BUSINESS FINANCE

WEEK 2 – MODULE 3

Financial institutions, financial market and financial instrument is a part

of every business. Let’s take it to the simplest explanation. In a company they were
able to produce products and after producing their product buyers such as super
markets etc. will now get the products to be sold at a wholesale or retail price to the
consumers. Some will pay through checks and some will pay it in cash. The company
represents financial institution, super marts are what we called financial market and
the mode of payment such as check and cash are what we called financial instrument.

Financial instrument is the written legal obligation of one party to transfer

something of value-usually money to another party at some future date under certain
condition such as stocks, loans, or insurance. It is a monetary contract between
parties. Financial instrument serves as a means of payment (like money) store of value
(like money) allow for the trading of risk.

Examples: bank loans, future contracts bonds, stocks, mortgages insurance

Financial Markets offer liquidity to borrowers and savers. Refer broadly to any market
place where the trading of securities occurs, including the stock market, bond market,
forex market and derivative market.

Types of Financial Market

a. Over-the-counter Market- doesn’t have physical location and trading is conducted

electronically
b. Bond Market -Sells securities such as notes and bills
c. Money Market – trade in products with highly liquid short-term maturities and
high degree of safety and a relatively low return in interest d. Derivatives Market-
trades in future and option contracts and other advanced financial products that
derive their value from underlying instruments.

Financial Institution is a company engaged in business of dealing with financial and

monetary transactions such as deposits loans, investments and currency exchange.
Financial institution encompasses a broad range of business operations with in the
financial services sector including banks, trust companies, brokerage firms and
investment dealers. Financial institution can vary by size scope and geography.

Examples:
Commercial and Investment bank
Insurance companies
Brokerage firm
What is Financial Instrument?
Financial instrument are assets that can be traded, or they can also be seen as
packages of capital that may be traded. Most types of financial instrument provide
efficient flow and transfer of capital all throughout the world’s investors. These assets
can be cash, a contractual right to deliver or receive cash or another type of financial
instrument, or evidence of one’s ownership of an entity.

Financial instrument can be divided into two type’s cash instrument and derivative
instrument.
a.) Cash Instrument the values of cash instruments are directly influenced and
determined by the markets. Cash instrument may also be deposits and loans agreed
upon by borrowers and lenders.
b.) Derivative Instrument The value and characteristics of derivative instruments are
based on the vehicles underlying components such as assets, interest rates or indices.
An equity option contract, for example, is a derivative because it derives its value from
the underlying stock.

What is Financial Institution?

Financial institution is a company engaged in the business of dealing with
financial and monetary transaction such as deposits, loans, investments and currency
exchange. Financial institution encompasses a broad range of business operations
within the financial service sector including banks, trust companies, insurance
companies, brokerage firms and investment dealers.

Types of Financial Institutions

a.) Commercial Bank- is a type of financial institution that accepts deposits, offer
checking account services, makes business, personal, and mortgage loans, and offer
basics basic financial products like certificate of deposits and savings account to
individuals and small businesses. A commercial bank is where people do their
banking, as opposed to an investment bank.
b.) Investment Banks – Investment Bank specialized in providing services designed to
facilitate business operations, such as capital expenditure financing and equity
offerings, including initial public offerings (IPOs).
c.) Insurance Companies- Among the most familiar non-bank financial institutions are
insurance companies. Providing insurance, whether for Individuals Corporation.
d.) Brokerage Firms- Investment companies and brokerages, such as mutual fund
and exchange traded fund (ETF) provide investment services that include wealth
management and financial advisory services.

What is Financial Market?

Financial market refers broadly to any market place where the trading of
securities occurs, including the stock market, bond market, forex market and
derivatives market among others. Financial market is vital to the smooth operation of
capitalist economies.
 Types of Financial Market.

a.) Over-the-counter Market- it is a decentralized market-meaning it does not have

physical locations, and trading is conducted electronically- in which market
participants trade securities directly between two parties without a broker.
b.) Bond Markets- A bond is a security in which an investor loans money for a defined
period at a pre-established interest rate. The bond market sells securities such as
notes and bills.
c.) Money Market- typically the money markets trade in products with highly liquid
short-term maturities (of less he one year) and are characterized by high degree of
safety and a relatively low return in interest. At the wholesale level, the money
markets involved large volume trades between institutions and traders. At the retail
level, they include money market mutual funds bought by individual investors and
money market accounts opened by bank customers.
BUSINESS FINANCE
Module 2
Activity # 1

DIRECTION: Classify the words below as financial instruments financial institutions

or financial market. Write your answers on the shapes assigned to each classification.

Commercial bank Cash Mortgages

Stocks brokerages Firms Bond market
Bonds Insurance Companies
Investment Bank Over- the- counter Market
Money Market Insurance

FINANCIAL FINANCIAL FINANCIAL

INSTRUMENT INSTITUTION MARKET

ACTIVITY # 2

You have learned about the financial instrument financial institutions and financial
market now let’s try to distinguish the similarities and differences of the three using
Venn diagram.