopped.
Dealing with shares in physical form has been stopped due to Fraud and Manipulation Risk.
Since signatures can be forged by unscrupulous persons and it is easily manipulated due to
lack of transparency.
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

CHAPTER 2 CASES
CASE 1
BACKGROUND
Gabriel won a cash prize of Php 20,000 in the National level Robotics Competition.
On the advice of his father, he visits a nearby bank to open a Fixed deposit account in his
name with the prize money. His sister Heart accompanied him to the bank. On reaching the
bank, he notices big banners which are placed within the premises containing information
about the various arrangements through which corporates may raise their capital through the
bank. Being a finance graduate, Heart explains to Gabriel that banks play the role of the
financial intermediary by helping in the process of channelizing the savings of the
households into the most profitable business ventures.

ANALYSIS
Aside from the bank , suggest other financial intermediaries that help in the process of
channelizing the savings of the households into the most productive to use.

Aside from banks, mutual fund and Insurance Companies may help Gabriel in the
process of channelizing his savings. Mutual Funds is a type of financial vehicle made up of
a pool of money collected from many investors to invest in securities such as stocks, bonds,
money market instruments, and other assets. Insurance Companies are business that
provides coverage, in the form of compensation resulting from loss, damages, injury,
treatment or hardship in exchange for premium payments. These two are possible alternatives
for banks but to know which is more advantageous, the pros and cons should be considered.

Advantages of Mutual Fund

1. Diversification. One golden rule of investing for both large and small investors is to
go for asset diversification. That involves reducing the risk to your assets by buying a
mix of stocks from different industries and investments of different types.
2. Economies of Scale. Mutual funds take advantage of their buying and selling volume
to reduce transaction costs for their investors.
3. Liquidity. An investor who is hit with a financial emergency might have to sell out in
a hurry. That can be disastrous if the assets have taken a hit at the wrong moment. It
tends to be less so in mutual funds, which swing in value less wildly because of their
diversification.
4. Professional Management. When you buy a mutual fund, you also are choosing
a professional money manager. This manager makes the decisions on how to invest
your money, based on a good deal of research and an overall strategy for making
money.
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Disadvantages of Mutual Fund

1. No Control Over Portfolio. Giving up the control to the portfolio and let the money
managers manage it.
2. Fees and Expenses. Some mutual funds may assess a sales charge on all purchases,
also known as a “load” – this is what it costs to get into the fund. Plus, all mutual
funds charge annual expenses, which are conveniently expressed as an annual
expense ratio – this is basically the cost of doing business.
3. Cash Drag. Mutual funds need to maintain assets in cash to satisfy investor
redemptions and to maintain liquidity for purchases. However, investors still pay to
have funds sitting in cash because annual expenses are assessed on all fund assets,
regardless of whether they’re invested or not.
Advantages of Insurance Banks
1. Guarantees. When you buy a segregated fund through a life insurance company,
there are typically guarantees of capital under two circumstances. The first is when
you die and the second is when you reach a 10-year maturity period.
Creditor Protection. Safeguarding assets from seizure by creditors is an important and
often overlooked aspect of asset management.
2. Probate Protection. When you have to probate an estate at death, there is the
potential for significant fees and time delays depending on the complexity and size of
the estate.
3. Covers Business Property. The insurance serves as the protection of the property of
someone who invest in an insurance bank.

Disadvantages of Insurance Banks

1. Opportunity Cost. Currently, life insurance is seen as a luxury in the market, which
means that we constantly think about what we could be spending the money on
elsewhere. If we didn’t have to pay premiums, we wonder where the extra money
could go.
2. Not Necessary. If you have no dependents or have money saved up for your final
expenses and burial costs with no other debts, life insurance isn’t necessarily a
must.
3. Lack of Trust. Finally, there are also people who lack the trust in the huge
corporations and they don’t want to give money away to a company that could
collapse at any moment.
After weighing the advantages and disadvantages of the two intermediaries, we are
suggesting that it will be better if Gabriel would invest in Mutual Fund since in mutual
fund, he can make money in three possible ways- income earned, increase in price of
securities and the increase in fund share price.
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Fund Provider/Lender and Financial Demander/Borrower:

A lender is an individual, a public or private group, or a financial institution that
makes funds available to another with the expectation that the funds will be repaid. In this
case, the fund provider/ lender is Gabriel for he has an excess fund available for lending out
to another party. The return he is expecting will be coming from the interests in loans and
credit cards made by the borrowers. On the other hand, borrowers are parties who are willing
to pay the required return to obtain additional funds to finance their investment initiatives. In
this case, the borrower will be a person, company or institution who obtains money or some
other asset (for example machinery, property) in the form of loan, mortgage or leasing
arrangement.

Financial Instrument
Gabriel is planning to open a fixed deposit account. A fixed deposit (FD) is a financial
instrument provided by banks which provides investors a higher rate of interest than a
regular savings account, until the given maturity date. This instrument is preferred by many
because of its return in form of interest.

Advantages of Fixed Deposit

 Returns are assured: Investment in fixed deposits gives you an assured return. The
returns are generally over and above the returns offered by a savings bank account.
However, returns vary as per the tenure of investments.
 Provide flexibility: FDs provide you with the flexibility of fixing your money over a
period of time. Yes, fixed deposits come up with n-numbers of tenure duration which
ranges from 7 days to 10 years.
 Risk managing instrument: Some of the instruments can give you higher returns but
are volatile in nature, like mutual funds, gold ETF’s, ULIP’s, etc. Therefore, it
becomes necessary to invest in debt instruments to adjust the market risk. FDs are the
best in managing that kind of risk when you are planning for long-term financial
goals of your life.

 Helps in liability crunch: Sometimes liabilities arise due to uncertainty and you may
have an urgency of having cash at that point in time. In those conditions, you can take
a loan against your fixed deposits.
Disadvantages of Fixed Deposit
 Reducing interest rates: Even though fixed deposits have a lot of advantages, the
interest rates do not move in line with inflation. This means in some cases, they may
actually earn less than the inflation rate. The interest rates for fixed deposits have
been falling in recent times which has reduced the attractiveness of this investment.
 Locked in funds: Fixed deposits lock in your funds for a fixed duration. These funds
are not available for you to use unless you withdraw the funds prematurely. Fixed
deposits are not at all liquid and cannot be converted into cash easily.
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

 Penalties on withdrawal: Banks charge penalty to the depositors who withdraw their
fixed deposits prematurely. This penalty is in the form of a reduced rate of interest.
 No tax benefit: The interest earned on fixed deposit is added to the taxable income of
the deposit holder. There is no deduction on any interest earned.
 Fixed interest rate: The rate of interest on a fixed deposit remains the same for the
entire duration of the fixed deposit. Even if the rates increase, the bank does not pay
additional interest to the deposit holder.

Financial Intermediaries
A mutual fund is a type of financial vehicle made up of a pool of money
collected from many investors to invest in securities such as stocks, bonds, money
market instruments, and other assets. Mutual funds are operated by professional
money managers, who allocate the fund's assets and attempt to produce capital gains
or income for the fund's investors. A mutual fund's portfolio is structured and
maintained to match the investment objectives stated in its prospectus.

How to Invest in Mutual Fund

Step 1: Decide whether you want to go active or passive
The biggest decision you'll need to make as a mutual fund investor is whether you
think active management is worth the extra price you'll pay. Unfortunately, a large
majority of actively managed mutual funds end up underperforming the major stock
market benchmarks, making it counterproductive to spend more money to invest in
them. However, a handful of fund managers have been able to demonstrate sustained
outperformance over the long run. If you're confident that those track records are
legitimate -- and that they'll continue -- then it can make sense to invest at least some
of your money actively in order to try to capture the prowess of superior fund
managers.
Step 2: Minimize fees
Regardless of which type of mutual fund you end up choosing, it always pays to
economize on costs. First and foremost, make sure that you don't pay an up-front
sales load on a mutual fund purchase, as doing so simply diverts a percentage of your
initial investment into your broker's wallet. Equally important but often overlooked is
the impact of high annual expenses. Paying more than 1% for an active fund makes it
very difficult for a fund even to match the performance of its benchmark, let alone
surpass it on a consistent basis. With index funds offering expense ratios of less than
0.1%, you don't have to pay a lot for mutual funds.
Step 3: Pick a diversified portfolio of funds
In buying mutual funds, it's important to look beyond the mere number of funds you
own and make sure that those funds actually own different investments. If you have
five mutual funds but they're all index-tracking funds that follow the S&P 500, then
you actually have no more diversification than you'd have owning a single fund.
Instead, look to buy mutual funds with different investments, such as stocks, bonds,
real estate investments, and other alternatives.
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Step 4: Find a family

With mutual funds, the cheapest way to set up accounts is directly with the fund
company that offers shares. Therefore, if you can find a company that offers a family
of funds that you like, then it makes things a lot easier, because you can make a single
deposit that gets divided into different funds on a regular basis
Step 5: Don't stop watching
Finally, even once you've selected and invested in a mutual fund, your job's not over.
You also need to monitor your mutual funds to make sure that everything continues to
run smoothly. If there's a change in investment management, you'll want to watch
closely to see if the new manager continues to do things as well as the old manager
did, especially for actively managed funds. With index funds, a change to a new
benchmark index could signal a shift in the performance of the fund, and you'll have
to decide whether that's consistent with your investment strategy going forward. Most
importantly, a rise in fees can signal a change in fund philosophy that you won't like.

Financial Market:
The financial market can be identified using either the instrument or country’s
perspective. The instrument used was fixed deposit account which can be a short-term or
long-term, this means the capital market could capital market or money market. And
assuming that Gabriel is a Filpino and lives in the Philippines, we considered also the
domestic market. This is a market where issuers who are considered residents in the country
issue the securities and where these securities are traded afterwards.

Regulatory Environment
The mutual fund is regulated by (SEC) Securities and Exchange Commission,
Information about the rules and governance of mutual funds can be found in a document
called prospectus. It is required by the SEC and should fully explain the fees, the objective,
the operations, and the market risks of each mutual fund. Mutual funds must also file regular
shareholder reports with the SEC. The following are some of the regulations used to govern
the mutual fund:

 The Investment Company Act of 1940. This act regulates mutual funds, as well as
other companies. It focuses on disclosures and information about investment
objectives, investment company structure, and operations.
 The Securities Act of 1933. This act requires that investors receive certain
significant information pertaining to securities that are offered for sale in the public
markets. It also prohibits fraud and misrepresentations in the sale of securities.
 The Securities Exchange Act of 1934. The Act of 1934 created the SEC. It
empowers the SEC with authority over the securities industry.
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

CASE 2
PROBLEM
Michael works as a waiter in a five-star hotel in Philippines. While serving the customer
he overhears him at the table saying that he has made profits higher than expected by
investing in securities market. So, Michael also decides to make a nominal investment from
his savings in the stock market in pursuit of higher gains.

Question 1:
A. As a financial consultant, discuss with him the steps involved in investing in the
securities market.

What is a financial consultant?

Financial consultants work for financial institutions or as self-employed professionals
helping clients manage their finances.
Financial consultants work with clients to develop individualized financial plans for
savings, retirement, investments and insurance. They spend much of their time marketing
their business and recruiting new clients. Many become both certified in financial planning
and licensed to sell financial products.

Financial Consultant Job Description

Financial consultants work with companies or individuals to plan for their financial
futures by offering information and guidance on topics that include taxes, investments and
insurance decisions. Often called financial advisors, these consultants work closely with
clients to offer personalized financial advice. Consultants may also direct the buying and
selling of stocks and bonds for their clients. Some consultants work for consulting firms that
focus on the financial needs of specific businesses or industries.

Duties of a financial consultant

1. Consultants meet personally with clients to assess their financial situation in order to
present a financial plan that includes both short- and long-term financial goals.
2. Consultants help clients with financial planning decisions for retirement, education, day-
to-day expenses and investments. They meet regularly with clients to assess how life changes
such as marriage, job change or the birth of a child will affect the client's financial plan.

3. Many consultants are licensed to buy and sell financial products such as insurance policies,
stocks and bonds.

4. Consultants may also offer financial planning classes or seminars to reach out to potential
clients.

Requirements
1. Financial consultants have a bachelor's or graduate degree in finance. Prospective financial
consultants earn degrees in finance, math, business or economics as preparation for the field.
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

2. Certifications, such as the Certified Financial Planner (CFP) credential help consultants
improve their professional standing and are looked on favorably by employers. The Certified
Financial Planner Board of Standards issues the certification, which requires applicants to
have three years of relevant experience and a bachelor's degree.

3. In addition, applicants must pass a comprehensive exam that covers key aspects of the
financial planning process.

4. Candidates for certification must adhere to a code of ethics and complete 30 hours of
continuing education every two years in order to remain current in the ever-changing field of
financial planning.

5. Consultants must be licensed and registered with their particular state and the Securities
Exchange Commission if they sell securities. The variety of licenses needed by financial
consultants depends on the products they wish to offer their clients. Those who sell insurance
products must also be licensed by a state board.

Security Markets
The securities market is an economic institute where sale and purchase transactions of
securities between subjects of economy take place according to demand and supply. These
can be broken down into different types based on what is being traded.
The primary function of the securities markets is to enable to flow of capital from those
that have it to those that need it. Securities market help in transfer of resources from those
with idle resources to others who have a productive need for them. Securities markets
provide channels for allocation of savings to investments and thereby decouple these two
activities. As a result, the savers and investors are not constrained by their individual
abilities, but by the economy’s abilities to invest and save respectively, which inevitably
enhances savings and investment in the economy.

Types of Securities Market

1. Primary Market
The primary market is a market, where occurs an initial offering of stocks. The
initial offering can be either private or public (IPO -initial public offering). In the first
case, the stocks are bought by certain number of persons without the disclosure of
financial information. In the second case, the offering takes places through intermediaries
with published financial indicators.
2. Secondary Market
The secondary market is a market, where the already issued stocks are being resold.
The main participants of the market are speculators, who make money on the difference
between the buying and selling prices of stocks.
3. Government securities market
It is a market of circulation of government debt securities issued mainly for the
repayment of the deficit of the state budget or government projects.
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

4. Derivatives Market
A market of derivative securities with delayed execution of transactions.

What is a Security?
A security is a financial instrument, typically any financial asset that can be traded. The
nature of what can and can’t be called a security generally depends on the jurisdiction in
which the assets are being traded.

Types of Securities
1. Equity securities
Equity almost always refers to stocks and a share of ownership in a company (which is
possessed by the shareholder). Equity securities usually generate regular earnings for
shareholders in the form of dividends. An equity security does, however, rise and fall in
value in accord with the financial markets and the company’s fortunes.

2. Debt securities
Debt securities differ from equity securities in an important way; they involve borrowed
money and the selling of a security. They are issued by an individual or company and sold to
another party for a certain amount, with a promise of repayment plus interest. They include a
fixed amount (that must be repaid), a specified rate of interest, and a maturity date (the date
when the total amount of the security must be paid by).
Bonds, bank notes (or promissory notes), and Treasury notes are all examples of debt
securities. They all are agreements made between two parties for an amount to be borrowed
and paid back – with interest – at a previously-established time.

3. Derivatives
Derivatives are a slightly different type of security because their value is based on an
underlying asset that is then purchased and repaid, with the price, interest, and maturity date
all specified at the time of the initial transaction.
The individual selling the derivative doesn’t need to own the underlying asset outright.
The seller can simply pay the buyer back with enough cash to purchase the underlying asset
or by offering another derivative that satisfies the debt owed on the first.
A derivative often derives its value from commodities such as gas or precious metals
such as gold and silver. Currencies are another underlying asset a derivative can be structured
on, as well as interest rates, Treasury notes, bonds, and stocks.
Derivatives are most often traded by hedge funds to offset risk from other investments.
As mentioned above, they require the seller to own the underlying asset and may only require
a relatively small down payment, which makes them favorable because they are easier to
trade.
Steps involved in investing in Securities Market
STEPS IN INVESTING IN SECURITIES MARKET:
(WITH THE HELP OF FINANCIAL CONSULTANT)
1. Decide how you want to invest in stocks.
2. Open an investing account.
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

3. Know the difference between stocks and stocks mutual funds.

4. Start investing.
5. Keep in mind that investing is risky and the money that he will invest is something he is
willing to give up.
Process
● Investors must first open an account in brokerage firms (BDO Nomura, BPI Trade) which
are the intermediary companies between the stock exchange and the investors.
● Once the account is opened, investors fund the account so they can buy stocks.
● Stock exchange efficiently executes multiple orders from different brokerage companies in
accordance with the fixed rule.
●The transaction is executed safely and investors settle their trades through the brokerage
companies.
How much money you will need to buy stocks?
For the newbies and starters, some online brokers offer easy investment and trading
options for as low as P5000.
The 4 Golden Rules
Discipline and the right methodology is the key to a successful stock investment program.
Understand and adopt these four essential rules of thumb to keep you on track.
1. Invest EARLY
2. Invest REGULARLY
3. Invest LONG TERM
4. Invest using DIVERSIFICATION

Question 2:

B. Discuss also with him, other alternatives where he can invest his savings, the process
and which financial intermediaries they can go to.

Answer: Aside from securities market, Michael can also invest in an investment bank.
An investment bank is a financial intermediary that specializes primarily in selling
securities and underwriting the issuance of new equity shares to raise capital funds.

How it works:

Investment banks mediate between companies that issue securities and the individuals
or entities wishing to purchase them. In this respect, investment banks operate along two
main lines: a "buy" side and a "sell" side. "Buy" side operations include services such as
securities trading and portfolio management. "Sell" side activities include underwriting new
lines of stock, marketing financial products, and publishing financial research. The
investment bank can earn from this service through commissions when they act as a broker
or dealer for a transaction.
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

CASE 3

BACKGROUND:
He finalizes a deal to buy a new house. So, he visits a nearby branch of a commercial
bank and withdraw from his account in order to pay the token money to the seller. A large
number of customers are present to make cash withdrawals.

PROBLEM:
The bank is likely to fall short of cash for that day.

OPTION GIVEN IN THE CASE:

In order to make up for the deficit and maintain its cash reserve ratio, it will have to
approach another bank.

ANALYSIS:
The option given in the case can be considered since bank to bank borrowing is not
uncommon in the financial system. Usually, retail banks approach the central bank, Bangko
Sentral ng Pilipinas, to make amends on their cash shortage. Since retail banks are maintaining
cash reserves in the central bank, issuance of financial instruments like repurchase agreement
is one of the best option that a commercial bank could avail.

What is repurchase agreements?

Repurchase agreements are used by money market funds to invest surplus funds on a
short term basis and by dealers as a key source of funding that is the economic equivalent of
secured funding for their counterparty. Securities dealers use these transactions to manage their
liquidity and finance their inventories. While repurchase agreements are commonly held within
money market funds as short-term, mostly as overnight investments, a cash investor might look
to invest cash for a more customized period of time to fulfil a specific investment need. Since
repurchase agreements are short term and considered relatively safe due to the transaction
being the economic equivalent of a collateralized transaction, rates remain competitive for all
investors.

The Trading Process for Repurchase Agreements:

1. Repurchase agreements are arranged either directly between two parties or with the help of
brokers and dealers. The repo buyer, arranges to purchase funds from the repo seller, with an
agreement that the seller will repurchase the funds within a stated period of time—one day or
three to six months.

2. The repo is collateralized with treasury bond. In most repurchase agreements, the repo buyer
acquires title to the securities for the term of the agreement.

3. Once the transaction is agreed upon, the repo buyer, instructs its district Reserve Bank to
transfer cash in excess reserves, to the repo seller’s reserve account. The repo seller, instructs
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

its district Reserve Bank to transfer cash from its treasury bomd account to the repo buyer’s
treasury bond account.

4. Upon maturity of the repo, these transactions are reversed. In addition, the repo seller
transfers additional funds (representing one day’s interest) from its reserve account to the
reserve account of the repo buyer.

Advantages of Repurchase Agreements:

1. A repo is a secured loan.
2. They are safe investments because the underlying security has a value in the market
which serves as collateral for the transaction.
3. The underlying security is being sold as collateral hence it serves the purpose for both
the lender and the borrower.
4. If the borrower defaults to repay, the lender can sell the security.
5. It is secured funding for the lender and easy liquidity for the borrower.

Disadvantages of Repurchase Agreements:

1. Repos are subject to counterparty risk even though the collateral provides the
protection.

2. In case of a counterparty default, the loss is uncertain. It can be determined only after
the proceeds generated after the sale of the underlying security along with its accrued
interest falls below the amount specified in the repurchase agreement.
3. If the counterparty becomes bankrupt or insolvent, the lender may suffer a loss of
principal and interest.