Module 3 - Level 1 Investments PDF

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Valuation Concepts and Methods Level 1 Investments MODULE 3 Level 1 Investments Reference:  PSE  Investopedia  Bloomberg INTRODUCTION Investments, for them to be valued, has to be assessed as to what level they belong. Different levels call for different valuation basis and method. For this lesson, we will focus on the level 1 investments. Learning Outcomes: After completing this module, students should be able to: 1. Be familiar of the common financial terms used. 2. To know more about the level 1 investments and how they are valued.

COMMON FINANCIAL TERMS:  Trade date o The date that a contractual obligation to buy or sell the instrument is made  Settlement date o The date that cash transfers to settle a buy or sell transaction  Mark-to-Market o

An adjustment to the value of a financial instrument from the previous value to the current value.

 Bid price o The price which buyers are willing to pay for a particular financial instrument  Ask price o The price that sellers are willing to sell a particular financial instrument  Mid price o In between the bid and ask prices  Last trade price o The final price at which a security is traded on a given trading day

Valuation Concepts and Methods Level 1 Investments  What Are Level 1 Assets? Level 1 assets include listed stocks, bonds, funds, or any assets that have a regular mark-to-market mechanism for setting a fair market value. These assets are considered to have a readily observable, transparent prices, and therefore a reliable fair market value.  Level 1 assets are liquids financial assets and liabilities, such as stocks or bonds, that experience regular market pricing.  Level 1 assets are the top classification based on their transparency and how reliably their fair market value can be calculated.  Level 2 and 3 assets are less liquid and more difficult to quickly and correctly ascertain their fair value.  Understanding Level 1 Assets Publicly traded companies must classify all of their assets based on the ease that they can be valued, with Level 1 assets being the easiest. A big part of valuing assets comes from market depth and liquidity. For developed markets, robust market activity acts as a natural price discovery mechanism. This, in turn, is a core element to market liquidity, which is a related gauge measuring a market’s ability to purchase or sell an asset without causing a significant change in the asset’s price.  Advantages of Level 1 Assets Level 1 assets are one way to measure the strength and reliability of an entity’s balance sheet. Because the valuation of Level 1 assets is dependable, certain businesses can enjoy incremental benefits relative to another business with fewer Level 1 assets. For example, banks, investors, and regulators look favorably on an entity with a majority of assets that have a market-based valuation because they can rely on supplied financial statements. If a business heavily uses derivatives and a majority of its assets fall into the Level 2 or 3 category, then interested parties are less comfortable with the valuation of these assets. The issue with assets outside Level 1 is best displayed during times of distress. Naturally, during a volatile market, liquidity and market depth erode and many assets will not enjoy a reasonable price discovery mechanism. These assets then need to be valued by appraisals or according to a model.

Valuation Concepts and Methods Level 1 Investments Both of these are less than perfect methods, so investors and creditors often lose confidence in reported valuations. During periods of peak uncertainty, such as during the depths of the Great Recession, Level 3 assets are especially scrutinized—with pundits calling mark-to-model methods more like mark-to-myth.

 Valuing Level 1 Assets o For Philippine setup, the Philippine Stock Exchange (PSE) is one of the primary sources of fair value.

We have to input the company name in the “Search Company or Symbol” portion. Let’s take Jollibee as an example.

Valuation Concepts and Methods Level 1 Investments All the relevant stocks and warrants concerning Jollibee will appear, included those which are delisted already.

When we try to choose the one that is still listed, all the information relating to it will appear. If we want to access the names of the current Board of Directors, we may access the “Profile” tab. The historical data portion, on the other hand, shows all the previous prices.

o For the international setup, the Bloomberg is one of the primary sources of fair value.

Valuation Concepts and Methods Level 1 Investments

In the “Quote Search” portion, we will just input the investment that we want to value. For example, VanEck Vectors Semiconductor ETF (exchange-traded fund).

Just like in the PSE, you will also find the essential details of the fund when you search in the Bloomberg website.

Valuation Concepts and Methods Level 1 Investments

 Conclusion We can indeed utilize the internet to know the prices of investments and funds and use the data obtained to either make investment-related decisions, or just to simply know how the industry has been performing....