Frequently Asked Questions

People often think of a market as a physical place where certain goods are offered and sold. However, the economic definition of a market is more inclusive: it is a system that allows the buyers and sellers of a good or service to come together to buy and sell. Capital markets are where the supply and demand of financial capital in different forms (money, securities - including stocks and bonds, or financial assets) are coordinated, regulated and brokered.

The market is made up of a set of rules, institutions, practices and individuals where the suppliers of resources sell them to buyers (those who demand the resources). There are different ways of carrying out the purchase and sale of these resources (money, stocks, bonds, etc.), each of which confers different rights and obligations to the sellers and buyers, and varies in price depending on the characteristics of the resource.
For instance, if a company needs money to invest in a project it seeks someone who is interested in providing the money to them at a certain price. This money may be raised through the sale of stock, in which case, the buyer (or supplier of the money) becomes an owner or shareholder in the company, or by borrowing money, in which case the supplier becomes a lender or creditor to the borrowing company.
The Stock market is a place where all kinds of negotiable securities (stocks, bonds, commercial paper, etc.) are traded.
The Chilean capital market is structured into three major sectors. Each is regulated by a different oversight agency:
1. Pension fund management companies receive the money of workers (affiliates), and offer these resources in the market, mainly through the purchase of bonds, or of other debt instruments. Pension fund companies are regulated by the Superintendency of Pension Fund Managing Companies (SAFP).
2. Banks receive money from depositors and provide the market with money mainly through credit (loans). Banks are regulated by the Superintendency of Banks and Financial Institutions (SBIF).
3. The securities and insurance market includes all of the institutions that trade public securities (documents representing some monetary obligation that are traded in regulated markets) and is regulated by the Superintendency of Securities and Insurance.
In addition to regulated markets, the capital market also includes private transactions that do not take place in organized markets, but are based on agreements between two parties. However, most large capital transactions in Chile take place in organized markets, which is why their regulation is crucial in guarantying competitively priced access to capital.

Governments, like companies, need to finance their activities. They can get financing from different sources such as tax collections, surpluses from the operation of state-own companies, and borrowing.

There are two basic ways for the government to borrow money: through credit (or borrowing) from domestic, foreign or international banks; and through the issue of debt, such as government bond certificates or promissory notes. Bonds are offered to investors, who buy them in exchange for repayment of the principal (face value) plus agreed upon interest payments. A sovereign bond is a debt instrument issued by a government that allows it to gain access to financing through capital markets.

Governments may issue bonds in both domestic and foreign markets, depending on their objectives and the cost. However, sovereign bonds refer to government bonds that are issued in foreign or international markets.

The interest rate required by buyers of sovereign bonds is an important indicator of the confidence the international market has in the creditworthiness of the country that issued the bond.

The difference between the interest rate required by buyers on the bond and the risk free interest rate for a bond of equal maturity is called the “spread” and the smaller the spread, the better the credit rating and the lower the “country risk” of the issuer: It means investors have more confidence in that nation’s economic stability and its ability to pay back its debt obligations, and are willing to loan it money at a lower cost.

The Chilean government has issued a total of 6 sovereign bonds. These are referred to by the name of the issuing country, followed by the year the bonds mature (become payable):

• Chile 05: Bond for €$ 300,000,000 due in July 2005, with a 5.125% annual interest rate.
• Chile 07: Bond for US$ 600,000,000 due in July 2007, with a 5.625% annual interest rate.
• Chile 08: Bond for US$ 600,000,000 due in January 2008, at a floating rate of Libor + 40 basis points (Libor + 0.4%).
• Chile 09: Bond for US$ 500,000,000 due in April 2009, with a 6.875% annual interest rate.
• Chile 12: Bond for US$ 750,000,000 due in January 2012, with a 7.125% annual interest rate.
• Chile 13: Bond for US$ 1,000,000,000 due in January 2013, with a 5.5% annual interest rate.

Information on financial regulations can be found at:

• Superintendency of Securities and Insurance (SVS)
• Superintendency of Banks and Financial Institutions (SBIF)
• Superintendency of Pension Fund Administrators (SAFP)
• Central Bank of Chile

A Derivative is defined as any operation, contract or agreement that is based on the price or profitability of another asset (or a combination of assets), which is also referred to as the underlying asset.
The most common derivatives are futures, swaps, call and put options, or some combination of different underlying assets. Normally the underlying asset, on which the price of the derivative is based, is a currency, an adjustable unit, such as the UF (inflation adjusted currency unit), or a fixed and/or floating interest rate.
Derivatives based on the price of raw materials or commodities are also commonplace. These instruments may be used to hedge (offset) risk related to the underlying asset, or for speculative purposes. Derivatives may include delivery of the underlying asset, but usually they do not (non-delivery).
In derivative contracts that are for delivery, the underlying asset may be delivered at the agreed price when the contract expires, but for non-delivery derivatives, only the difference is paid at maturity: there is no transfer of the underlying asset.