FINANCIAL MARKET,

FINANCIAL
INSTITUTIONS, AND
FINANCIAL
INSTRUMENTS
Chapter 4
 FINANCIAL MARKETS
• Is a meeting place for people, corporations and
institutions that either need money or have money to
lend or invest.
• Global network of individuals and financial
institutions that may be lenders, borrowers or
owners of public companies worldwide.
• PUBLIC FINANCIAL
MARKETS
Financial market for
national, state and local
government that are primarily
borrowers of funds for
highways, education, welfare
and other public activities
CORPORATE FINANCIAL
MARKETS
Financial markets for
corporations to raise funds for
short-term operations and for
new plant and equipment.
 FINANCIAL MARKET FUNCTIONS:
PRIMARY MARKET
• Original sale of securities by
governments and corporations.
• The corporation or the government is
the seller and the transaction raises
money for the corporation or the
government
• Corporations engage in two types of
primary market transactions, public
offerings and private placements.
SECONDARY MARKET
• Also known as Stock
Market or Exchange.
• After the securities are sold
to the public (institutions
and individuals) they can
now be traded in the
secondary market.
 STOCK EXCHANGE
 an organized secondary market where securities like shares,
debentures of public companies, government securities and
bonds issued by municipalities, public corporations, utility
undertakings, port trusts and such other local authorities are
purchased and sold. In order to bring liquidity, the stocks are
traded systematically in a stock exchange.
 STOCK EXCHANGE
 is an entity which is in the business of bringing buyers and
sellers of stocks and securities together. The purpose of stock
exchange is to facilitate the exchange of securities between
buyers and sellers, thus providing a market place, virtual or
real.
Known as the barometer of the company’s economy.
 TYPES OF MARKETS

1. PHYSICAL ASSET MARKETS VS FINANCIAL

ASSET MARKETS.
2. SPOT MARKETS VS FUTURE MARKETS.
3. MONEY MARKETS VS CAPITAL MARKETS
4. PRIMARY MARKETS VS SECONDARY MARKETS
5. PRIVATE MARKETS VS PUBLIC MARKETS
 PHYSICAL ASSET MARKETS VS FINANCIAL ASSET MARKETS

PHYSICAL ASSET FINANCIAL ASSET

MARKETS MARKET

 Also called tangible or real • Deal with stocks, bonds, notes

asset markets and mortgages.
Are for products such as • It also deals with derivative
wheat, autos, real estate, securities.
computers and machinery.
 SPOT MARKETS VS FUTURE MARKETS

SPOT MARKETS FUTURE MARKETS

 spot markets are markets in  markets in which participants

which assets are bought or sold agree today to buy or sell an
for “on-the-spot” delivery. asset at some future date.
 MONEY MARKETS VS CAPITAL MARKETS

MONEY MARKETS CAPITAL MARKETS

 financial markets in which  financial markets for stocks

funds are borrowed or loaned and for intermediate or long-
for short periods. term debt.
 MONEY MARKETS VS CAPITAL MARKETS

PRIMARY MARKETS SECONDARY MARKETS

Markets in which corporations Markets in which securities

raise capital by issuing new and other financial assets are
securities. traded among investors after
they have been issued by
corporations.
 MONEY MARKETS VS CAPITAL MARKETS

PRIVATE MARKETS PUBLIC MARKETS

Markets in which transactions Markets in which standardized

are worked out directly contracts are traded on
between two parties. organized exchanges.
 FINANCIAL INSTITUTIONS
Are institutions or organizations that provide financial services,
among others, in the term of loan, credit, fund administration,
financing, depository, and safekeeping.
Financial institutions, based on the financial services provided, are
generally classified as follows:

1. Depository institutions
2. Financial intermediaries
3. Investment institutions
 DEPOSITORY INSTITUTIONS

are financial institutions that accept deposits (savings, current, and

time deposits) from individuals and corporate entities, extend loans
to borrowers, transfer funds, and manage funds for investment
purposes.
Depository institutions include the following:
1. Banks
2. Savings and loan association
3. Trust companies
4. Credit unions
 BANKS
•BANKS are institutions authorized to
operate and regulated by the BSP under the
General Banking Law of 2000. They accept
deposits and bills payment, provide loans,
and facilitate the transfer of funds
domestically or abroad.
 BANKS

• Under BSP Circular No. 271, the major classifications of

banks operating in the Philippines are as follows:
a. Universal Bank
d. Rural Bank
b. Commercial Bank
e. Cooperative
c. Thrift Bank Bank
f. Islamic Bank
 SAVINGS AND LOAN ASSOCIATION
• A savings and loan association, sometimes referred to as a
financing and mortgage loan company, is a financial institution
that is engaged in the business of accumulating the savings of its
members and stockholders, and using such accumulations for
loans or investment in securities of productive enterprises.
• The unique feature of the financing and mortgage loan company
is that the depositors are also the member-borrowers of the
association.
 PENSION FUNDS
• A pension fund is set up by a business for the purpose of paying
the pension requirements of all private-sector employees who
retire from the business organization upon reaching their
retirement age.
 INSURANCE COMPANIES

• An insurance company acts as a financial intermediary by

pooling together the proceeds of insurance policies sold to the
public and investing the accumulated funds in high-yield
maturing securities from investment houses. Most of the
money accumulated by insurance companies from insurance
premium is lent in either medium- or long-term loan to
companies engaged in commercial real estate.
 INSURANCE COMPANIES

• Insurance companies may offer the following products to the

public:
1. Life Insurance 6. Marine Insurance
2. Health Insurance 7. other insurance products
3. Car Insurance
4. Fire Insurance
5. Crop Insurance
 INVESTMENT INSTITUTIONS

• An investment institution is a company engaged in buying

securities of other companies which are listed in the stock
exchange for investment purposes only. Hence, the buying and
selling of financial securities are not the primary business
activities of an investment institutions.
 FINANCIAL INSTRUMENTS
• IAS 32 and 39 define a financial instrument as "any contract
that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity“
• are monetary contracts between parties. They can be created,
traded, modified and settled. They can be cash (currency),
evidence of an ownership interest in an entity (share), or a
contractual right to receive or deliver cash (bond).
 FINANCIAL INSTRUMENTS

• Financial instruments include primary instruments and

derivative financial instruments
Primary Instruments include the ff:
i. Financial assets
ii. Financial Liabilities
iii. Equity Instruments
 FINANCIAL ASSET

A Financial Asset is any asset that is:

• Cash
• An equity instrument of another entity (ex.
Investment in ordinary share of a corporation)
• Receivable (accounts, notes and loans
receivable)
 FINANCIAL ASSET
• Cash
 Petty Cash
 Demand, savings and time deposits
 Undeposited checks
 Foreign currencies
 Money Orders
 Bank drafts

• Equity instruments of another entity

 Stock certificates
 Bond certificates

• Receivables
 Trade-receivables
 Promissory notes
 Bond certificates
 FINANCIAL LIABILITIES

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)
 FINANCIAL LIABILITIES

Examples of Financial Liabilities are the following:

• Accounts and notes payable
• Loans from other entities
• Bonds and other debt instruments issued by the entity
 EQUITY INTRUMENTS

An Equity Instrument is any contract that evidences a

residual interest in the assets of an entity after deducting all
liabilities. (IAS 32)
EQUITY INTRUMENTS
 COMPARISON OF STOCKS AND BONDS
• Higher risk but with
possibility of higher
returns
• Can be appropriate if the
STO investment is for the
CKS long term (10 years or
more). This can allow
investors to wait for
stock prices to increase if
ever they go low.
• Lower risk but lower
yield.
• Can be appropriate for
retirees (because of the
BO
guaranteed fixed
ND
income) or for those who
S
need the money soon
(because they cannot
afford to take a chance at
the stock market)
 DEBT SECURITIES
Treasury bills and bonds are both investment securities
issued by the government in order to raise funds for the
running of the government and to pay off any outstanding
government loans. The major similarity between these
securities is that they are issued by the same party, and any
individual who purchases these securities is essentially
lending money to their country’s government. Regardless of
their similarities, treasury bills and bonds are quite different to
each other in terms of their characteristics.
 DEBT SECURITIES
>Treasury bill is a short term security, with maturity of usually
less than one year.
>The return to an investor of a treasury bill is not from interest
paid like in most bonds (interest on bonds are called coupon
payments). Rather, the investment return is through the
appreciation of the price of the security. For example, the price
of a T-bill is set at 950. The investor pays the T-bill at 950 and
waits for it to mature. At maturity, the government pays the
bill holder (investor) 1000. The return that the investor would
have made is the difference of 50.
 DEBT SECURITIES
•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.
GROUPING:
MAKE A VENN DIAGRAM SHOWING THE
COMPARISON AND CONTRAST OF THE
FOLLOWING:
GROUP 1 : EQUITY AND DEBT SECURITIES
GROUP 2 : STOCK AND BONDS
GROUP 3 : COMMON AND PREFERRED STOCKS
GROUP 4 : TREASURY BILL AND TREASURY
BONDS