BANK ACCOUNTS AND CREDIT

SECURITIES

Lesson 2:
FM 42 Investment and Portfolio
Management
 It is always advisable for an entity or an
individual to adopt defensive investing, that
is, have part of his funds invested safely and
for fixed income. This may be realized by
maintaining bank accounts and acquiring
credit securities such as bonds and treasury
bills.

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 Bank accounts may be in the form of
savings account, time deposits and special
savings deposit or premium savings
accounts.
 Upon opening a bank account, one becomes
a lender to the bank. The latter treats the
account as a liability and includes it as such
in its balance sheet.
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Factors to consider when opening a bank
account:
1. Minimum balance required
2. Interest rate or rates
3. Limitations as to withdrawals
4. The bank’s reputation
5. Insurance

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 Current account (checking account) is a
type of bank account from which
withdrawals are made by issuing checks,
and deposits are made with the use of
deposit slips.
 Savings account is a type of bank account
wherein deposits thereto and withdrawals
therefrom can be made anytime.
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 Time deposits is a loan to a bank for a fixed
term. These are evidenced by certificates of
time deposits.
 Trust investment or common trust fund
refers to cash entrusted to a trustee bank for
investment in chosen items such as treasury
bills, loans, stocks and bonds for the benefit
of the designated beneficiary.
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Securities
 Securities are written evidences of
ownership, interest, or participation, in an
enterprise, or written evidences of
indebtedness of a person or enterprise.

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Classifications of Securities Market
 Based on maturity of securities:
1. Money market refers to the trading of short-
term securities. These are near-cash securities
on the part of the investors and those
maturing within three months, as cash
equivalents.
2. Capital market refers to the trading of long-
term securities.

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Classifications of Securities
Market
 Based on who is the seller:
1. Primary market. The seller is the issuing
party. The proceeds from the sale of securities
go to the issuing corporation.
2. Secondary Market. The seller is a party
other than the issuing entity. The proceeds
from sale of securities do not go to the issuing
corporation.
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 Credit securities are evidences of
indebtedness issued by an entity as a
vehicle in borrowing from the public. Upon
their issuance, they evidence the transfer of
financial resources from a lender to a
borrower.
1. Commercial papers
2. Commercial bonds
3. Government securities ( treasury bills &
bonds
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Factors to consider in Investing in Credit
Securities
1. Interest rate
2. Date of maturity
3. Value of security
4. Yield on the security
5. Credit rating of the issuing party

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 Commercial papers are promissory notes
issued by big firms of unquestionable credit
standing and reputation.
 It may be short-term or long-term. In times
of rising interest rates, entities issuing
commercial papers prefer to sell them on
the long-term basis and vice versa.

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 Interest rate are one or two percent lower
than the prime bank lending rate during
normal times.
 Prime rate refers to the interest charged by
banks to their most important and reliable
business borrowers.

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 Bond is a certificate of indebtedness with a
fixed interest rate and maturity date. It is a
formal and unconditional promise, made under
seal, to pay a specified sum of money at a
determinable future date and to make periodic
interest payments at a stated rate until the
principal amount is paid.
 Bond indenture is the written agreement on
bond issues between the issuing party and the
bondholder.

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Classifications of
As to issuing party:
1. Government bonds- issued by government
unit
2. Commercial bonds- issued by a private
corporation

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 As to security
1. Mortgage bonds- secured by lien on real property
2. Equipment trust bonds- secured by equipment of
the corporation
3. Collateral trust bonds- secured by securities
invested in by the issuing company.
4. Debenture bonds- secured by all of the free assets
of the issuing company so that in effect they are
not secured by any specific asset
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 As to maturity of principal:
1. Straight bonds- the entire principal will mature at one
time
2. Serial bonds- the principal matures in installments
3. Convertible bonds- they can be exchanged for other
securities of the company at the option of the bondholder
4. Callable or redeemable bonds-they can be called,
redeemed or retired by the issuing company before
maturity date
5. Noncallable or non-redeemable bonds- they are not
subject to calls or redemption before maturity date
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 As to transferability:
1. Bearer bonds- they can be transferred to other parties by mere
delivery because bondholders are not registered in the books of the
issuing entity.
2. Coupon bonds- interest coupons are attached to the bond certificate
and interest is paid to the holder of the said coupons.
3. Registered bonds- they are registered in the books of the issuing
entity so that they can be transferred to other parties only upon
surrender of the bond certificate to the issuing entity or its transfer
agent.
a. Registered as to principal only. Interest is paid to any party
who presents interest coupons.
b. Registered as to both principal and interest. Interest is paid only to
the party whose name appears as bondholders in the books of the issuing
entity

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 Zero coupon bonds are those on which
there is no periodic payment of interest.
 Junk bonds are high yielding bonds issued
by companies with very low credit rating so
that there is higher risk from default in the
payment of interest and principal.

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Bond Quotations: Premium and Discounts
 Bonds are quoted in terms of percentage at
par or face value.
 Bonds are selling at a premium when they
are quoted more than 100% of their par
value.
 If they are selling at less than par or face
value, they are selling at a discount.

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Effective Rate on Short-Term Bond
Investment
 When an investor has no intention of
holding on to bonds beyond one year, the
yield thereon is computed by dividing the
annual interest by purchase cost.
 Effective interest= Interest/Purchase Cost
The effective rate is higher than interest rate if
the bonds are purchased at a discount.

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Bonds as Long-Term Investment; Yield and
Bond Value
 Yield on bonds refers to the effective rate at which an
investor is earning on his investment. It also used to refer
to the increase in value of an investment.
 Bond value refers to the price at which investors would be
willing to buy so that they can realize their desired yield
on or rate of return from the investment.
Bond value= present value + present value of
annual interest redemption price at maturity
date

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Effects of Purchase Price on
Bond Yield
 Bonds acquired at Face Value. If the bonds are
acquired at face value or at 100, the yield thereon
must be equal to the nominal rate of interest.
 Bonds acquired at a Discount. When the bonds are
acquired at a discount, the yield thereon is higher
than the nominal rate.
 Bonds acquired at a Premium. When the bonds are
acquired at a premium, the yield thereon is lower
than the nominal rate.
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 Government securities are debt instruments
issued by the government.
 Treasury bills (T-bills) are government
securities that mature in less than a year.
 Treasury bonds are government securities
that mature beyond one year.

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