Republic of the Philippines

Department of Education
Region III
SCHOOLS DIVISION OF ZAMBALES
Zone 6, Iba, Zambales
Tel./Fax No. (047) 602 1391
E-mail Address: zambales@deped.gov.ph
website: www.depedzambales.ph

Name: ______________________________________ Grade/Section__________

School: _____________________________________ Date: __________________

LEARNING ACTIVITY SHEET

BUSINESS FINANCE
INTRODUCTION TO FINANCIAL MANAGEMENT
Quarter 1 - Week 2

I. Introduction

In my previous lesson, I discussed the major role of financial

management, different individuals involved, and flow of funds
within the organization, as well as the role of financial manager. In this new
lesson, you are going to distinguish a financial institution, from financial
instruments, and a financial market. You will be having a new idea of the
importance of the financial system in the business.
You will be more interested to find out what are the necessary transactions
existing in the business. As a business student, you will be more equip more
on financial system in this lesson.

II. Learning Competency

Distinguish a financial institution from financial instrument and

financial market - ABM_BF12-IIIa-2

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 III. Objectives:

At the end of this learning activity sheet, you are expected to:
1. define the Financial Institution, Financial Instrument and Financial
Market;
2. differentiate Financial Institution from Financial Instrument and
Financial Market;
3. identify the types of Financial Markets, Financial Institutions and
Financial Instruments.

IV. Discussion

The topic for this week is just a continuation of my lesson discussed last
week. I am going to let you understand the meaning of Financial Institutions,
Financial Instrument and Financial Markets. Those words play important role
in the Financial System, you will find out later their specific meaning, and you
will be able to understand each one of them. Are you familiar with those words?
Let us just do the vocabulary of these important words that you are going
to encounter later while the discussion is going on.

 Financial Markets – organized forums in which the suppliers and users

of various types of funds can make transactions directly

 Financial Institutions – intermediaries that channel the savings of

individuals, businesses, and governments into loans or investments.

 Private Placements - the sale of a new security directly to an investor or

group of investors.

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  Public Offering - The sale of either bonds or stocks to the general public.

 Financial Instruments – is a real or a virtual document representing a

legal agreement involving some sort-of monetary value

 Primary Market - 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.

 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

I would like you to analyze the situation so you can easily understand the
next topic. If Group A knows that Group B is in needs of funds, or if Group B
knows that Group A is willing to invest funds, Group A and B may agree to make
a private placement. However, if these facts are unknown to them, Groups A
and B can go to a Financial Market which is an organized forum that lets Group
A, along with other suppliers of funds, and Group B, along with other users of
funds, meet and make transactions. Once Group A and Group B have met in the
Financial Market, they can now agree to make a private placement.
If Group A and Group B do not want to make an effort to find a
counterparty in the Financial Markets, Group A and Group B may go to a
Financial Institution. A Financial Institution will receive Group A’s supply of
funds and match it with Group B’s demand of funds. Unlike the Financial
Markets were Groups A and B knows to whom the fund went and from whom

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the funds came, Financial Institutions serve as an intermediary to the
suppliers and users of funds.

Financial System

This is a diagram of a Financial System. The solid lines represent the flow
of cash/funds, while the broken lines represent the flow of financial instruments
which represent obligations to transfer cash or other assets in the future.

How transactions between suppliers and users of funds take place? How
would they prove that there was a transaction so that the demander will be able
to repay the supplier on time and at the right amount? You may write your
answers on the box.

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 through Financial Instruments.

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Financial Instruments when a financial instrument is issued, it gives rise to a
financial asset on one hand and a financial liability or equity instrument on the
other.

Recall the following definitions:

Financial Asset 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

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

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.
When companies need 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.

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Common examples of Debt and Equity Instruments

Debt Instruments have fixed returns due to fixed interest rates.

Examples of debt instruments are as follows:

• Treasury Bonds and Treasury Bills are sued 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. 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. The
following are types of equity instruments:

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.
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, A. 2015)

Holders of Common Stock on the other hand 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.
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Financial Markets

I will now classify Financial Markets into comparative groups:

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).

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).

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Financial Institutions: Roles and Purposes

The following are examples of 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.

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.

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.

Pension Funds – these are 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 .

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V. Activities

A. True of False
Direction: Write True of the statement is correct, write False if the
statement is incorrect. Write your answer in your activity notebook.

1. Primary and secondary markets are markets for short-term and long-term
securities, respectively.
2. Financial markets are intermediaries that channel the savings of
individuals, businesses, and government into loans or investments.
3. The money market involves trading of securities with maturities of one year
or less while the capital market involves the buying and selling of securities
with maturities of more than one year.
4. Holders of equity have claims on both income and assets that are secondary
to the claims of creditors.
5. Preferred stock is a special form of stock having a fixed periodic dividend
that must be paid prior to payment of any interest to outstanding bonds.
6. Commercial banks obtain most of their funds from borrowing in the capital
markets.
7. Credit unions are the largest type of financial intermediary handling
individual savings.
8. A mutual fund is a type of financial intermediary that obtains funds
through the sale of shares and uses the proceeds to acquire bonds and
stocks issued by various business and governmental units.
9. IPO stands for Interest and Principal Obligation.
10. Pension Funds these are financial institutions that receive payments from
employees and invest the proceeds on their behalf.

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B. Multiple Choice
Direction: Choose the letter of the correct answer. Write your answer in your
activity notebook.

1. A ______ is one financial intermediary handling individual savings. It

receives premium payments that are placed in loans or investments to
accumulate funds to cover future benefits.
a. life insurance company
b. commercial bank
c. savings bank
d. credit union
2. The key participants in financial transactions are individuals, businesses,
and governments. Individuals are net ______ of funds, and businesses are net
______ of funds.
a. suppliers; users
b. purchasers; sellers
c. users; suppliers
d. users; providers
3. Which of the following is not a financial institution?
a. A pension fund
b. A newspaper publisher
c. A commercial bank
d. An insurance company
4. A ______ is set up so that employees of corporations or governments can
receive income after retirement.
a. life insurance company
b. pension fund
c. savings bank
d. credit union

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5. A ______ is a type of financial intermediary that pools savings of individuals
and makes them available to business and government users. Funds are
obtained through the sale of shares.
a. mutual fund
b. savings and loans
c. savings bank
d. credit union
6. Most businesses raise money by selling their securities in a.
a. a direct placement
b. a stock exchange
c. a public offering
d. a private placement
7. Which of the following is not a service provided by financial institutions?
a. Buying the businesses of customers
b. Investing customers’ savings in stocks and bonds
c. Paying savers’ interest on deposited funds
d. Lending money to customers
8. Government usually
a. borrows funds directly from financial institutions
b. maintains permanent deposits with financial institutions
c. is a net supplier of funds
d. is a net demander of funds
9. By definition, the money market involves the buying and selling of
a. funds that mature in more than one year
b. flow of funds
c. stocks and bonds
d. short-term funds

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 10. The ______ is created by a financial relationship between suppliers and
users of short-term funds
a. financial market
b. money market
c. stock market
d. capital market

C. Fill in the Blank

Direction: Identify the following. Write your answer in your activity notebook.

1. The ________________ is financial relationship created between suppliers

and users of short-term funds.
2. The ________________ is a real or a virtual document representing a legal
agreement involving some sort-of monetary value.
3. The _________________ is a market that enables suppliers and users of long-
term funds to make transactions.
4. _________________ 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.
5. _________________ organized forums in which the suppliers and users of
various types of funds can make transactions directly.
6. ________________ these are financial institutions that receive payments
from employees and invest the proceeds on their behalf.
7. ________________ intermediaries that channel the savings of individuals,
businesses, and governments into loans or investments.
8. The _________________ is the sale of a new security directly to an investor
or group of investors.
9. _________________ is any contract that evidences a residual interest in the
assets of an entity after deducting all liabilities.

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10. The ____________ the sale of either bonds or stocks to the general public.

D. Word Search Puzzle

Direction: Search words that are related to the lesson discussed. Write
your answer in your activity notebook.

E. Crossword Puzzle
Direction: Analyze the puzzle. Use the clues provided beside the puzzle.
Write your answer in your activity notebook.

Across

2. sale of either bond or stocks to the public

3. has a priority over a common stock

4. forums of suppliers and users

5. suppliers and users of long-term funds

6. liability with contractual obligation

7. is a real or a virtual document

8. cash, receivable, investments

Down

1. sale of a new security to an investor

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 VI. Assessment
Direction: Match column A to column B.
activity notebook.
Column A
1. Financial Markets
2. Financial Instruments
3. Capital Market
4. Money Market
5. Mutual Funds
6. Insurance Companies
7. Corporate Bonds
8. Preferred Stock
9. Public Offering
10. Private Placements
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Write your answer in your
Column B
a. is issued by publicly listed
companies. These bonds usually have
higher interest rates than Treasury
bonds
b. Individuals purchase insurance
(life, property and casualty, and
health) protection with insurance
premiums
c. has priority over a common stock in
terms of claims over the assets of a
company
d. the sale of a new security directly to
an investor or group of investors.
e. The sale of either bonds or stocks to
the general public
f. A financial relationship created
between suppliers and users of short-
term funds
g. is a real or a virtual document
representing a legal agreement
involving some sort-of monetary value
h. organized forums in which the
suppliers and users of various types of
funds can make transactions directly
I. A market that enables suppliers and
users of long-term funds to make
transactions
j. is 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

VII. Reflection

Direction: Fill in each blank with the right word/words in the box
below. Write your answer in your activity notebook.

The (1) ___________ is created by a financial relationship between suppliers

and users of short-term funds. (2) _______________ is 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. The major securities traded in the capital markets are
(3) ________________. The primary goal of the financial manager is (4)
_________________. Long-term debt instruments used by both government and
business are known as (5) ___________. (6) ____________ are financial
institutions that receive payments from employees and invest the proceeds
on their behalf. (7) ___________ is any contract that evidences a residual
interest in the assets of an entity after deducting all liabilities. (8) ____________
is a financial market in which preowned securities (those that are not new
issues) are traded. (9) _____________ is financial market in which securities
are initially issued; the only market in which the issuer is directly involved in
the transaction.(10) ____________ is any liability that is a contractual
obligation.

Money Market Private Placement Stocks and Bonds

Maximizing wealth Bonds Pension Funds Financial Liability
Equity Instrument Secondary Market Primary Market

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VIII. References

Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex

Bookstore.

Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial Finance

(13th Ed), USA: Prentice-Hall

https://smallbusiness.chron.com/business-financing-problems-
292.html Retrieved August 9, 2020

Prepared by:

MARIA AMOR L. AGUDO

Teacher III
SNHS - Senior High School, Subic District

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