BUSINESS FINANCE

• • Settlement Risk - risk that the bank may not be able to give back your deposit. Philippine banks are normally insured by the Philippine Deposit Insurance Corporation (PDIC). Depositors may recover up to PHP500,000 per depositor from PDIC in case of bank default/bankruptcy.
• • Management Fee - the amount clients pay to the professionals who manage their mutual funds, normally a certain percentage of portfolio value.
• • Dividends - distribution of the company's income to its shareholders.
• • Voting Rights - right to be heard on certain policies that the company wants to implement.
• • Liquidity - ability to be converted into cash: the higher the liquidity, the better.
• • Margin Trading - allows clients to trade more than their capital. It can magnify both earnings and losses.
• • Inflation - general increase in prices.
• • Hedge - investment that reduces the risk of adverse price movements in an asset.
• • Diversification - process of investing in different kinds of assets to lessen exposure in market/price volatility.
• • Geopolitical risks - the influence of one country's foreign policy on the domestic, political, and social policy of another country or region
• • Correlation - how the price of an asset moves with respect to another asset (i.e. positive correlation if both assets move in the same direction, negative correlation if both assets move in the opposite direction)
• • Escalation Clause - agreement to raise prices in the future depending on certain circumstances (i.e. increase in inflation leading to higher rental rates).
• • Insurance Premium - the amount paid on a regular basis to the insurance company in return for the insurance/protection provided.
• • VUL - Variable Universal Life insurance or a life insurance that offers both death benefit

  and investment features.
• Stocks (Equity)

  • Unlimited Upside

  • No guaranteed returns. Riskiest of all assets
• Bank Deposits (Fixed Income)

  • Known income based on outstanding principal and current interest rate
• Bonds (Fixed income)

  • Known periodic payments for a certain period of time

  • Can't lose money if bond investment is held until maturity
• Mutual funds - Provide professional management of funds

  • Pay management fees
• Unit investment trust fund (UITF)

  • Easier access because clients can open an account in any branch of the bank near them.

  • No entry and management fees.

  No shareholder rights for investors such as dividends and voting rights.
• Currencies

  • Largest market in the world in terms of trading volume, so much liquidity

  Curengy asstsalts a medum of

  exchange which people can use to transact

  • Volatile and trades 24-hours a day (must be closely monitored)

  • Generally uses margin trading which allows clients to bet more than their capital (may also be an advantage)
• Commodities

  • Natural hedge against inflation

  • Negatively correlated with equities and bonds (may be used for diversification)

  • Hedge against geopolitical risks

  • apra dis a net directly considering

  storage, transportation and insurance costs involved
• Real Estate

  • Generally appreciates over time because land gets scarce

  • Have relatively low correlations with other asset classes (may be used for diversification)

  • Can be a source of recurring rental income

  • May also be a hedge against inflation because of inflation-linked rent escalation clauses

  • Huge capital needed, financing can be difficult

  • Maintenance of the property
• Insurance

  • Gives the insured individual/entity the cash/capital to deal with unforeseen adverse financial consequences

  • May provide certain tax benefits i.e. tax deductibility, tax-free provisions)

  • Insurance premiums may be costly

  • On some of traditional insurance plans, no sickness/death until a certain age may mean not getting any benefits at all (that's why VUL's are now very prevalent)

  • Some insurance companies can go bankrupt (i.e. College Assurance Plan) if companies fail to factor significantly adverse unforeseen circumstances
• Systematic

  Uncertainty inherent to the entire market

  Market risk, undiversifiable risk

  Changes in interest rates, recession, wars

  Beta (B)
• Non-systematic

  Uncertainty that comes with the company or industry

  Specific risk, diversifiable risk, residual risk
• Beta 

  Systematic risk

  Measure of the systematic risk of an investment or portfolio vs. the market as a whole. • Tendency of an investment's returns to respond to swings in the market
• Standard deviation

  total risk

  Sum of systematic and non-systematic risk.

  • Total volatility of an investment
• Diversification - To minimize investment risk, an investor has to have a diversified portfolio. The composition of the portfolio depends on the risk appetite of the investor. A more conservative investor (i.e. investor who has less appetite for risk) may have a portfolio which is more skewed to fixed income instruments like time deposits. On the other hand, an investor who has a higher appetite for risk (i.e. an investor who is more willing to take risk) may have a portfolio which is more skewed to equity investments.
•  Personal Finance - Personal finance includes all financial decisions and activities of an individual including budgeting, insurance, mortgage planning, savings, and retirement planning. It involves analyzing current financial positions, projecting short-term and long-term funding needs, and executing a plan to fulfil those needs considering individual financial constraints. It is primarily dependent on one's earnings, cost of living, and personal goals and wants.
• Personal financial planning process.

  1. Objective Setting

  • Quantify monetary objectives with definite time frames.
  • Prioritize objectives.
  • Examine these objectives with an individual's resources and limitations.
• Data gathering

  • Use surveys, questionnaires, and interviews to gather quantitative and qualitative information from the individual.
  • Quantitative - for assessing financial status (i.e. investments, cash flow, liabilities, etc.)
  • Qualitative - to identify individual's goals and objectives, lifestyle, risk-tolerance, 
• D. Financial Plan Recommendation

  • Propose financial products
• Data Analysis

  • Analyze the individual's financial position and cash flows.
  • Review legal papers (i.e. insurance policies, trust agreements, wills, etc.).
  • Evaluate objectives vis-à-vis the individual's resources and economic conditions
• Plan Implementation

  • Assist the individual in the execution of the recommended financial plan.
  • Implementation may involve other entities so assist the individual in dealing with the parties involved in the execution of the financial plan
• Plan Monitoring

  • Review the financial plan periodically to evaluate changing market conditions (i.e. economic conditions, taxes, interest rates, etc.).
  • Evaluate the financial plan regularly to see if it effectively meets the individual's goals and obje
• Six Key Areas of Personal Financial Planning.

  1. Financial Position

  • Understanding of personal resources by checking an individual’s net worth and cash flow.

  • Net worth = assets less liabilities at a point in time

  • Cash flow = expected sources of income less expected expenses within a period (i.e. year)

  • Helps in determining the time frame to which personal goals can realistically be met.
• Adequate Protection

  • Analysis of protection needed for unforeseen risks.

  • Includes risks of liability, property, death, disability, health, and long-term care.

  • Some insurance plans enjoy some tax benefits.
• Tax Planning

  • Management of when and how much taxes will be paid.

  • Understanding possible tax incentives, deductions, rebates, etc. can have a significant impact

  on managing personal finances given the magnitude of taxes paid by an individual.
• Investment and Accumulation Goals

  • Planning on wealth accumulation for large purchases such as house, educational expenses,

  investments for retirement, etc.
• Retirement Planning

  • Understanding the cost of retirement.

  • Analysis of cash flows to come up with investment plans that will meet the costs of retirement

  in the future.