Introduction to

Financial
Management
Financial Institutions, Financial Instruments and
Financial Markets
Objectives
• To distinguish a financial institution from financial instrument
and financial market
• To enumerate the varied financial institutions and their
corresponding services
• To compare and contrast the varied financial institutions
• To explain the flow of funds within an organization – through
and from the enterprise – and the role of financial manager
What’s In
S U N F D It is a sum of money saved or made available for a
particular purpose

A K R M T E It is a regular gathering of people for the

purchase and sale of provisions, livestock
and other commodities.

T U T I I I N S T O N

It is an establishment, foundation or organization created to pursue an endeavor.

T R U M I N S E N T

It is a document that has a monetary value, or it represents a legally enforceable agreement between
two or more parties regarding a right to payment of money.
The
Financial
System
The Financial System

• Private Placements - the sale of a new

security directly to an investor or
group of investors.
• Financial Market - organized forums in
which the suppliers and users of
various types of funds can make
transactions directly
• Financial Institutions - intermediaries
that channel the savings of individuals,
businesses, and governments into
loans or investments.
The Financial System

• Public Offering - The sale of

either bonds or stocks to the
general public.

• Financial Instruments – is a real

or a virtual document
representing a legal agreement
involving some sort-of monetary
value
Financial Instruments
• When a financial instrument issued, it gives rise
to a financial asset on one hand and a financial
liability or equity instrument on the other.
• These can be debt securities like corporate bonds
or equity like shares of stock.
 Is any asset that is:
• Cash
• An equity instrument of another entity

Financial • A contractual right to receive cash or another

financial asset from another entity.
• A contractual right to exchange instruments
Asset with another entity under conditions that are
potentially favorable. (IAS 32.11)

Examples: Notes Receivable, Loans Receivable,

Investment in Stocks, Investment in Bonds
 is any liability that is a contractual
obligation:
• To deliver cash or other financial

Financial instrument to another entity.

• To exchange financial instruments with
another entity under conditions that are
Liability potentially unfavorable. (IAS 32)

Examples: Notes Payable, Loans Payable,

Bonds Payable
 is any contract that evidences a
residual interest in the assets of an
Equity entity after deducting all liabilities.
(IAS 32)
Instruments
Examples: Ordinary Share Capital,
Preference Share Capital
• Treasury Bonds and Treasury Bills
o are issued by the Philippine government.
o These bonds and bills have usually low interest
rates and have very low risk of default since the
government assures that these will be paid.
Debt
• Corporate Bonds
o are issued by publicly listed companies.
Instruments
o These bonds usually have higher interest rates than
Treasury bonds.
o However, these bonds are not risk free. If the
company which issued them 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.
• Commercial Paper
o is an unsecured, short-term debt instrument
issued by corporations.
o typically used to finance short-term liabilities
such as payroll, accounts payable, and
inventories. Debt
o is usually issued at a discount from face value. It
reflects prevailing market interest rates.
Instruments
o involves a specific amount of money that is to
be repaid by a specific date.
o Maturities on commercial paper range from
one to 270 days, with an average of around 30
days.
• Certificate of Deposits

ois a savings product that earns interest on

a lump sum of money for a fixed period of
time.
oCDs differ from savings accounts because
Debt
the money must remain untouched for
the entirety of their term or you risk Instruments
paying a penalty.
oCDs usually have higher interest rates
than savings accounts as an incentive for
lost liquidity.
• generally, have varied returns based on the
performance of the issuing company.
Equity
• Returns from equity instruments come from
either dividends or stock price appreciation.
Instruments
 Preferred Stock
• has priority over a common stock in terms of claims
over the assets of a company.
This means that if a company were to be liquidated and
its assets must be distributed, no asset will be
distributed to common stockholders unless all the
Equity claims of the preferred stockholders have been given.
• has no voting rights
Instruments • have also priority over common stockholders in cash
dividend declaration.
Dividends to preferred stockholders are usually in a
fixed rate. No cash dividends will be given to common
stockholders unless all the dividends due to preferred
stockholders are paid first. (Cayanan, 2015)
 Common Stock
• are the real owners of the company.
• If the company’s growth is spurring, the
common stockholders will benefit on the
Equity growth.
• Moreover, during a profitable period for
Instruments which a company may decide to declare
higher dividends, preferred stock will receive
a fixed dividend rate while common
stockholders receive all the excess.
Financial refers to a marketplace, where creation and trading of financial
assets, such as shares, debentures, bonds, derivatives,
currencies, etc. take place.

Markets
 Primary vs. Secondary
Markets
• To raise money, users of funds will go to a primary market
to issue new securities (either debt or equity) through a
public offering or a private placement.
• The sale of new securities to the public is referred to as a
public offering and the first offering of stock is called an
initial public offering. The sale of new securities to one
investor or a group of investors (institutional investors) is
referred to as a private placement.
• However, suppliers of funds or the holders of the securities
may decide to sell the securities that have previously been
purchased. The sale of previously owned securities takes
place in secondary markets.
Money Markets vs. Capital Markets
• Money markets are a venue wherein securities with short-term maturities (1
year or less) are sold.
Are created because some users of funds have temporally idle funds that they wish
to invest in a relatively safe, interest-bearing asset. Some find themselves in need of
seasonal or temporary financing

• Securities with longer-term maturities are sold in Capital markets. The key capital
market securities are bonds (long-term debt) and both common stock and
preferred stock (equity, or ownership)
 • Primary Market - Financial market in which securities are
initially issued; the only market in which the issuer is
directly involved in the transaction.
• Public offering - The sale of either bonds or stocks to the
public.
Financial • Private placement - The sale of a new security directly to
an investor or group of investors.

Markets • Secondary market - Financial market in which preowned

securities (those that are not new issues) are traded.
• Money market - A financial relationship created between
suppliers and users of short-term funds.
• Capital market - A market that enables suppliers and users
of long-term funds to make transactions.
 Financial
Institutions
1. Thrift Banks
• are composed of savings and mortgage
banks, private development banks,
stock savings and loan associations,
and microfinance thrift banks.
• essentially engaged in accumulating
savings of depositors and investing
them, providing short-term working
capital and medium- and long-term
financing to businesses engaged in
agriculture, services, industry and
housing, and diversified financial and
allied services, and to their chosen
markets, especially small- and medium-
enterprises and individuals.
 Financial
Institutions
2. Commercial Banks
Individuals deposit funds at commercial
banks, which use the deposited funds to
provide commercial loans to firms and
personal loans to individuals, and
purchase debt securities issued by firms
or government agencies.
3. Insurance Companies
• Individuals purchase insurance (life, property
and casualty, and health) protection with
insurance premiums.
• The insurance companies pool these payments
and invest the proceeds in various securities
Financial
until the funds are needed to pay off claims by
policyholders. Institutions
• Because they often own large blocks of a
firm’s stocks or bonds, they frequently attempt
to influence the management of the firm to
improve the firm’s performance, and
ultimately, the performance of the securities
they own.
4. Mutual Funds
• are owned by investment companies which
enable small investors to enjoy the benefits of
investing in a diversified portfolio of securities
purchased on their behalf by professional
investment managers. Financial
• When mutual funds use money from investors
to invest in newly issued debt or equity
securities, they finance new investment by
Institutions
firms.
• Conversely, when they invest in debt or equity
securities already held by investors, they are
transferring ownership of the securities among
investors.
5. Pension Funds - Financial institutions that receive
payments from employees and invest the proceeds on
their behalf.

6. Other financial institutions include pension funds

like Government Service Insurance System (GSIS) and
Social Security System (SSS), unit investment trust
Financial
fund (UITF), investment banks, and credit unions
• Universal Banks
Institutions
• Private equity funds
• Investment Companies
• Leasing Companies
Role of Financial Institutions
Role of Financial Institutions
 • How would you relate the role of financial
managers, role of financial markets and role
of investors?
Enrichment
• Make a diagram, write the definition and give
3 examples of Financial Institution, Financial
Instruments and Financial Market.
Enrichment