CHAPTER 12 3. What is a financial intermediary?

- A financial intermediary is an institution

1. Describe the nature of the basic services of
that acts as a middleman between savers
financial institutions.
and borrowers, facilitating the transfer of
- Financial institutions offer a range of
funds. Examples include banks, credit
services to facilitate the flow of funds in the
unions, mutual funds, and insurance
economy. These services include deposit-
companies. They help reduce information
taking, lending, investment management,
asymmetry and transaction costs in the
and various financial products. They play a
financial system.
crucial role in mobilizing savings and
- A financial intermediary is a financial firm,
channeling them towards productive
such as bank, that borrows funds from
activities.
savers and lends them to borrowers.
- A financial institution is a company engaged
in the business of dealing with financial and
4. What is considered the most important and
monetary transactions such as deposits,
significant financial intermediary in our financial
loans, investments and currency exchange.
system?
Financial institutions encompass a b road
- Banks are often considered the most
range of business operations within the
important and significant financial
financial service sector including banks,
intermediaries in the financial system. They
trust companies’ insurance companies,
accept deposits from individuals and
brokerage firms and investments dealers.
businesses and provide loans to borrowers,
Financial company can operate at several
thereby playing a crucial role in the creation
scales from local community credit unions
of money and the allocation of funds.
to international investment banks.
- Commercial banks are the most important
intermediaries. Commercial banks play a key
2. What are the channels through which the
role in the financial system by taking in
financial system matches savers and borrowers?
deposits from households and firms and
- Financial systems match savers and
investing most of those deposits, either by
borrowers through various channels such as
making loans to household and firms or by
banks, financial markets, and
buying securities, such as government
intermediaries. Banks connect depositors
bonds, or securitized loans.
with borrowers, financial markets provide a
platform for buying and selling financial
5. Give some services offered by a universal bank.
instruments, and intermediaries like mutual
- Universal banks provide a wide range of
funds and pension funds pool funds from
financial services, including savings and
savers to invest in diversified portfolios
checking accounts, loans, investment
- The financial system matches savers and
banking, asset management, and other
borrowers through two channels: Financial
financial products. They aim to offer
Markets, and Banks and other financial
comprehensive financial solutions to both
intermediaries These two channels are
retail and corporate clients.
distinguished by how funds flow from
- The types of services offered by universal
savers, or lenders, to borrowers and by the
banks are: Deposit accounts such as
financial institutions involved. Fund flow
checking and savings Loans and credit
from lenders to borrowers directly through
Asset and wealth management Buying
financial markets such as New York Stock
and selling securities Financial and
Exchange and Philippine Stock Exchange or
investment advice Insurance products
indirectly through financial intermediaries,
such as banks.
6. Describe the nature of operations of insurance
companies.
 - Insurance companies operate by providing
financial protection against risks.
Policyholders pay premiums to the
insurance company, which, in turn,
promises to compensate them in the event
of specified losses, such as accidents,
illnesses, or property damage.
- Insurance companies specialized in writing
contracts to protect their policyholders from
the risks of financial losses associated with
particular events, such as automobile
accidents or fires. Insurance companies
collect premiums form policyholders, which
the companies then invest then obtain the
funds necessary to pay claims to pay claims
to policyholders and ti cover their other
costs. The insurance has two segments (1)
life insurance companies wherein it sell
policies to protect households against a loss
of earnings from the disability; retirement
or death of the insurance person, (2)
Property and casualty wherein companies
sell policies to protect household and firms
from risks illness, theft, fire, accidents and
natural disasters.
7. What is the nature of the services of “Pension
Funds” as a financial intermediary?
- Pension funds act as financial
intermediaries focused on managing
retirement savings. They invest the
contributions from individuals and
employers in various assets to generate
returns and provide a source of income
during retirement.
- The pension fund is a financial intermediary
that invests contribution of workers and
firms in stocks, bonds, and mortgages to
provide pension benefit payments during
workers’ retirement. People can accumulate
retirement savings in two ways: Through
pension funds sponsored by employers or
through personal savings account. Most
notable examples of pension funds are
Social Security System (SSS) for employees
of private companies and Government
Service Insurance System (GSIS) for
government employees. Pension funds
invest contributions from workers and firms
in stocks, bonds, and mortgages to earn the
money necessary to pay pension benefit
payments during workers’ retirements. The
SSS and government pension funds are
important source of demand for financial
securities.
8. Distinguish between defined contribution plan
and defined benefit plan.
- Defined Contribution Plan: In this plan, the
contributions made by both the employer
and employee are specified, but the
ultimate benefit depends on the
performance of the investment portfolio.
Examples include 401(k) plans.
- Defined Benefit Plan: Here, the employer
guarantees a specific benefit to the
employee upon retirement, often based on
factors like salary and years of service.
Pension plans are common examples.
- Defined Contribution plan has the following
feature: a. Employer places contributions
from employer into investments such as
mutual funds, chosen by employees.
Employees own the value of the funds plan.
They also bear the risk of poor investment
return. b. If the employee’s investments are
profitable, employer’s income during
retirement will be high. On the other hand if
the employee’s investments are not
profitable, employee’s income during
retirement will be low. c. Most private
Employers’ “Defined Contribution Plans” in
the United States are 401 (k) plans. Some
Employers’ “Defined Contribution Plan” in
the United States are 401 (k) plans. Some
employers match employee’s contribution
up to a certain amount. Defined Benefit
Plan has the following feature: a. An
employer promises employees a particular
peso benefit payment, based on each
employee’s earnings and years of service.
The benefit payments may or may not be
indexed to increase with inflation. b. If the
funds in the pension plan exceed the
amount promised, the excess remains with
the employer managing the fund. c. If the
funds in the pension plan are insufficient to
pay the promised benefit, the plan is
 underfunded and the employer is liable for
the different.
- companies.
9. What are investment intermediaries?
- Investment intermediaries, such as mutual
funds and exchange-traded funds (ETFs),
pool funds from multiple investors to invest
in a diversified portfolio of stocks, bonds,
and other securities. They provide a way for
individuals to access a professionally
managed and diversified investment
portfolio.
- Investment intermediaries are financial
firms that raise funds to invest in loans and
securities. The most important investment
intermediaries are investment banks,
mutual funds, hedge funds finance
companies and money market mutual.
10. Distinguish between closed-end mutual funds
and open-end mutual fund.
- Closed-End Mutual Funds: These have a
fixed number of shares, which are traded on
stock exchanges. The market determines
the share price, which may trade at a
premium or discount to the net asset value
(NAV).
- Open-End Mutual Funds: These
continuously issue and redeem shares at
their NAV. The number of shares is not
fixed, and they are bought and sold at the
end of the trading day at the NAV price.
- This mutual fund issues a fixed number of
nonredeemable shares, which investors may
then rode in over-the counter markets just
as stocks are traded. The price of share
fluctuates with the market value of the
assets- often called the net asset value
(NAV) in the fund. On the other hand Open-
end Mutual Fund are mutual fund issues
share that investor can redeem each day
after the markets close for a price tied to
the NAV.
11. What are finance companies?
- Finance companies are non-bank financial
institutions that provide various consumer
and business financing services. They can
include consumer finance companies,
commercial finance companies, and leasing
- Finance companies are nonbank financial
intermediaries that raise funds through
sales of commercial paper and other
securities and use the funds to make small
loans to household and firms. Finance
companies raise funds by selling commercial
paper (a short-term debt investment) and
by issuing stocks and bonds. They lend
these funds to consumers, who make
purchases of such items as cars, furniture
and home improvements, and to small
business. Some finance companies are
organized by a parent corporation to help
sell its products
12. Give and explain briefly the three main types of
finance companies.
- Consumer Finance Companies: Provide
loans and credit to individual consumers for
purposes such as purchasing durable goods
or covering personal expenses.
- Commercial Finance Companies: Offer
financing solutions to businesses, including
equipment financing, inventory financing,
and factoring.
- Leasing Companies: Specialize in leasing
equipment and machinery to businesses
rather than outright purchase, providing an
alternative financing option.

CHAPTER 13
1. What are the primary source and use of funds
of a commercial bank?
- Primary Source of Funds: Customer
deposits, which include various types such
as savings accounts, checking accounts, and
fixed deposits.
- Primary Use of Funds: Loans and
investments, where the bank lends money
to individuals and businesses or invests in
various financial instruments.
2. Give and explain the nature of a commercial
bank’s assets.
- Cash and Reserves: Including physical cash,
deposits with central banks, and short-term
liquid investments.
- Loans and Advances: Money lent to
individuals and businesses.
- Investments: Securities such as government
bonds and corporate bonds.
- Property and Equipment: Physical assets
owned by the bank.
3. Give and explain briefly the primary liabilities of
a commercial bank.
- Deposits: Customer funds held in various
accounts, including savings deposits,
checking accounts, and time deposits.
- Borrowings: Funds borrowed from other
financial institutions or the central bank.
- Other Liabilities: This includes items like
accrued expenses and other obligations.
4. Discuss how compliance with reserve
requirements of the BSP affects the financial
position of a commercial bank.
- Compliance with reserve requirements set
by the central bank (like BSP) affects a
commercial bank's liquidity and ability to
lend. Meeting these requirements ensures
that the bank holds a specified percentage
of its deposits in reserve, impacting its
lending capacity.
5. What basic strategy do commercial banks
follows to maximize return on its assets?
- Commercial banks typically aim to maximize
the spread between interest earned on
loans and investments and the interest paid
on deposits. They also focus on efficient
management of operating expenses and risk
to enhance overall profitability.
6. Describe the shift in generating funds among
commercial banks that is from demand deposits
received to issuance of negotiable CD’S and
bank borrowing.
- There has been a shift from relying heavily
on demand deposits to diversifying funding
sources. Commercial banks increasingly
issue negotiable Certificates of Deposit
(CDs) and borrow from other financial
institutions to manage liquidity and reduce
dependence on a single funding stream.
7. How is return on assets of (ROA) of commercial
banks computed?
- ROA is calculated by dividing the net income
of the bank by its average total assets. It
provides a measure of how efficiently the
bank is utilizing its assets to generate
profits.
8. How is return on equity (ROE) of commercial
banks computed?
- ROE is computed by dividing the net income
of the bank by its average equity. It reflects
the profitability of the bank in relation to its
equity capital.
9. What are the three basic types of risks that
banks fare?
- Credit Risk: The risk of borrowers defaulting
on loans.
- Interest Rate Risk: The risk of fluctuations in
interest rates impacting the bank's
profitability.
- Liquidity Risk: The risk of being unable to
meet short-term financial obligations.
10. Describe the three types of risks asked in
question no. 9. How do banks try to manage
them?
- Credit Risk Management: Involves thorough
credit assessments, diversification of loan
portfolios, and the use of credit scoring
models.
- Interest Rate Risk Management: Banks use
tools like interest rate swaps and derivatives
to manage exposure to interest rate
fluctuations.
- Liquidity Risk Management: Involves
maintaining sufficient liquid assets,
establishing contingency funding plans, and
managing cash flows to meet short-term
obligations.