Submitted by:

Marilou B. Alfinda
Jona Maie Abion

Subject: Financial Management

Submitted to:
Michelle G. Acuavera, MBA
Subject Professor

The Domestic and International Financial Market

OBJECTIVES:

✓ Define what a financial system is;

✓ Enumerate the functions of the financial system;
✓ Enumerate the components of the financial system;
✓ Illustrate the financial cycle;
✓ Discuss the financial markets;
✓ Describe the classification of financial market ;
✓ Enumerate the financial intermediaries or financial institutions;
✓ Examine the different financial institutions;
✓ Discuss the non-bank government controlled institutions;
✓ Define financial instruments;
✓ Enumerate the money market instruments;
✓ Enumerate the capital market instruments; and
✓ Explain security exchanges and stock market transactions.

What Are Financial Markets?

Financial markets refer broadly to any marketplace where securities trading occurs,
including the stock market, bond market, forex market, and derivatives market.
Financial markets are vital to the smooth operation of capitalist economies.

KEY TAKEAWAYS

• Financial markets refer broadly to any marketplace where the trading of

securities occurs.
• There are many kinds of financial markets, including (but not limited to) forex,
money, stock, and bond markets.
• These markets may include assets or securities that are either listed on
regulated exchanges or trade over-the-counter (OTC).
• Financial markets trade in all types of securities and are critical to the smooth
operation of a capitalist society.
• When financial markets fail, economic disruption, including recession and rising
unemployment, can result.

Functions of the Financial System

Performs functions that are essential in making an economic system work. These
functions includes:

1. Credit - refers to the ability of a borrower to obtain goods or services before payment,
based on the trust that payment will be made in the future.
2. Payments - refers to the transfer of money or financial assets from one party to another
in exchange for goods, services, or as settlement of a debt or obligation.
3. Money Creation - refers to the process by which money enters circulation in the
economy. It primarily occurs through the actions of central banks and commercial banks
within the financial system.
4. Savings - refers to the portion of income that individuals or entities set aside for future
use rather than spending it immediately.

Components of the Financial System

1. Financial instruments
2. Financial sector consisting of financial markets and financial institutions
3. Rules governing the conduct of trade
 ➢ Financial markets- a vehicles through which financial assets are bought,sold,
and traded.
➢ Financial Assets- represents claims against the assets and future earnings of
the corporation.

Classification of financial market

• Money market- dealings inshort-term securities having maturities of one year

or less
• Capital market- dealings in long-term securities having maturities greater than
one year.
• Primary market- investor who purchases new securities is participating in a
primary financial market.
• Secondary market- an investor who resells existing securities is participating
in a secondary financial market.

Security exchange- place where stock brokers and traders can buy and
sell stocks/shares,bonds and other securities.

Over-the-counter (OTC)- does not have centralized place of business but

rather exist as networks of security dealers.

Financial Intermediaries or Financial Institutions

- It facilitates the flow of funds between surplus spending units (SSUs) and
deficit spending units (DSUs)
- These different financial intermediaries specialize in the types of deposits
they accept ( source of funds) and the types of investments they make (uses
of funds).

Different Financial Institutions

1. Universal Banks – considered as a “one-stop-shop bank” services given/

rendered are the same as that of “ALL” the services rendered by financial
institutions…from simple saving deposits to trust funds and
insurance…(whether banking or non-banking financial institutions)
2. Commercial Banks – accepts both demand deposits (in the form of checking
accounts) and time deposits (in the form of savings account and certificates of
deposits). These funds are loaned to individuals,businesses, and government.
3. Thrift Institutions – include savings and loan associations, mutual savings
bank, and credit unions.
- Savings and loan associations and mutual savings bank invest most of their
funds in home mortgages, whereas;
 - Credit unions are engaged primarily in consumerloans.
4. Investment Companies – such as mutual funds and real estate investmen
trusts, pool the funds of many savers and invest these funds in various types of
assets.
5. Pension Funds – pooling of funds coming from the contributions of employees
(and/or employers) and invest these funds in various types of financial assets,
such as corporate securities, or real assets, such as real estate.
6. Insurance Companies – insurance companies receive periodic or lump-sum
premium payments from individuals or organizations in exchange for agreeing
to make certain future contractual payments.
Example of Insurance:
a. Life insurance companies make payments to a beneficiary based on
certain events, such as the death or disability of the insured party:
b. Property and casualty insurance companies make payments, when a
financial loss occurs due to such events as fire, theft, accident and illness.
The premium received are used to build reserves to pay future claims.
These reserves are invested in variousntypes of assets, such as corporate
securities.
7. Finance Companies – obtain funds by issuing their own debt securities and
through loans from commercial banks.

Non-Bank Government Controlled Institutions

1. Government Service Insurance System (GSIS) – a non-bank government

owned and controlled corporation created by Commonwealth Act. No. 186
passed on November 14, 1936, mandated to provide, and administer the
following social security benefits for government employees like compulsory life
insurance, optional life insurance, retirement benefits, disability benefits for
work-related contingencies and death benefits.
2. Social Security System (SSS) – a non- bank government-controlled institution
that provides retirement and other health and disability benefits to all enrolled
private employees and other non-employee belonging in the self-employed sector
in the Philippines, whereby members can make salary or calamity loans for their
individual needs.
3. Home Development Mutual Fund (HDMF) – more popularly known as the Pag-
Ibig Fund – a non-bank government-controlled corporation established to
provide a national savings program and affordable shelter financing for the
Filipino worker. The FUND offers its members short-term loans and access to
housing programs.
4. PhilHealth – a non-bank government owned and controlled corporation
established to provide health insurance coverage and ensure affordable,
acceptable, available and accessible health care services for all citizens of the
Philippines.
A financial instrument is a real or virtual document representing a legal agreement
involving any kind of monetary value.

Note: Example Debt-Based Financial Instruments- credit cards, mortgaged

A financial instrument is effectively a monetary contract (real or virtual) that confers a
right or claim against some counterparty in the form of a payment (checks, bearer
instruments), equity ownership or dividends (stocks), debt (bonds, loans, deposit
accounts), currency (forex), or derivatives (futures, forwards, options, and swaps).
Financial instruments can be segmented by asset class and as cash-based, securities,
or derivatives.
Financial instrument differs in respect to:
• Denomination

• Maturity
• Ownership
• Collateral

• Terms of re-pricing
• Marketability
• Interest payment

• Options
• Currency Denomination

Types of Market Instruments

Money Market
Money markets are typically shorter-term instrument and carry less risk but offer less
potential reward. Capital markets are typically longer-term and offer greater risk but
potential for greater rewards,
The money market is a good place for individuals, banks, other companies, and
governments to park cash for a short period of time, usually one year or less. It exists
so that businesses and governments that need cash to operate can get it quickly at a
reasonable cost, and so that businesses that have more cash than they need can put it
to use.
EXAMPLES OF MONEY MARKET INSTRUMENTS
Treasury Bills

The federal government raises cash by issuing Treasury bills.9 Their duration is for one
year or less.
Commercial Paper
Large companies with impeccable credit can simply issue short-term unsecured
promissory notes to raise cash. Asset-backed commercial paper is a derivative based
upon commercial paper.
Bankers Acceptances

This works like a bank loan for international trade. The bank guarantees that one of its
customers will pay for goods received, typically 30 to 60 days later. For example, an
importer wants to order goods, but the exporter won't give him credit. He goes to his
bank, which guarantees the payment. The bank is accepting the responsibility for the
payment.
Repurchase Agreements

A repo is used when a bank issues securities but promises at the same time to
repurchase them later at a higher price.5 This often means the next day with a little
added interest. Even though it's a sale, it's booked as a short-term collateralized loan.
The buyer of the security, who is actually the lender, executes a reverse repo.
Tax Anticipation Bills
short-term debt instruments issued by the government to cover temporary cash
shortages.
Interbank Call Loans

The borrowing conducted by banks to cover their deficiencies in their financial standing
Certificates of Deposit
Banks issue certificates of deposit to raise short-term cash.4 Their duration is from one
to six months. The CDs pay the holder higher interest rates the longer the cash is held.
Certificates Of Assignments
A financial instrument issued by a borrower transferring ownership of a batch of
Promissory Notes to the lender.
Certificates Of Participation
• A new form of credit instrument whereby banks can raise funds from from other banks
and other central bank approved financial institution to ease liquidity
Capital Market
Capital markets are where savings and investments are channeled between suppliers
and those in need. Suppliers are people or institutions with capital to lend or invest and
typically include banks and investors. Those who seek capital in this market are
businesses, governments, and individuals. Capital markets are composed of primary
and secondary markets. The most common capital markets are the stock market and
the bond market. They seek to improve transactional efficiencies by bringing suppliers
together with those seeking capital and providing a place where they can exchange
securities.

EXAMPLE OF CAPITAL MARKET INSTRUMENTS

Stocks
An ownership equity in a corporation allowing the holder to enjoy some of the profits
and share some of the risks
Mortgaged-Backed Securities
A short-term promissory note issued by a large, established firm with strong credit
rating.
Corporate Bonds
Are long-term financial instruments issued by corporations with strong credit ratings.

Treasury Bonds
Are long-term financial instruments issued by the government to finance DEFICITS of
the national government

Municipal Bonds
Long-term indebtedness issued by towns, cities, or provinces and are secured by the
taxing power of these entities.

Treasury Notes
A negotiable debt obligation issued by the government and backed by its full faith and
credit having a maturity of one year and 25 years.
Long-Term Corporate Notes
Are commercial papers issued by corporations to finance various requirements.

SECURITY EXCHANGES AND STOCK MARKET TRANSACTIONS

Securities and Exchange Commission (SEC) is an independent federal
government regulatory agency responsible for protecting investors, maintaining fair and
orderly functioning of the securities markets, and facilitating capital formation

New York Stock Exchange

The New York Stock Exchange (NYSE) is the oldest and most influential securities
exchange in the United States, and is the largest stock exchange in the world by total
listed company market cap. With humble beginnings under a buttonwood tree in
Manhattan, the NYSE is now a landmark that epitomizes Wall Street. Today, the NYSE
lists the most important publicly-traded American companies and is still seen as the
premier venue for stock trading.
American Stock Exchange
The American Stock Exchange (AMEX) was once the third-largest stock
exchange in the United States, as measured by trading volume. The exchange, at its
height, handled about 10% of all securities traded in the U.S.
Today, the AMEX is known as the NYSE American. In 2008,
NYSE Euronext acquired the AMEX. In the subsequent years, it also became known as
NYSE Amex Equities and NYSE MKT.1

Philippine Stock Exchange

The Philippine Stock Exchange, Incis the national stock exchange of
the Philippines. The exchange was created in 1992 from the merger of the Manila Stock
Exchange and the Makati Stock Exchange. Including previous forms, the exchange has
been in operation since 1927. The PSE's headquarters is located at the Philippine Stock
Exchange Tower, located along the One Bonifacio High Street complex in Bonifacio
Global City.

KEY TAKEAWAYS
• Capital markets refer to the venues where funds are exchanged between suppliers
and those who seek capital for their own use.

• Suppliers in capital markets are typically banks and investors while those who
seek capital are businesses, governments, and individuals.
• Capital markets are used to sell different financial instruments, including
equities and debt securities.
• These markets are divided into two categories: primary and secondary markets.
• The best-known capital markets include the stock market and the bond markets
Reference:
Simplified Approach to Financial Management
(Theories and Practices)

by
DR. PRECILA R. BAUTISTA
https://www.investopedia.com/terms/s/sec.asp

https://www.investopedia.com/terms/c/capitalmarkets.asp
https://www.thebalancemoney.com/money-market-instruments-types-role-in-
financial-crisis-3305528

https://en.wikipedia.org/wiki/Philippine_Stock_Exchange
https://www.investopedia.com/terms/m/moneymarket.asp
https://www.investopedia.com/articles/investing/052313/financial-markets-capital-
vs-money-markets.asp