Business Finance

Session 1:
Financial System
Financial System Process
Nida C. Flores
Teacher III
Lesson Objectives
At the end of the lesson, the students must be able to:

1. Distinguish a financial institution from financial instrument and financial

market. (ABM_BF12-IIIa-2)
2 Enumerate the varied financial institutions and their corresponding services. (ABM_BF12-IIIa-3)
3.Compare and contrast the varied financial instruments.
(ABM_BF12-IIIa-4)
4. Explain the flow of funds within an organization – through and from
the enterprise—and the role of the financial manager. (ABM_BF12-IIIa-5)
Specific Learning Objectives
At the end of the lesson, the students must be able to:

1. Prepare a diagram illustrating how the Financial System works.

2 Define Financial Markets, Financial Institutions and Financial

Instruments
Warm-up Activity : Savings and Shortages

1. If you place your money in a business

opportunity, what business industry you would
like to try and why?
2.Now, that you have a business running and profitable,
you decide to expand but do not have enough cash to
pay for the expansion. Where can you get the additional
funding?
Pre-test
Directions: Before each statement, write TRUE if the statement is
correct or FALSE if the statement is incorrect.
______________1.
The wealth of corporate owners is measured by the
share price of the stock. ______________2. Risk and the timing of cash
flows are the key determinants of share price, which represents the
wealth of the owners in the firm.
______________3. When considering each financial decision alternative
or possible action in terms of its impact on the share price of the firm's
stock, financial managers should accept only those actions that are
expected to maximize shareholder value.
______________4. An increase in firm risk tends to result in a higher
share price since the stockholder must be compensated for the
greater risk.
______________5. Stockholders expect to earn higher rates of return on
investments of lower risk and lower rates of return on investments of
higher risk.
 Introduction to Financial Management

Start-up

How transactions between suppliers of

fund( lenders) and users of funds
(borrowers) takes place?
 Introduction to Financial Management

Introduction
If Company A knows that Company B is in need of funds, or if
Company B knows that Company A is willing to invest funds,
Company A and B may agree to make a private placement.
However, if these facts are unknown to them, Companies 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.If the two companies do not want to
make an effort to find counterparty in the Financial Markets,
they may go to a Financial Institution. Financial Institutions
serve as an intermediary to the suppliers and users of funds.
Moreover, financial institutions actively participate in the
financial markets as both suppliers and users of funds.
 Introduction to Financial Management

Financial System

A system that answers problem on where

to find company/institution to invest
money and where to find source of funds.
 Introduction to Financial Management

Relevant Vocabulary
1.Financial Markets – organized forums in which the suppliers and users of
various types of funds can make transactions directly
2.Financial Institutions – intermediaries that channel the savings of
individuals, businesses, and governments into loans or investments.

3. Private Placements - the sale of a new security directly to an investor

or group of investors.
4. Public Offering - The sale of either bonds or stocks to the general
public.
5.Financial Instruments – is a real or a virtual document representing a
legal agreement involving some sort-of monetary value (Source:
Investopedia - Sharper Insight. Smarter Investing. | Investopedia. (2016).
Investopedia. Retrieved 8 May 2016, from http://investopedia.com). These
can be debt securities like corporate bonds or equity like shares of stock.
Financial System
 Financial System
• If A knows that B is in need of funds, or if B knows that A is willing to invest funds, A and B may​
agree to make a Private Placement​
• However, if these facts are unknown to them, 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.​
• 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.​
Moreover, Financial institutions actively participate in the financial markets as both suppliers and​
users of funds.​
the resulting diagram illustrates the Financial System.​
Due to the increased need for security for the performance of obligations arising from these
transactions and due to the​growing size of the financial system, the transfers of funds from one
party to another are made through Financial Instruments.​
• Note that on the diagram presented, the solid lines represent the flow of cash/funds,
while the colored lines represent the flow of financial​instruments which represent
obligations to transfer cash or other assets in the future.​
 Take the Challenge

Due to the increased need for security for the

performance of obligations arising from these
transactions, the transfers of funds from one party
to another are made, what could be the best solution
for both parties to become secured?
 Wrap -up

How does the Financial System work?

 Evaluation

Illustrate how does the Financial System work?

 Business Finance

Session 2:
Financial System
Financial Instruments
Nida C. Flores
Teacher III
Lesson Objectives
At the end of the lesson, the students must be able to:

1. Distinguish a financial institution from financial instrument and financial

market. (ABM_BF12-IIIa-2)
2 Enumerate the varied financial institutions and their corresponding services. (ABM_BF12-IIIa-3)
3.Compare and contrast the varied financial instruments.
(ABM_BF12-IIIa-4)
4. Explain the flow of funds within an organization – through and from
the enterprise—and the role of the financial manager. (ABM_BF12-IIIa-5)
Specific Learning Objectives
At the end of the lesson, the students must be able to:

1. Prepare a diagram illustrating how the Financial System works.

2 Define Financial Markets, Financial Institutions and Financial

Instruments
3. Identify the types of Financial Markets, Financial Institutions and
Financial Instruments.
 Introduction to Financial Management

Financial Instruments
1.Financial Assets -is any asset that is:

• Cash
• An equity instrument of another entity
• A contractual right to receive cash or another financial asset
from another entity.
• A contractual right to exchange instruments with another
entity under conditions that are potentially favorable. (IAS
32.11)
• Examples: Notes Receivable, Loans Receivable, Investment in
Stocks, Investment in Bonds
 Introduction to Financial Management

Financial Instruments
2. Financial Liability- is any liability that is a contractual
obligation:

• To deliver cash or other financial instrument to

another entity.
• To exchange financial instruments with another
entity under conditions that are potentially
unfavorable. (IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds
Payable
 Introduction to Financial Management

Financial Instruments
3. Equity Instrument - is any contract that evidences a residual
interest in the assets of an entity after deducting all liabilities.
(IAS 32)
Examples: Ordinary Share Capital, Preference Share Capital

Note: When companies are in need of funding, they either sell

debt securities (or bonds) or issue equity instruments. The
proceeds from the sale of the debt securities and issuance of
bonds will be used to finance the company’s plans. On the
other hand, investors buy debt securities of equity
instruments in hopes of receiving returns through interest,
dividend income or appreciation in the financial asset’s price.
 Take the Challenge

Who are the holders of financial assets,

financial liabilities and equity instruments?
 Introduction to Financial Management

Debt and Equity Instruments

1. Debt Instruments- generally have fixed returns due to fixed
interest rates.
 Treasury Bonds and Treasury Bills are issued by the
Philippine government. These bonds and bills have usually low
interest rates and have very low risk of default since the
government assures that these will be paid.
 Corporate Bonds are issued by publicly listed companies.
These bonds usually have higher interest rates than Treasury
bonds. However, these bonds are not risk free. If the company
which issued the bonds goes bankrupt, the holder of the bonds
will no longer receive any return from their investment and even
their principal investment can be wiped out.
 Introduction to Financial Management
Debt and Equity Instruments
2.Equity Instruments -generally have varied returns based on the
performance of the issuing company. Returns from equity instruments come
from either dividends or stock price appreciation.
 Preferred Stock has priority over a common stock in terms of claims over
the assets of a company. This means that if a company were to be liquidated
and its assets have to be distributed, no asset will be distributed to common
stockholders unless all the claims of the preferred stockholders have been
given. Moreover, preferred stockholders have also priority over common
stockholders in cash dividend declaration. Dividends to preferred stockholders
are usually in a fixed rate. No cash dividends will be given to common
stockholders unless all the dividends due to preferred stockholders are paid
first. (Cayanan, 2015)
 Common Stock .Holders of common stocks are the real owners of the
company. If the company’s growth is spurring, the common stockholders will
benefit on the growth. Moreover, during a profitable period for which a
company may decide to declare higher dividends, preferred stock will receive
a fixed dividend rate while common stockholders receive all the excess.
 Introduction to Financial Management
Debt and Equity Instruments
2.Equity Instruments -generally have varied returns based on
the performance of the issuing company. Returns from equity
instruments come from either dividends or stock price
appreciation.
 Preferred Stock has priority over a common stock in terms of claims over
the assets of a company. This means that if a company were to be liquidated
and its assets have to be distributed, no asset will be distributed to common
stockholders unless all the claims of the preferred stockholders have been
given. Moreover, preferred stockholders have also priority over common
stockholders in cash dividend declaration. Dividends to preferred stockholders
are usually in a fixed rate. No cash dividends will be given to common
stockholders unless all the dividends due to preferred stockholders are paid
first. (Cayanan, 2015)
 Common Stock .Holders of common stocks are the real owners of the
company. If the company’s growth is spurring, the common stockholders will
benefit on the growth. Moreover, during a profitable period for which a
company may decide to declare higher dividends, preferred stock will receive
a fixed dividend rate while common stockholders receive all the excess.
 Application

Which of the financial instruments presented,

you found most appealing? Why?
 Wrap -up

What is the role of financial instruments to

users and sources of funds?
 Evaluation

Name a financial instrument and discuss its

role in the sources and users of funds.
 Business Finance

Session 3:
Financial System
Financial Markets
Nida C. Flores
Teacher III
 Introduction to Financial Management

Financial Markets
Primary vs. Secondary Markets

To raise money, users of funds will go to a primary market to issue

new securities (either debt or equity) through a public offering or a
private placement. The sale of new securities to the general public is
referred to as a public offering and the first offering of stock is
called an initial public offering.
The sale of new securities to one investor or a group of investors
(institutional investors) is referred to as a private placement. The
sale of previously owned securities takes place in secondary
markets. The Philippine Stock Exchange (PSE) is both a primary and
secondary market. Gitman, L. J. & Zutter C. J. (2012) & (Cayanan, A.
2015).
 Introduction to Financial Management

Financial Markets
Money Markets vs. Capital Markets

Money markets are a venue wherein securities with short-term

maturities are sold. They are created because some individuals,
businesses, governments, and financial institutions have
temporarily idle funds that they wish to invest in a relatively safe,
interest-bearing asset. At the same time, other individuals,
businesses, governments, and financial institutions find themselves
in need of seasonal or temporary financing.
On the other hand, securities with longer-term maturities are sold
in Capital markets. The key capital market securities are bonds
(long-term debt) and both common stock and preferred stock
(Gitman, L. J. & Zutter C. J. 2012) & (Cayanan, A. 2015).
 Introduction to Financial Management

Start-up

What are the terms in the situation you

deemed relevant for our topic?
Relevant Vocabulary
Primary Market - Financial market in which securities are
initially issued; the only market in which the issuer is directly
involved in the transaction.

Public offering - The sale of either bonds or stocks to the

general public.
Private placement - The sale of a new security directly to an
investor or group of investors.
Secondary market - Financial market in which preowned
securities (those that are not new issues) are traded.
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
 Take the Challenge

Which among the Financial Markets

discussed, you consider poses most risk in
connection to users of funds?
 Application

Which type of financial markets is most

critical to firms?
 Wrap -up

What are the classifications of financial

markets and their role to sources and users
of funds?
 Evaluation

Which among the financial markets

presented, you found most appealing?
Discuss.
 Business Finance

Session 3:
Financial System
Financial Institutions: Roles and Purposes
Nida C. Flores
Teacher III
 Introduction to Financial Management

Recall:

Definition of financial institutions

Start-up​
 It is the amount to which an investment will
grow after earning interest
FLUTEVAUUER
FUTURE VALUE
 Introduction to Financial Management

Financial Institutions

• Commercial Banks - Individuals deposit funds at

commercial banks, which use the deposited funds
to provide commercial loans to firms and personal
loans to individuals, and purchase debt securities
issued by firms or government agencies.
 Introduction to Financial Management

Financial Institutions
• Insurance Companies - Individuals purchase insurance
(life, property and casualty, and health) protection with
insurance premiums. The insurance companies pool these
payments and invest the proceeds in various securities
until the funds are needed to pay off claims by
policyholders. Because they often own large blocks of a
firm’s stocks or bonds, they frequently attempt to
influence the management of the firm to improve the
firm’s performance, and ultimately, the performance of
the securities they own.
 Introduction to Financial Management

Financial Institutions
• Mutual Funds - Mutual funds 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. When mutual funds use money from investors
to invest in newly issued debt or equity securities, they
finance new investment by firms. Conversely, when they
invest in debt or equity securities already held by
investors, they are transferring ownership of the securities
among investors.
 Introduction to Financial Management

Financial Institutions

• Pension Funds - Financial institutions that receive

payments from employees and invest the proceeds on
their behalf.
• Other financial institutions include pension funds like
Government Service Insurance System (GSIS) and Social
Security System (SSS), unit investment trust fund (UITF),
investment banks, and credit unions, among others
How Financial Institutions Provide Financing for
Firms
 Take the Challenge

Illustrate how the key financial institutions

serve as intermediaries for suppliers and
users of funds
 Application

Which type of financial institution is most

critical to firms/users of funds?
 Wrap -up

What are the different types of financial

institution and their services?
 Evaluation

How would you relate the role of financial

managers, role of financial markets and role
of investors?
How would you relate the role of financial managers, role of financial
markets and role of investors?
Thanks for listening