Finance

• Financial markets


  Markets where financial instruments like stocks, bonds, currencies, and derivatives are traded
• Financial institutions


  Entities that provide financial services, such as banks, insurance companies, and investment firms
• Importance of studying financial markets and institutions

  • They play a vital role in the financial system and the overall economy
  • They influence everyday life and involve huge flows of funds that affect business profits, production, and economic well-being
• Rational agents


  Economic agents who are able to consider the outcome of their choices and recognise the net benefits of each one, selecting the choice which presents the highest benefits
• Rationality in classical economic theory is a flawed assumption as people usually don't act rationally
• Marginal utility


  The additional utility (satisfaction) gained from the consumption of an additional product
• If you add up marginal utility for each unit you get total utility
• Money


  Any commodity or token that is generally accepted as a means of payment for goods and services or for repayment of debt, and that serves as an asset to its holder
• Characteristics of money


  • Value, durable, portable, uniform, divisible, limited supply, usable as a means of exchange
• Key functions of money

  • Store of value
  • Item of worth
  • Means of exchange
  • Unit of account
  • Standard of deferred payment
• Evolution of money


  1. Barter

  2. Evidence of trade records

  3. Coinage

  4. Bank notes

  5. Digital money
• The Spanish discovered silver in Potosi, Bolivia, and caused a century of inflation by shipping 350 tons of the metal back to Europe annually
• England's Henry VIII debased the silver penny, making it three-quarters copper, causing inflation as trust dropped
• Merchants in England began to form joint-stock companies in 1553, where investors bought shares and shared in the rewards
• The Bank of England was created in 1694 as a body that could raise funds at a low interest rate and manage national debt
• Debt financing involves borrowing money from lenders, such as banks or bondholders, while equity financing involves selling shares of ownership in the company to investors.
• Debt financing involves borrowing money from lenders, such as banks or bondholders, with interest payments due on a regular basis.
• Financial system


  All financial intermediaries and financial markets and their relations with respect to the flow of funds to and from households, governments, business firms and foreigners, as well as the financial infrastructure
• A vibrant and healthy economy requires a financial system that makes or channel funds from people who save to people who have productive investment opportunities
• A strong financial system is a necessary ingredient for a growing and prosperous economy
• Companies raising capital to finance capital expenditures and investors saving to accumulate funds for future use require well-functioning financial markets and institutions
• Flow of funds through the financial system

  1. Lender-savers

  2. Financial markets

  3. Financial intermediaries

  4. Borrower-spenders
• Direct finance


  Borrowers borrow funds directly from lenders in financial markets by selling them securities
• Indirect finance


  Funds flow through financial intermediaries before reaching borrowers
• Key components of the financial system

  • Financial instruments
  • Financial markets and financial institutions
  • The central bank and other financial regulators
• Functions of the financial system

  • Channel funds from sectors with surplus to sectors with shortage
  • Provide risk sharing
  • Provide liquidity
  • Provide information
• Risk sharing


  The financial system allows savers to hold many assets, making them more willing to buy stocks, bonds and other financial assets
• Liquidity


  The ease with which an asset can be exchanged for money, which savers view as a benefit
• Information


  The financial system collects and communicates information about borrowers and expectations of return on financial assets
• When the financial system breaks down, severe economic hardship results
• Structure of the Philippine financial system

  • Bangko Sentral ng Pilipinas
  • Banking institutions (private and government)
  • Non-bank financial institutions (private and government)
• Expanded commercial banks/universal banks

  • Perform investment house function in addition to commercial banking
  • May invest in equities of allied and non-allied enterprises
• Commercial banks


  • Confined to commercial bank functions such as accepting drafts, issuing letters of credit, discounting and negotiating promissory notes, accepting deposits, buying and selling foreign exchange, and extending credit
• Thrift banks


  • Accumulate savings of depositors and invest them together with their capital in loans, bonds, mortgages, and other forms of security
• Savings and mortgage banks

  • Accumulate savings of depositors and invest them in readily marketable bonds, debt securities, and loans secured by bonds, mortgages or real estate
• Private development banks


  • Help construct, expand and rehabilitate agricultural and industrial sectors
• Stock savings and loan associations

  • Accumulate savings of members/stockholders and use the funds for loans and investment in securities of productive enterprises or government
• Rural banks


  • Accept deposits and make credit available to farmers, businessmen and cottage industries in rural areas
• Cooperative banks


  • Assist various cooperatives by lending funds at reasonable interest rates
• Development Bank of the Philippines (DBP)

  • Provides loans for development purposes, to the agricultural, commercial and industrial sectors