Chapter 9

BASIC FINANCE
 THE POWER OF COMPOUNDING
INVESTING VS. SAVING
FINANCIAL MARKETS AND THE
ECONOMY

LESSON REAL AND FINANCIAL ASSETS

ARE PROPERTIES INVESTMENTS,

OUTLINE TOO?
KEY CONSIDERATION IN
INVESTMENTS
FINANCIAL INTERMEDIARIES
SUMMARY

END OF CHAPTER ASSESSMENT

 AT THE END OF THIS CHAPTER, THE
STUDENT SHOULD BE ABLE TO:
1. EXPLAIN THE CONCEPT OF TIME
VALUE OF MONEY;
2.DETERMINE THE DIFFERENT TYPES

LESSON
OF INVESTMENT;
3. DISTINGUISH REAL FROM

OBJECTIVE
FINANCIAL ASSETS;
4. IDENTIFY THE EFFECTS OF
FINANCIAL INTERMEDIATION TO THE
MARKETS
5. DETERMINE THE RELATIONSHIP
BETWEEN FINANCIAL MARKETS AND
THE ECONOMY.
THE POWER OF
COMPOUNDING

The power of compounding refers to an

investment's potential to generate
returns not just on the original amount
but also on the interest gained over
time. The power of compounding can be
leveraged in a variety of investing
strategies, adding interest to the money
you have invested.
 COMPOUND INTEREST
Compound interest is interest that applies
not only to the initial principal of an
investment or a loan, but also to the
accumulated interest from previous periods.
In other words, compound interest involves
earning, or owing, interest on your
interest.
FORMULA
A=P (1+—
r nt
n)
 INVESTING VS SAVING
Saving essentially means storing your money
to use in the fairly near future. You might
deposit this money into a bank savings
account. While Investing involves purchasing
securities that have the potential to return
more than savings over time but also come
with higher risk.

The latter involves not "touching" one's

disposable income, while the former is about
putting this "untouched" income in the form
of another asset
FOR EXAMPLE:
If my mother earns Php 50,000 per month and spends Php
30,000 on expenses and payment of debts, there remains
20,000 pesos. The Php 30,000 or 60% of her income was
consumed while the remaining 20,000 pesos is "untouched."
When this Php 20,000 is placed inside her piggy bank or
is staying inside her wallet or cash box, it is
considered part of her savings. She saved it. If she
chooses to buy Php 20,000 worth of San Miguel Company
Equity stocks, though, she invests it. Thus, saving
basically revolves around the fact that you do not spend
or consume your whole income, while investing entails
placing it on some other form of assets, which in this
case is the San Miguel Company Equity stocks
When investing, one shall have an investment portfolio.
The investment portfolio is the collection of investment
assets. The key to investing is not putting all your
hard- earned income to one type of investment. Do not use
all your savings on San Miguel Company Equity stocks. You
need to learn how to diversify.

Diversification, as what they say, is "not placing all of

your eggs in one basket" or spreading your income to
different types-from banks, to corporate bonds,
government bills, and other options.
FINANCIAL MARKETS AND
THE ECONOMY
Financial Markets
refer broadly to any marketplace where securities
trading occurs,

Example: stock market, bond market, and foreign exchange

market

Financial markets play a vital role in

facilitating the smooth operation of
capitalist economies by
FINANCIAL MARKETS AND
THE ECONOMY
Even out consumption need / Consumption smoothing

creating a balance between spending and saving

during the different phases of our lives to
achieve a higher overall standard of living.

Financial markets allow individuals to decide

concerning their current spending and
constraint.
FINANCIAL MARKETS AND
THE ECONOMY
Allocating Risk
financial markets provide a glimpse to the future
of firms, investors are guided by the stock
market's movements. They depict which firms are
going to be better, those that may fail, and those
that are their peak
FINANCIAL MARKETS AND
THE ECONOMY
Business Management
For entrepreneurs and employers, financial markets
are the go-signals and red lights on some of their
decisions. They consider the perception of the
public and use the movements in the financial
markets to direct them towards decisions that may
make or break their firms. Management of firms'
investment portfolios may be under either passive
or active management.

is not spending
involves a effort on
continuous attempt improving one's
to improve the highly
current investment diversified
portfolio of a firm. investment
portfolio.
FINANCIAL MARKETS AND
THE ECONOMY
Ethical Practices

Financial markets, time and again, have proven

their worth in putting down malpractices and
closing down businesses found and sometimes, just
rumored to engage in unethical practices and
management.

unethical practices Discovered:

Insider Trading - illegally obtaining information

about the company's status, operations, and
dealings by having someone from the inside divulge
confidential but significant information to an
outsider with personal agenda.
What are real assets
-Real Assets are
tangible resources,
namely real estate,
infrastructure, and
commodities, with an
intrinsic value tied
to their utility, i.e.
ability to produce
goods or services.
 -Definition
A real asset can be described as a
tangible asset that possesses value due
to being able to produce goods or
services.

The core purpose of real assets is the

generate revenue and profits, so the
intrinsic value of these assets stems
from their utility with regard to
productivity, i.e. the capacity to
produce and generate cash flows.

From a broad perspective, all the wealth

creation within the economy is thereby
determined by real assets and their
productive capacity.
Real Estate- The land and properties for
residential and commercial purposes, e.g.
family homes, housing apartments,
commercial buildings,

Infrastructure- The systems and networks

that facilitate the transportation, storage,
and distribution of goods and services, e.g.
roads, airports, railroads, sewer systems,
power lines, subways, pipelines, and towers.

Commodities- The resources used in

commerce and often a necessary input for
the production of other types of goods, e.g.
oil, natural gas, corn, soybeans, and
precious metals like gold and silver.
REAL STATE
 What is the Difference Between Real
Assets vs. Financial Assets?
Financial assets represent claims
against an underlying company, so the
value of financial assets depends on
the underlying asset, e.g. a
corporation that raised capital
through selling shares or issuing
debt.
ARE PROPERTIES INVESTMENT, TOO?
Real estate investment is one of the
most well-known forms of investing,
and it’s been around even before
stock trading was invented. It's
considered one of the safest methods
to increase your money due to
constant property price increases.

Some of us are considered collectors.

Earlier in this chapter we even
countered time as an investment.
KEY CONSIDERATIONS IN INVESTMENTS
Investment objectives

Available funds
Level of risk tolerance
Invesment horizon

Accessibility of funds

Taxation treatment
Performance of the investment

Diversification
 Financial
intermediaries
Financial intermediaries, like banks,
connect investors and borrowers by
managing funds, while other
institutions like pawnshops and
remittance offices also help move
money in the economy.
 Financial
intermediaries

As discussed in Chapter 8, banks serve as financial intermediaries

between the investors and borrowers through the deposit-taking
and credit or lending functions. They facilitate the pooling of
resources from several depositors and allocate these resources
to borrowers based on their capacity to pay, needs, and
regulatory requirements.
 But this does not mean that banks are the
only ones allowed to engage in that business.
Otherwise, the BSP can only examine the
banks and would not include pawnshops,
remittance offices, and money changers.
However, the BSP’s role goes beyond banks
because all of the aforementioned
institutions are also engaged in financial
intermediation. As such, they affect the flow
of money between households and firms, and
are contributors in the supply and demand of
money in the economy. They channel
household earnings to the business sector.
ASSESSMENT
TIME!
1. THIS ARE MONEY THAT IS SET ASIDE TO BE USED IN THE FUTURE.
A. LOAN
B. SAVING
C. INVESTMENT
D. DIVERSIFICATION
2. IT IS A METHOD OF SETTING ASIDE MONEY FOR THE FUTURE THAT
TAKES ON A HIGHER RISK THAN THE TRADITIONAL SAVINGS ACCOUNT.
A. LOAN
B. SAVING
C. INVESTMENT
D. DIVERSIFICATION
3. WHAT IS THE PRIMARY ROLE OF BANKS AS FINANCIAL
INTERMEDIARIES?
A) TO REGULATE MONETARY POLICY
B) TO SERVE AS FINANCIAL INTERMEDIARIES BETWEEN INVESTORS AND
BORROWERS
C) TO PROVIDE INSURANCE POLICIES
D) TO MANAGE GOVERNMENT FUNDS
4. Which of the following institutions is NOT explicitly mentioned
as being examined by the BSP?

A) Pawnshops
B) Investment banks
C) Money changers
D) Remittance offices

5. Which of the following statements is true regarding asset

allocation?

A) It is only important for large investors.

B) It helps manage investment risk and return.
C) It involves investing all funds in one asset class.
D) It guarantees a profit on investments.
6. Which of the following is the primary objective of investing?
A) To achieve financial goals
B) To minimize risk
C) To avoid taxes
D) To maintain liquidity
7. What is the primary function of financial markets?
A) To set interest rates
B) To facilitate the exchange of goods
C) To allocate resources and capital
D) To regulate businesses
8. What distinguishes financial assets from real assets?
A) Financial assets derive value from a contractual claim, while
real assets have intrinsic value.
B) Financial assets are tangible, while real assets are intangible
C) Financial assets have a physical presence, while real assets do
not.
9. The following are advantages of compound interest, which is not
an advantage?
A. Can help build wealth long-term in savings and investments
B. Returns are taxable
C. Compounding can work for you when making loan repayments
D. Mitigates wealth erosion risks
10.WHICH OF THE 3 ARE TRUE ABOUT COMPOUND INTEREST?
I. It applies not only to the initial principal of an investment or
a loan but also to the accumulated interests from previous periods.
II. It calculated on the principal alone
III. It involves earning, or owing, interest on your interes
A. I, II, and III
B. I and II only
C. II and III only
D. I and III only
ANSWERS KEY:
1. B
2. C
3. B
4. B
5. B
6. A
7. C
8. A
9. B
10.D
THANK YOU FOR
LISTENING!