FINANCIAL MARKETS

Terms in Life Insurance Use: Avoidable through timely premium payments or grace Financing Companies
periods.
1. Policy Terms 1. Loan Terms
2. Claims-Related Terms
Policyholder: The individual who owns the life insurance
policy. Death Benefit: The lump sum paid to the beneficiary when 1. Principal
the insured dies. Definition: The original amount of money borrowed
Use: Responsible for paying premiums and naming or invested, excluding interest.
beneficiaries. Use: Provides financial security to loved ones.
Relevance: Basis for interest calculation and
Insured: The person whose life is covered by the policy. Contestability Period: A period (usually 2 years) during repayment schedules.
which the insurer can investigate and deny claims due to
Use: The basis for the insurance; triggers benefits upon their misrepresentation or fraud. 2. Interest Rate
death.
Definition: The percentage charged on the
Use: Protects the insurer from false applications.
Beneficiary: The person(s) or entity designated to receive principal amount over a period.
the death benefit. Grace Period: Extra time (often 30 days) to pay overdue
premiums before the policy lapses. Relevance: Determines the cost of borrowing or
Use: Provides financial support to dependents or other return on investment.
chosen recipients. Use: Helps policyholders avoid losing coverage due to
missed payments. 3. Term
Premium: Regular payment made to keep the policy active. Definition: The duration for which a loan is
Claimant: The person filing a claim for the death benefit. granted.
Use: Ensures coverage remains in effect; calculated based
on risk factors like age and health. Use: Ensures benefits are Aid to the rightful recipient. Relevance: Affects repayment schedules and
interest paid over time.
Face Amount (or Coverage Amount): The total amount Settlement Options: Choices for receiving the death benefit
payable to the beneficiary upon the insured’s death. (e.g., lump sum, annuities).
4. Amortization
Use: Serves as the primary financial protection provided by Use: Allows beneficiaries to tailor payouts to their needs. Definition: The process of spreading loan
the policy. payments over time, typically into equal
installments.
Term: The length of time the policy is in effect (e.g., 10, 20,
or 30 years). 3. Financial and Regulatory Terms Relevance: Helps borrowers understand payment
breakdown between principal and interest.
Use: Determines the duration of coverage for term life Underwriting: The process of evaluating risk and
insurance policies. determining premiums. 5. Balloon Payment:
Definition: A large, final payment due at the end of
Cash Value: A savings component in certain life insurance Use: Ensures policies are priced appropriately.
a loan term.
policies (e.g., whole life) that grows over time.
Reinsurance: Insurance purchased by the insurer to
manage large risks. Relevance: Common in loans with lower regular
Use: Can be borrowed against, withdrawn, or used to pay
payments.
premiums.
Use: Protects insurers from excessive claims payouts.
Rider: Optional add-ons to a life insurance policy for
Dividend: A share of surplus profits distributed to 2. Credit and Risk Terms
additional benefits (e.g., disability waiver, accidental death).
policyholders in participating policies.
6. Creditworthiness:
Use: Enhances the policy’s value and customizes coverage.
Use: Rewards policyholders with additional benefits or cash. Definition: An assessment of a borrower’s ability to
Surrender Value: The amount received by the policyholder repay a loan.
if they terminate the policy early. Use: Reflects the cash Free-Look Period: A period (e.g., 10–30 days) during which
value minus applicable fees. a policyholder can cancel the policy for a full refund. Relevance: Key factor in approval decisions and
interest rate determination.
Lapse: The termination of a policy due to non-payment of Use: Ensures satisfaction and reduces buyer’s remorse.
premiums.
 FINANCIAL MARKETS
7. Credit Score: MUTUAL FUND
Definition: A numerical representation of a 14. Working Capital Loan:
borrower’s credit history and reliability. Definition: Short-term financing to cover day-to- A mutual fund is a professionally managed type of collective
day operational expenses. investment scheme that pools money from many investors to
Relevance: Used to evaluate loan eligibility and buy stocks, bonds, short- term money market instruments,
terms. Relevance: Helps businesses manage liquidity and/ or other securities.
issues.
8. Collateral: CONCEPT
Definition: An asset pledged by the borrower to 15. Invoice Financing:
A Mutual Fund is a trust that pools the savings of a number
secure a loan. Definition: A loan based on unpaid customer
of investors who share a common financial goal.
invoices.
Relevance: Reduces lender risk and may lower The money thus collected is then invested in capital. Market
interest rates. Relevance: Improves cash flow without waiting for instruments such as shares, debentures and other securities
customer payments
9. Default: The income earned through these investments and the
Definition: Failure to repay a loan as agreed. 4. Payment Terms capital appreciation realized are shared by its unit holders in
proportion to the number of units owned by them.
Relevance: Triggers penalties, legal action, or 16. Installment Loan:
asset seizure. Definition: A loan repaid in fixed, regular payments Thus, a Mutual Fund is the most suitable investment for the
over a specified term. common man as it offers an opportunity to invest in a
10. Debt-to-Income Ratio (DTI): diversified, professionally managed basket of securities at a
Definition: The ratio of a borrower’s monthly debt Relevance: Common for auto loans, mortgages, relatively low cost.
payments to their income. and personal loans.

Relevance: Indicates a borrower’s financial health 17. Revolving Credit:

TYPES OF MUTUAL FUNDS SCHEMES
and ability to handle additional debt. Definition: A credit arrangement where funds are
re-accessible after repayment. By Structure

Relevance: Examples include credit cards and • Open-Ended-anytime enter/exit

3.Financing Types lines of credit. • Close-Ended Schemes – listed on exchange,
redemption after period of scheme is over.
18. Prepayment
11. Secured Loan: Definition: Early repayment of a loan, partially or in By Investment Objective
Definition: A loan backed by collateral. full.
• Equity (Growth) -only in Stocks-Long Term (3
Relevance: Offers lower interest rates but risks Relevance: May incur penalties or save on interest years or more)
asset loss upon default. costs. • Debt (Income) – only in Fixed Income Securities
(3-10 months)
12. Unsecured Loan: 19. Late Fee: • Liquid/Money Market (including gilt) – Short-term
Definition: A loan without collateral, based solely Definition: A penalty charged for missing a Money Market (Govt.)
on creditworthiness. scheduled payment. • Balanced/Hybrid-Stocks + Fixed Income Securities
(1-3 years)
Relevance: Higher risk for lenders, leading to Relevance: Encourages timely repayment.
Other Schemes
higher interest rates.
20. Refinancing:
Definition: Replacing an existing loan with a new • Tax Saving Schemes
13. Line of Credit:
one, often to secure better terms. • Special Schemes
Definition: A flexible loan where borrowers can
draw up to a maximum limit as needed.
Relevance: Helps reduce interest costs or extend
Relevance: Useful for managing cash flow or repayment terms.
emergency expenses.
 FINANCIAL MARKETS
REASONS TO INVEST CREDIT RISK: The debt servicing ability of a company Life Insurance
through its cash flows determines the Credit Risk faced by
EXPERT ON YOUR SIDE: When you invest in a mutual you. Life insurance policies come in many forms. Some
fund, you buy into the experience and skills of a fund of the typical policies include:
manager and an army of professional analysts Inflation Risk: Inflation is the loss of purchasing power over
time. Term Life: the insured is covered while the policy
LIMITED RISK: Mutual funds are diversification in action is in effect, usually 10-20 years.
and hence do not rely on the performance of a single entity. INTEREST RATE RISK: In a free-market economy interest
rates are difficult if not impossible to predict. Whole Life: similar to term life, but allows the
MORE FOR LESS: For the price of one blue chip stock for policyholder to borrow against the policies cash value. When
instance, you could get yourself a number of units across a POLITICAL/GOVERNMENT POLICY RISK: Changes in the term of policy expires, the insured can get the cash value
number of companies and industries when you invest in a government policy and political decision can change the of the policy.
fund! investment environment.
Universal Life: includes both a term life portion and
EASY INVESTING: You can invest in a mutual fund with as LIQUIDITY RISK: Liquidity risk arises when it becomes a savings portion.
little as Rs. 5,000. Salaried individuals also have the option difficult to sell the securities that one has purchased.
of investing in a monthly savings plan. • Annuities: pays a benefit to the insured until
death, to cover retirement years.
CONVENIENCE: You can invest directly with a fund house,
or through your bank or financial adviser, or even over the Insurance Companies and Pension Funds Health Insurance
internet.
Insurance Companies Health insurance policies are highly vulnerable to
INVESTOR PROTECTION: A mutual fund in India is the adverse selection problem. Those with known or
registered with SEBI, which also monitors the operations of • Insurance companies assume the risk of their clients in expected health problems are more likely to seek coverage.
the fund to protect your interests. return for a fee, called the premium.
This is why most health insurance is offered
QUICK ACCESS TO YOUR MONEY: It’s good to know that • Most people purchase insurance because they are risk- through group policies. Individual policies must be priced
should you need your money at short notice, you can usually averse-they would rather pay a certainty equivalent (the assuming adverse selection.
get it in four working days premium) than accept a gamble
Property and Casualty Insurance
TRANSPARENCY: As an investor, you get updates on the
value of your units, information on specific investments Property Insurance: protects businesses and owners from
Fundamentals of Insurance the risk associated with ownership.
made by the mutual fund and the fund manager’s strategy
and outlook. Another problem is that most people don’t purchase enough • Named-peril policies: insures against any losses
insurance. Insurance companies use a strong sales force to only from perils specifically named in the policy
LOW TRANSACTION COSTS: A mutual fund, by sheer
combat this. • Open-peril policies: insures against any losses
scale of its investments is able to carry out cost-effective
brokerage transactions. except from perils specifically named in the policy
• Independent agents may sell the insurance
products of a number of different insurance
TAX BENEFITS: Over the years, tax policies on mutual
companies. Property and Casualty Insurance
funds have been favorable to investors and continue to be
• Exclusive agents only sell the products of one
so.
company. • Casualty Insurance: also known as liability insurance, it protects
• An underwriter reviews each policy prior to its against financial losses because of a claim of negligence.
•
acceptance to determine if the risk is acceptable. Reinsurance: allocates a portion of the risk to another company in
RISK FACTORS OF MUTUAL FUNDS exchange for a portion of the premium.
Types of Insurance
THE RISK-RETURN TRADE-OFF: The most important
relationship to understand is the risk-return trade-off. Higher Insurance is classified by which type of undesirable event is
the risk greater the returns/loss and lower the risk lesser the covered:
returns/loss.
• Life Insurance
MARKET RISK: Sometimes prices and yields of all • Health Insurance
securities rise and fall. Broad outside influences affecting the • Property and Casualty Insurance
market in general lead to this.
 FINANCIAL MARKETS
PENSIONS COMMERCIAL BANKS Commercial Banks have traditionally been located
in buildings where customers come to use teller window
Definition: A pension plan is an asset pool that accumulates The term commercial bank refers to a financial services and automated teller machines (ATMs) to do their
over an individual’s working years and paid out during institution that accepts deposits, offers checking account routine banking. With the rise in internet technology, most
nonworking years. services, makes various loans, and offers basic financial banks now allow their customers to do most of the same
products like certificates of deposit (CDs) and savings services online that they could do in person including
Also became popular as life expectancy increased. accounts to individuals and small businesses. transfers, deposits, and bill payments.
Commercial banks make money by providing and Significance of Commercial Banks
earning interest from loans such as mortgages, auto loans,
Types of Pensions business loans, and personal loans. Customer deposits Commercial banks are an important part of the
provide banks with the capital to make these loans. economy. Not only do they provide consumers with an
Defined-Benefit Pension Plans place a burden on the
essential service, but they also help create capital and
employer to properly fund the expected retirement benefit KEY TAKEAWAYS liquidity in the market.
payouts.
Commercial banks offer consumers and small to mid-sized They ensure liquidity by taking the funds that their
• Fully funded: sufficient funds are available to meet businesses with basic banking services including deposit customers deposit in their accounts and lending them out to
payouts accounts and loans. others. Commercial banks play a role in the creation of
• Overfunded: funds exceed the expected payout
credit, which leads to an increase in production,
• Underfunded: funds are not expected to meet the Commercial banks make money from a variety of fees and employment, and consumer spending, thereby boosting the
required benefit payouts by earning interest income from loans economy.
Defined-Contribution Pension Plan: a plan where a set Commercial banks have traditionally been located in Commercial banks are heavily regulated by a
amount is invested for retirement, but the benefit payout is physical locations, but a growing number now operate central bank in their country or region for instance
uncertain. exclusively online. requirements on commercial banks. This means banks are
Private Pension Plans: any pension plan set up by required to hold a certain percentage of their consumer
Commercial banks are important to the economy because
employers, groups, or individuals deposits at the central bank as a cushion if there’s a rush to
they create capital, credit, and liquidity in the market.
withdraw funds by the general public.
Public Pension Plan: any pension plan set up by a How Commercial Banks Works
government body for the general public (e.g., Social Bank Sources of Funds
Security) Commercial Bank provide basic banking services
and products to the general public, both individual • Deposit Accounts
consumers and small to mid-sized businesses. These • Transaction Deposits
services include checking and savings accounts, loans and • Bank Sources of Funds
Social Security mortgages, basic investment services such as CDs, as well • Time Deposits
as other services such as safe deposit boxes. • Money market deposit accounts
• Pay as you go system, where current funding is
used (partially) to pay current benefits. Banks make money from services charges and Borrowed Funds
• Projected number of workers is falling while fees. These fees vary based on the products, ranging from
projected number of retirees is increasing, which account fees (monthly maintenance charges, minimum • Federal Funds purchased
will cause problems in years to come if not balance fees, overdraft fees, non-sufficient funds (NSF) • Repurchased agreements
corrected. charges), safe deposit box fees, and late fees. Many loan • Eurodollar borrowings
• It’s difficult to measure the health of the social products also contain fees in addition to interest charges.
security system. Many factors are hard to predict, Long term sources of Funds
such as birth rates and the rate of immigration. Banks also earn money from interest they earn by
lending out money to other clients. The funds they lend • Bond issued by the bank
Although it may not fail, it’d be wise for you plan
other sources for your retirement cash flows. comes from customer deposits. However, the interest rate • Bank capital
paid by the bank on the money they borrow is less than the
What is Transaction Deposit
rate charged on the money they lend. For instance, a bank
may offer savings account customers an annual interest rate Transaction deposits that has immediate and full liquidity,
of 0.25%, while charging mortgage clients 4.75% in interest with no delays or waiting periods. Transaction deposits can
annually. be used for other transactions at the request of the account
holder.
 FINANCIAL MARKETS
A checking account, for example, is a common transaction Time deposits generally pay a slightly higher rate of interest Here is the full list of the Philippine Commercial Banks:
deposit account and the account holder is allowed to than a regular savings account. The longer the time to
withdraw the amount at any time. maturity, the higher the interest payment will be. Another BDO Unibank, Inc.
name for this type of investment is term deposit. Metropolitan Bank and Trust Company
TAKEAWAY (Metrobank)
KEY TAKEAWAYS: Bank of the Philippine Islands (BPI)
A transaction deposit is a deposit made to a transaction Land Bank of the Philippines
account, such as checking account A time deposit is an interest-bearing bank account that has a Philippine National Bank (PNB)
date of maturity, such as a certificate of deposit (CD). Security Bank Corporation (Security Bank)
Transaction accounts are liquid, so the money that has been Maybank Philippines, Inc.
deposited is available instantly upon request. The money in a time deposit must be held for the fixed term Robinsons Bank Corporation
to receive the interest in full Philippine Bank of Communications (PBCom)
Non-transaction accounts, by comparison, are not fully
Mizuho Bank, Ltd. Manila Branc
liquid. Withdrawals of non-transaction deposits may require
MUFG Bank, Ltd.
some notice or a waiting period.
KEY TAKEAWAYS: BDO Private Bank (subsidiary of Banco de Oro)
What is Savings Account Standard Chartered Bank Philippines
Deutsche Bank
A saving account is an interest-bearing deposit account held Philippine Veterans Bank (Veterans Bank; PVB
at a bank or other financial institution. Though these Typically, the longer the term, the higher the interest rate that
accounts typically pay a modest interest rate, their safety the depositor receives.
and reliability make them a great option for parking cash you
want available for short-term needs. Time deposits are an extremely safe investment but they
have a low rate of return.
Savings Accounts have some limitations on how often you
can withdraw funds, but generally offer exceptional flexibility
that's ideal for building an emergency fund, saving for a
What Is the Eurodollar?
short-term goal like buying a car or going on vacation, or
simply sweeping surplus cash you don't need in your The term Eurodollar refers to Us. dollar-denominated
checking account so it can earn more interest elsewhere. deposits at foreign banks or at the overseas branches of
American banks. Because they are held outside the United
TAKEAWAYS
States, Eurodollars are not subject to regulation by the
Because savings accounts pay interest but keep your funds Federal Reserve Board, including reserve requirements.
easy to access, they’re a good options parking cash you'll Dollar-denominated deposits not subject to U.S. banking
want in the short-term or to cover an emergency. regulations were originally held almost exclusively in Europe
(hence, the name Eurodollar). Now, they are also widely held
In exchange for the ease and liquidity that savings accounts in branches located in the Bahamas and the Cayman Islands
offer, you'll earn a lower rate than more restrictive savings
instruments and investments might pay.

The amount you can withdraw from a savings account is KEY TAKEAWAYS:
generally unlimited.
Eurodollars refer to dollar-denominated accounts at foreign
The interest you earn on a savings account is considered banks or overseas branches of American banks The
taxable income. Eurodollar market is one of the world's biggest capitals
markets and consists of sophisticated financial instruments.
What Is a Time Deposit?

A time deposit is an interest-bearing bank account that has a

pre-set date of maturity. A certificate of deposit (CD) is the
best- known example. The money must remain in the
account for the fixed term in order to earn the stated interest
rate.
FINANCIAL MARKETS