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 CORPORATE FINANCIAL
MARKETS MARKETS
Financial market for
Financial markets for
national, state and local
government that are corporations to raise funds
primarily borrowers of for short-term operations
funds for highways, and for new plant and
education, welfare and
equipment.
other public activities
 FINANCIAL MARKET FUNCTIONS:
PRIMARY MARKET SECONDARY MARKET

• Original sale of securities by • Also known as Stock

governments and corporations. Market or Exchange.
• The corporation or the • After the securities are
government is the seller and the
sold to the public
transaction raises money for the
corporation or the government
(institutions and
• Corporations engage in two types
individuals) they can now
of primary market transactions, be traded in the
public offerings and private secondary market.
placements.
 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 • Deal with stocks, bonds,
real asset markets notes 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  markets in which

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

MONEY MARKETS CAPITAL MARKETS

 financial markets in which  financial markets for

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

PRIMARY MARKETS SECONDARY MARKETS

Markets in which Markets in which securities

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

PRIVATE MARKETS PUBLIC MARKETS

Markets in which Markets in which

transactions are worked out standardized contracts are
directly between two traded on organized
parties. 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 • Lower risk but lower
possibility of higher yield.
S returns
• Can be appropriate
• Can be appropriate if
B
T for retirees (because
the investment is for O
O of the guaranteed
the long term (10 fixed income) or for N
C
years or more). This those who need the D
K
can allow investors to money soon (because S
S
wait for stock prices they cannot afford to
to increase if ever take a chance at the
they go low. 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