SAVINGS,

INVESTMENT,
AND THE
FINANCIAL
SYSTEM

Group 2
 SAVINGS

It refers to the sum of money left when

spending is subtracted from disposable
income over a given time period.
Can be used to increase income through
investing.
 Example
Sasha’s monthly paycheck is $5,000. Her expenses include:
Rent payment- $ 1,300
Car payment- $450
Student loan payment- $500
Credit card payment- $300
Groceries- $250
Utilities- $75
Since her monthly income is $5,000 and her
monthly expenses are, $2,875, Sasha has saved
a sum of money amounting to $2,125.
–If Sasha saves her excess income and faces an
emergency, she has money to live on while
resolving the issue.
Investment

– An investment is an asset or item that is purchased with

the hope that it will generate income or appreciate in
value at some point in the future.

– Concerns the outlay of some asset today (time, money,

effort, etc.) in hopes of a greater payoff than what was
originally put in.
 FINANCIAL SYSTEM

– system that allows the exchange of funds

between financial market participants such
as lenders, investors, and borrowers
– operate at national and global levels. 
 SOME OF THE IMPORTANT FINANCIAL
INSTITUTIONS IN THE PHILIPPINE ECONOMY

FINANCIAL INSTITUTION
– An enterprise such as a bank whose primary 
business and function is to collect money
from the public
 BANKING INSTITUTION

Banking institution in the Philippines can be

categorized as:
a. Private banking institution
b. Government banking institution
PRIVATE BANKING INSTITUTION

1. Commercial Banking Institution- They

account for the bulk of total resources of
banking industry.
2. Thrift Banks- mobilizing small savings of
people and provide funds for agriculture
and industry with reasonable interests rates.
 Examples of Thrift banks :
– Savings and mortgages banks - primarily to receive time
deposit of different types and to invest its funds in long term
investment.
 Savings and Loan Association- similar to savings and
mortgage banks and classified as either stock or non-stock
corporations.
 Private Development Banks- It is a government entity,
formerly the Rehabilitation Finance Corporations.
– Rural Banks -it fulfills the investment function by
allowing small farmers their needs through the granting
of loans for capital or other uses.
 Government Banking Institution
–1. The Philippine National Bank - operates under the
provision of Executive order No. 80
–2. Development Bank of the Philippines -started operating
in 1935 as National Loan and Investment Board. Its first
mission was to coordinate and manage trust funds.
–3. Land bank of Philippines - created by the agrarian
reform code to finance the acquisition and distribution of
agricultural estates for division and to resell this to small
landholders.
–4. Al- Amanah Islamic Investment Bank of the
Philippines- was created under Republic Act No. 6848 for
the purpose of promoting and acccelerating the socio-
economic growth of Mindanao
Other Classification of financial institutions.

1. Depository institutions
Allowed to accept monetary deposits from the consumers
legally.
2. Non-depository institutions
Serve as the intermediary between the savers and the borrowers.
They do not accept the time deposits but perform their activities
of lending to the public.
Financial system related to macroeconomic
variable

– Macroeconomic variables - indicators signaling the

current trends in the economy.

– In order to macro-manage the economy, the

government must study, analyze and understand the
major variables that determine the current behavior of
macro-economy.
 KEY INDICATORS TO MACROECONOMIC
VARIABLES:

1. Gross Domestic Product - it equals the total value of

goods and services produced by a country during a
year.
2. Unemployment rate – proportion of the labor force
that is not currently employed. It is also considered as a
lagging indicator.
Example: Spain's unemployment rate is sitting at 24.7%
- increasing non performing loans which in turn lower the
bank liquidity as well.
3. Inflation- rise in the prices of goods and services within a
particular economy.

Example: Spain's inflation sits at 2%

4. Interest rates- amount a lender charges for the use of
assets. It is expressed as a percentage of the principal.
It is used as an instrument in economic policy.
Example: Banks and other financial institutions set an
interest rate to achieve a monetary policy objective
 MODEL OF
SUPPLY AND
DEMAND FOR
LOANABLE
FUNDS IN
FINANCIAL
MARKETS
KEY TERMINOLOGIES:
1. Loanable fund (savers and borrowers)
2. Financial market for loanable funds
3. Supply and demand
4. Supply of loanable funds
5. Demand for loanable funds
6. Savings-investment spending identity
7. Budget surplus
8. Budget deficit
9. Public saving- difference between taxes collected and
government spending
10. Private saving- amount left from disposable income
after consumption is taken out
11. National saving- total amount of private saving and
public saving
– financial system influences the economic growth through
accumulation of the capital and the change in the
productivity of production factors

– efficient and effective banking system and financial

markets create a positive impact on the overall wealth of
society.
 HOW TO USE THE
LOANABLE FUNDS
MODEL TO
ANALYZE VARIOUS
GOVERNMENT
POLICIES
–Some government policies, such as investment tax credits,
basically lower the cost of borrowing money at every real
interest rate. Such policies would increase the demand for
loanable funds. Other policies, such as budget deficits,
might increase the demand for loanable funds.
– Real interest rates are procyclical
– When the economy is doing well:
– the rate of return on any investment spending will increase
– Which in effect will cause the demand for loanable fund to
increase, and leads to a higher real interest rate.
HOW
GOVERNMENT
BUDGET
DEFICITS AFFECT
THE PHILIPPINE
ECONOMY
Budget deficits- occurs when:
Government spending > tax revenue
Public spending- also known as budget surplus
Government run budget deficits and financed by borrowing
Components of budget deficit:
– 1. Revenue
– 2. Expenses
 EFFECTS/IMPLICATIONS OF A BUDGET
DEFICIT IN THE PHILIPPINE ECONOMY

1. Rise in national debt

2. Increase in Aggregate Demand (AD)
 Aggregate demand- total demand for final goods and
services in an economy at any given price level
3. Boosts the economy during a recession
 Recession- significant decline in economic activity
4. Fiscal policy
– Budget deficit is used to finance an expansionary fiscal
policy
5. Higher taxes in the future
6. Higher interest rates and bond yields
THE BASIC
TOOLS OF
FINANCE
 THE RELATIONSHIP BETWEEN
PRESENT VALUE AND FUTURE VALUE

Present value- sum of money that must be invested in order

to achieve a specific future goal
Future value- nominal future sum of money that will accrue
over time when that sum is invested
Derived from the time value of money and its monetary
concept use by business owner or investors every day.
The present value and future value vary directly: when one
increases, the other increases, assuming that the interest
rate and number of periods remain constant.
 FUTURE VALUE (EXAMPLE)

FV OF ₱1 = (1+ i)n
Where:
i= interest rate
n-= number of periods
 You deposited ₱10,000 today. The deposit earns 10% interest
compounded annually. How much will your deposit be worth after 3 years?
SOLUTION:

FV OF ₱1 = (1+10%)3
FV OF ₱1 = 1. 331
Future value of deposit:
(₱ 10,000 x 1.331) = ₱13,310
 PRESENT VALUE (EXAMPLE)

PV OF ₱1 = (1+ i)-n
You wish to withdraw ₱ 13,310 three years from now. The
interest rate is 10% compounded annually. How much
deposit should you make today?
SOLUTION:

PV OF ₱1 = (1+ 10%)-3
PV OF ₱1 = 0.751315
Present value of future withdrawal:
(13, 310 x 0.751315) = ₱10,000
 THE EFFECTS OF COMPOUND
GROWTH

Compound Annual Growth Rate- average rate

of growth experienced by an investment over a multi-year
period.
 EXAMPLE:
Five years ago, Sam invested $10,000 in the stocks of ABC
Corp. Below, you can see the total value of his investment at
the end of each year:
 Year 1: $10,500
 Year 2: $8,500
 Year 3: $9,750
 Year 4: $10,700
 Year 5: $11,500
The CAGR of his investment is calculated in
the following way:
HOW RISK-
AVERSE
PEOPLE
REDUCE THE
RISK THEY
FACE
A risk averse investor is an investor who:
 Prefers lower returns with known risks rather than higher
returns with unknown risks.

 Avoids uncertainty.

 Prioritizes the safety of prioritize the safety of principal

over the possibility of a higher return on their money.
 SEVEN WAYS TO CURE
YOUR AVERSION TO RISK

1.Start with small bets

2.Let yourself imagine the worst-case scenario. Develop a
portfolio of options
3.Have courage to not know
4.Don't confuse taking a risk with gambling
5.Take your eyes off of the prize
6.Be comfortable with good enough
HOW ASSET
PRICES ARE
DETERMINED
 ASSET PRICES

Asset prices are the prices for which financial instruments,

such as stocks and bonds, are bought and sold.
 GENERAL EQUILIBRIUM
THEORY
Prices are determined through market pricing by supply
and demand
EXAMPLE: