Chapter 12

1. Describe the nature of the basic services of financial institutions.

a. Deposit Institutions – It serves as a place for users to store their money and invests their deposits in order to
make loans to other users. (Page 197, Par 5)
b. Contractual Savings Institutions – these are financial Intermediaries that receive payments from individual
as a result of a contract and uses the funds to make investments (Page 198, Par 5)
c. Investment Intermediaries – they raise funds to invest in loans and securities. (Page 200, Par 5)
4. What is considered the most important and significant financial intermediary in our financial system?
- Commercial banks are the most important intermediary since they accept deposits from individuals and
businesses and invest those funds to support the ongoing flow of money and the economy. (Page 197, Par 4)
6. Describe the nature of operations of insurance companies.
- It is in their nature to issue or establish an agreement to protect their policyholder against possible financial
losses resulting from bad circumstances beyond of their control.
8. Distinguish between defined contribution plan and benefit plan.
- Contribution plans essentially involve the company making a contribution to an investment that the employee
selects, whose value may fluctuate over time. The employee will bear all advantages and risks associated with
the investment while the Benefit plans basically include the company offering the employee a certain sum that
may or may not rise in line with inflation, and all excess and inadequacy will be paid by the employer. (Page 199-
200, Par 6)
10. Distinguish between closed-end mutual funds and open mutual fund.
- Closed-end mutual funds issues a fixed number of nonredeemable shares, which investors may they rode in
over-the counter market just as stocks are traded while the Open-end mutual fund issues share that investors can
redeem each day after the market close for a price to the NAV. (Page 203, Par 2-4)
12. Give and explain briefly the three main types of financial companies.
Consumer Finance Companies – They provide loans to help people pay off debt and finance home
improvements. (Page 203, Par 1)
Business Finance Companies – They purchase accounts receivable at a discount of small firms and some even
purchase equipment of firm. (Page 203, Par 3)
Sales Finance Companies – They work with huge department shops or businesses that sell expensive items to
lend their customers credit cards or their offers so they may receive discounts from those businesses when
making purchases utilizing offerings. (Page 203, Par 4)

FLORES, KRISTINE HANNA U

401A
MGT7B
Chapter 13
2. Give and explain the nature of commercial bank’s assets.
Reserves and Other Cash Assets – they are Cash in the bank, in the vault, and on hand. Cash is a bank’s and
arguably any company’s most liquid asset. (Page 207, Par 4)
Securities – liquid assets that banks trade in a financial market using its funds except using checkable deposits.
(Page 208, Par 1)
Loans Receivable – It is the largest category of a bank’s assets and where most of their earnings most likely
originated from, as it has a higher interest rate than any marketable securities due to its greater risk and expense
of information. (Page 208, Par 2)
3. Give and Explain the primarily liabilities of commercial bank
Demand or Current Account deposits – these are deposits that can be withdrawn by their user at any given
time because they present the user’s liquid asset. (Page 209, Par 2)
Nondemand Deposits – These are deposits that, in exchange for a greater rate to make money, are not subject
to the user’s withdrawal for a certain amount of time. (Page 209, Par 3)
Borrowings – these are basically the funds they borrow usually at a lower rate to finance their operations or lend
a loan at a higher rate to earn profit. (Page 210, Par 1)
4. Discuss how compliance with reserve requirement of the BSP affects the financial Position of a
commercial bank.
- Compliance with reserve requirement will enable the bank to satisfy its demand deposits and current accounts
easily and without much excess, allowing them to use the surplus reserve for more productive operations, such
making short-term loans. (Page 207-208, Par 4)
6. Describe the shift in generating funds among commercial banks that is from demand deposits received
issuance of negotiable CD’s and bank borrowing
Commercial banks primarily relied on demand deposits, or deposits that can be withdrawn by the account holder
at any time, to generate funds for lending and investment purposes. However, in recent years, there has been a
shift towards the issuance of negotiable CDs, or certificates of deposit that can be bought and sold in the
secondary market, and bank borrowing to generate funds. This shift allows banks to diversify their funding
sources and access larger amounts of capital, but it also comes with increased risks and regulatory scrutiny.
(Based online)
10. Describe the tree main types of risked asked in Question No. 9. How do banks try to manage them?
Managing Liquidity Risk – Banks can reduce their holdings of loans and securities to create place for greater
reserves, which will ensure their liquidity, but such actions will stall their profitability. The best method to handle
such risks is to employ asset and liquidity management techniques. (Page 218, Par 5)
Managing Credit Risk – Banks can diversify their leading by not lending too much to one borrower or to
borrowers in a certain place or industry to make sure that not all will fail to pay their dues at once, they can also
oblige the borrower to put up collateral in case they become incapable of settling their debts. (Page 219, Par 2-4)
Managing Interest Rate Risk – Banks can provide floating-rate loans to their clients in an effort to lower this risk,
but borrowers would not prefer this because the risk of changing interest rates would be transferred to them. To
reduce risk for both parties, banks can also employ derivatives like interest-rate swaps, futures contracts, and
options. (Page 221, Par 1-2)

FLORES, KRISTINE HANNA U

401A
MGT7B