Learning Competencies:

• Enumerate the varied financial institutions and their corresponding

services. (ABM_BF12-IIIa-3)
• Compare and contrast the varied financial Instruments (ABM_BF12-IIIa-
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)
Before starting the module, I want you to set aside other task/s that may disturb
you while enjoying the lessons. Read the simple instructions below to
successfully enjoy the objectives of this kit. Have fun!
1. Follow carefully all the contents and instructions indicated in every page of
this module.
2. Write on your notebook the concepts about the lessons. Writing enhances
learning, which is important to develop and keep in mind.
3. Perform all the provided activities in the module.
5. Let your facilitator/guardian assess your answers using the answer key card.
Analyze conceptually the posttest and apply what you have learned.
6. Enjoy studying!

• Expectations - These are what you will be able to know after completing the
lessons in the module.
• Pre-test - This will measure your prior knowledge and the concepts to be
mastered throughout the lesson.
• Looking Back to your Lesson - This section will measure what learnings and skills
did you understand from the previous lesson.
• Brief Introduction- This section will give you an overview of the lesson.
• Activities - This is a set of activities you will perform with a partner.
• Remember - This section summarizes the concepts and applications of the
lessons.
• Check your Understanding - It will verify how you learned from the lesson.
• Post-test - This will measure how much you have learned from the entire module
When you finish this module, you should be able to:

• Enumerate the varied financial institutions and their corresponding services

• Compare and contrast the varied financial instruments

• Explain the flow of funds within an organization – through and from the enterprise—
and the roles of a financial manager

Specifically, this module will help you to:

 Prepare a diagram illustrating how the financial system works

 Define Financial Markets, Financial Institutions and Financial Instruments

 Identify the types of financial markets, financial institutions and financial instruments

Directions: Choose the letter corresponding to the correct answer for each of the
questions provided below. Encircle your answer.
1. The ___________ is created by a financial relationship between suppliers and users of
short-term funds.

A. financial market C. Stock Market B. money market D. capital market

2. Firms that require funds from external sources can obtain them from
______________________.

A. financial market C. financial institutions B. private placement. D. all of the

above
3. The major securities traded in the capital markets are ________________.

A. stocks and bonds B. bonds and commercial paper

C. commercial paper and Treasury bills D. Treasury bills and certificates of

deposit

4. The primary goal of the financial manager is ________________________

A. minimizing risk. B. maximizing profit C. maximizing wealth. D.

minimizing return

5. A financial manager must choose between four alternative Assets: 1, 2, 3, and each asset
costs Php35,000.00 and is expected to provide earnings over a three-year period as
described below.

Based on the profit maximization goal, the financial manager would choose
_________________.

A. Asset 1. B. Asset 2. C. Asset 3. D. Asset 4.

II. TRUE or FALSE

Directions: Before each statement on the space provided, write TRUE if the statement is
correct or FALSE if the statement is incorrect.

_____________1. To achieve the goal of profit maximization for each alternative being
considered, the financial manager would select the one that is expected to result in the
highest monetary return.
______________2. Dividend payments change directly with changes in earnings per
share.
 ______________3. The wealth of corporate owners is measured by the share price of the
stock.

______________4. Financial markets are intermediaries that channel the savings of

individuals, businesses, and government into loans or investments.

______________5. 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.

Recall from the previous discussions, that one of the functions of a financial
manager is financing and investing of funds. Now, if you are going to save the money,
where would you keep it? Maybe, you will place it in Banks, Piggy bank, Investments –
stocks, mutual funds, insurance, etc.

Activity I. If you place your money in a business opportunity, what business industry
you would like to try and why? You may write your answers on the box.

Activity 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?
 It maybe from your parents, ask or lend from friends, banks, or lending
institutions. The scenario where the lender and the borrower are present
at the right time and at the right place may not happen all the time. In fact,
it seldom happens. What happens if they did not meet?

You will not be able to find someone to invest your money to get funds to start
your expansion. Here is where the Financial System comes in. But before we go further
with our topic on Financial System, let us asses your in-depth knowledge on it
Part I. TRUE OR FALSE
Directions: Before each statement, write TRUE if the statement is correct or FALSE if the
statement is incorrect. Write your answer on the space provided before each number.

______________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.

Let us analyse the situation so you can understand easily the next topic. 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.
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.
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 from your ABM class
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

A 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.

An 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.

Who are the holders of Financial Assets? Who are the makers of Financial Liabilities and
Equity instruments? Do you have any idea? Please write on the box your answers.

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.

Note: Suppliers of Funds are the holders of financial assets. The users of funds are the
makers of financial liabilities and equity instruments.
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.

Which of the financial instruments presented to you find the most

appealing to you? Please on the box your answers.
Financial Markets
Let us 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).
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.

Let us check your understanding of the topic.

Activity 1 Financial Institutions
Directions: Complete the chart. Identify the roles of the following financial institutions

Activity 2 Question for reflection: How would you relate the role of financial managers,
role of financial markets and role of investors?
Activity 3 TRUE or FALSE
Direction: Before each statement on the space provided, write TRUE if the statement is
correct or FALSE if the statement is incorrect.

___________1. High cash flow is generally associated with a higher share price whereas
higher risk tends to result in a lower share price.

___________2. 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 increase the firm's profitability.

___________3. To achieve the goal of profit maximization for each alternative being
considered, the financial manager would select the one that is expected to result in the
highest monetary return.
___________4. Dividend payments change directly with changes in earnings per share.

___________5. The wealth of corporate owners is measured by the share price of the stock.

___________6. Risk and the magnitude and timing of cash flows are the key determinants
of share price, which represents the wealth of the owners in the firm.

___________7. 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.

___________8. An increase in firm risk tends to result in a higher share price since the
stockholder must be compensated for the greater risk.

___________9. Stockholders expect to earn higher rates of return on investments of lower

risk and lower rates of return on investments of higher risk.

___________10. The key capital market securities are bonds (long-term debt) and both
common stock and preferred stock (equity, or ownership).

• The financial institutions serve as an intermediary to the suppliers and users of funds
and actively participate in the financial markets as both suppliers and users of funds.

• Financial Instruments are the transfers of funds from one party to another.

• Financial Asset is any asset that is in the form of Cash, an equity instrument of another
entity, a contractual right to receive cash or another financial asset from another entity.
• Equity Instrument is any contract that evidences a residual interest in the assets of an
entity after deducting all liabilities. • Debt Instruments generally have fixed returns due
to fixed interest rates.

• 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.

• Common debt instruments are Treasury Bonds, Treasury Bills and Corporate Bonds

• Types of equity instruments are Preferred Stock and Common Stock.

• Primary market issues new securities, either debt or equity through a public offering or
a private placement.

• Money markets are a venue wherein securities with short-term maturities (1 year or
less) are sold.

• Capital markets are securities sold with longer-term maturities.

• Examples of financial institutions are: Commercial Banks, Insurance Companies,

Mutual Funds, Pension Funds and other financial institutions.

Activity 1. TRUE or FALSE

Directions: Before each statement on the space provided, write TRUE if the statement
is correct or FALSE if the statement is incorrect.
_____________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.
Activity 2 MULTIPLE CHOICE
Direction: Choose the letter corresponding to the correct answer for each of the questions
provided below.

1. Corporate owners receive realizable return through

A. earnings per share and cash dividends.

B. increase in share price and cash dividends.

C. increase in share price and earnings per share.

D. profit and earnings per share.

2. The wealth of the owners of a corporation is represented by

A. profits.

B. earnings per share.

C. share value.

D. cash flow.

3. Wealth maximization as the goal of the firm implies enhancing the wealth of

A. the Board of Directors.

B. the firm's employees

C. the federal government

D. the firm's stockholders

4. The goal of profit maximization would result in priority for

A. cash flows available to stockholders

B. risk of the investment

C. earnings per share.

D. timing of the returns

5. Profit maximization, as a goal, is not ideal because it does NOT consider

A. risk and cash flow. C. risk and EPS.

B. cash flow and stock price. D. EPS and stock price.

MULTIPLE CHOICE
Directions: Choose the letter corresponding to the correct answer for each of the
questions provided below. Encircle the letter of the correct answer.

1. A ______________________is one financial intermediary handling individual savings

and receives premium payments that are placed in loans.
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

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. flows of funds.
C. stocks and bonds.
D. short-term funds.

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
 To further explore the concept learned today and if it possible to connect the
internet, you may visit the following link:

How the key financial institutions serve as intermediaries for suppliers and users of
funds? Which type of financial institution do you think is most critical for firms?
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