Financial System

1. Financial System
FINANCIAL
INSTITUTION
USERS/DEMANDERS
OF FUNDS
FIANCIAL MARKETS
PRIVATE PLACEMENT
SAVERS/SUPPLIERS
OF FUNDS

2. Composition of Financial System

4. 1. Financial Instruments
Financial Instruments – is a real or a virtual
document representing a legal agreement involving
some sort-of monetary value (Source: Investopedia -
Sharper Insight. Smarter Investing. | Investopedia.
(2016). Investopedia. Retrieved 8 May 2016, from
http://investopedia.com). These can be debt
securities like corporate bonds or equity like shares
of stock.
When a financial instrument is issued, it gives
rise to a financial asset on one hand and a financial
liability or equity instrument on the other.

5. 1. Financial Instruments
Debt Instruments generally have fixed returns
due to fixed interest rates.
Examples of debt instruments are as
follows:
● Treasury Bonds and Treasury Bills that are
issued by the Philippine government. 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.

6. 1. Financial Instruments
. ● 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.

7. 1. Financial Instruments
Equity Instruments generally have varied
returns based on the performance of the
issuing company. Returns from equity
instruments come from either dividends or
stock price appreciation.
The following are types of equity
instruments:

8. 1. Financial 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 have to be distributed, no asset will be
distributed to common stockholders unless all the
claims of the preferred stockholders have been
given. Moreover, preferred stockholders 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)

9. 1. Financial Instruments
• Holders of Common Stock on the other hand are the
real owners of the company. If the company’s growth is
spurring, the common stockholders will benefit on the
growth. Moreover, during a profitable period for which
a company may decide to declare higher dividends,
preferred stock will receive a fixed dividend rate while
common stockholders receive all the excess.

10. 2. Financial Markets
Financial Markets – organized forums in which the
suppliers and users of various types of funds can
make transactions directly.
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

11. 2. Financial Markets
• The sale of new securities to the general 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.
• The Philippine Stock Exchange (PSE) is both a primary
and secondary market.

12. 2. Financial Markets
Money Markets vs. Capital Markets
● Money markets are a venue wherein securities with
short-term maturities (1 year or less) are sold. They
are created because some individuals, businesses,
governments, and financial institutions have
temporarily idle funds that they wish to invest in a
relatively safe, interest-bearing asset. At the same
time, other individuals, businesses, governments, and
financial institutions find themselves in need of
seasonal or temporary financing.
● On the other hand, securities with longer-term
maturities are sold in Capital markets.

13. 3. Financial Institutions
Financial Institutions – intermediaries that
channel the savings of individuals, businesses, and
governments into loans or investments.
Examples of financial institutions:
● 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.

14. 3. Financial Institutions
• 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
until the funds are needed to pay off
claims by policyholders.

15. 3. Financial Institutions
• Mutual Funds - 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. When mutual funds use money from
investors to invest in newly issued debt or
equity securities, they finance new investment
by firms. Conversely, when they invest in debt
or equity securities already held by investors,
they are transferring ownership of the
securities among investors.

16. 3. Financial Institutions
● Pension Funds - Financial institutions that
receive payments from employees and invest the
proceeds on their behalf.
● Other financial institutions include pension
funds like Government Service Insurance System
(GSIS) and Social Security System (SSS), unit
investment trust fund (UITF), investment banks,
and credit unions, among others