LET’S GO BACK TO

THE PAST
Quiz for the last lesson discussed
 MOTIVATIONAL ACTIVITY
Role playing to show the difference
between private placement, financial
market, financial institution and financial
instruments
 MOTIVATIONAL ACTIVITY
- One will be participant A (saver)and the
other as participant B(user of fund).
- Supposed that A and B met along the
way, B knew that A have excess money
so decided to borrow money to A.
 MOTIVATIONAL ACTIVITY
1st scene – A knows that B need funds, or
if B knows that A is willing to invest to the
business, they may agree to make a
Private placement.
 MOTIVATIONAL ACTIVITY
2nd scene – A and B can go to a Financial
Market which is an organized forum that lets
A, along with other suppliers of funds, and B,
along with other users of funds, meet and
make transactions. Once A and B have met in
the Financial Market, they can now agree to
make a private placement.
 MOTIVATIONAL ACTIVITY
3rd scene – If A and B do not want to make an effort to
find a counterparty in the Financial Markets, A and B
may go to a Financial Institution. A Financial Institution
will receive A’s supply of funds and match it with B’s
demand of funds. Unlike the Financial Markets were A
and B knows to whom the fund went and from whom
the funds came, Financial Institutions serve as an
intermediary to the suppliers and users of funds.
FINANCIAL SYSTEM
 DEFINITION OF TERMS
Financial Markets – an organized forums
in which the supplier and user of various
types of funds can make transactions
directly
Private placement – the sale of a new
security directly to an investor or group of
investor
 DEFINITION OF TERMS
Financial institution – intermediaries that
channel the savings of individuals,
businesses, and governments into loans
or investment
Financial instrument – is a real or virtual
document representing a legal agreement
involving some sort of monetary value
 FINANCIAL INSTRUMENTS
It is composed of the following:
a. Financial asset – it is any asset that is cash, notes
receivables, loans receivables, investment in stock,
investment in bonds
b. Financial liability – it is any liability that is a contractual
obligation such as: notes payable, loans payable, bonds
payable
c. Equity – any contract that evidences a residual interest in
the assets of an entity after deducting all liabilities such as
ordinary share capital and preference share capital
 COMMON EXAMPLES OF DEBT AND
EQUITY SECURITY
Debt instruments – it have Equity instruments – have varied
fixed returns due to fixed returns based on the
interest rates performance of issuing company

•Treasury bonds and •Preferred stock

treasury bills •Common stock
•Corporate bond
- Treasury bonds and bills –
it is issued by the Phil
government; usually it have a
lower interest rates and have
a very low risk of default
since the government
assures that these will be
paid
- Corporate bonds – issued by
publicly listed companies;
usually it have higher interest
rate but more risky thus if the
company goes bankrupt the
holder of the bonds will no
longer receive the returns and
even the principal investment
- Preferred stock – it has a priority over
common stock in terms of claims over the
asset of company. Their dividends is usually in
a fixed rate
- Common stock – they are the real owners of
the company, they are more beneficial when
the company growth is spurring since their
dividend rate is not fixed
 FINANCIAL MARKETS
It has two comparative groups:
1.Primary vs. secondary markets
2.Money markets vs. capital
markets
 DEFINITION OF TERMS
Primary markets -Financial market in which
securities are initially issued; the only
market in which the issuer is directly
involved in the transaction.
Secondary market: Financial market in
which preowned securities (those that are
not new issues) are traded.
 DEFINITION OF TERMS
Money market: A financial relationship
created between suppliers and users of
short-term funds.
Capital market: A market that enables
suppliers and users of long-term funds to
make transactions
 FINANCIAL INSTITUTIONS
Examples of financial institutions are:
- Commercial banks
- Insurance companies
- Mutual funds
- Pension funds
- Other financial institutions
 COMMERCIAL BANKS
individual deposit funds at commercial
banks thus it used the deposited funds to
provide commercial loans to firms and
personal loans to individuals, and
purchase debt securities issued by firms or
government agencies
 INSURANCE COMPANIES
Individuals purchase insurance(life,
property and casualty, and health)
protection with insurance premiums
- It is categorized as into life and non-life
 MUTUAL FUNDS
These are owned by investment companies
which enable small investors to enjoy the
benefits of investing in a diversified
portfolio of securities purchased on their
behalf by professional investment
managers
 PENSION FUNDS
It receive payments from employees and
invest in the proceeds on their behalf
 OTHER FINANCIAL INSTITUTIONS
It includes pension funds like Government
Service Insurance System(GSIS), Social
Security System(SSS), unit investment
trust fund(UITF), investment banks, credit
unions among others
FINANCIAL INSTITUTIONS
Role of Role of Financial Role of
Financial Markets Investors
Managers
Financial managers The financial market Investors provide the
make financing provide a forum in which funds that are to be
decisions that firms can issue securities used by financial
require funding from to obtain the funds that managers to finance
investors in the they need and in which corporate growth.
financial markets. investors can purchase
securities to invest their
funds.