Assignment for Business Finance

1.Define the following words and provide examples;

a. Private Placement- Is an offering that is not registered with SEC (Securities and

Exchange Commission -agency that regulates securities markets ,They are responsible

for managing securities markets and entitled entities to ensure investors are treated fairly)

,it involves the sales of stocks , bonds or securities directly to a small group of chosen

investor .It is also an alternative way of raising capital strictly sold through private offering.

Examples of types of securities that can be sold through private placement are

common stock, preferred stock and promissory notes

b. Financial Market- is a kind of marketplace where trading of securities including equities,

bonds, currencies, and derivatives occur. Financial market prices don’t indicate the true

value of a stock due to macroeconomic forces like taxes. In addition, Financial Market

enables investors to buy and sell shares of publicly traded companies. This is where

primary stock market is first offered.

Examples are banks, financial institutions and companies for an instance, if BPI

Capital Corporation decides to sell a new stock to raise equity, it will be a primary market

transaction which makes the buyer or investors become part owners of the company
c. Financial Institution- is also known as banking institutions ,responsible for dealing the

financial and monetary transactions such as deposits, loans, investments, and currency

exchange thus being an integral part of an economy where nation`s banking system

measures the economic stability of a country. Loss of stability in a financial institution can

easily lead to bank run or bankruptcy

Examples of financial institutions are banks, trust companies, insurance

companies, brokerage firms, and investment dealers.

2.Draw the schematic diagram of financial system. Explain each diagram and flow of the

transaction.

FINANCIAL SYSTEM

Is a process of institutions such as banks , insurance companies, and stock

exchanges, allows the exchange of funds .It also includes that financial system

have sets of rules and practices that borrows and lenders use to decide financial

transactions such as terms , who finances project and which projects get financed.
There are two passage ways of finance in the financial system the direct and

indirect finance . The direct finance allows you to become a part of the company

by buying primary stock market, while indirect finance acts only as a passage way

between financial

transactions for average

consumers. The two passage

way using cash transacts with

the borrowers and lenders to

enable to exchange for funds

or cash

3.Define the different types of Financial Markets

A. Stock market

The stock market trades shares of ownership of public companies. Each share comes

with a price, and investors make money with the stocks when they perform well in the

market. It is easy to buy stocks. The real challenge is in choosing the right stocks that will

earn money for the investor.

B. Bond market
The bond market offers opportunities for companies and the government to secure money

to finance a project or investment. In a bond market, investors buy bonds from a company,

and the company returns the amount of the bonds within an agreed period, plus interest.

C. Commodities market

The commodities market is where traders and investors buy and sell natural resources or

commodities such as corn, oil, meat, and gold. A specific market is created for such

resources because their price is unpredictable. There is a commodities futures market

wherein the price of items that are to be delivered at a given future time is already

identified and sealed today.

D. Derivatives market

Such a market involves derivatives or contracts whose value is based on the market value

of the asset being traded. The futures mentioned above in the commodities market is an

example of a derivative.

4. Define the different types of Financial Institution

Major Types of Financial Institutions

A. Central Banks

Central banks are the financial institutions responsible for the oversight and management

of all other banks. In the United States, the central bank is the Federal Reserve Bank,

which is responsible for conducting monetary policy and supervision and regulation of

financial institutions.

B.Retail and Commercial Banks

Traditionally, retail banks offered products to individual consumers while commercial

banks worked directly with businesses. Currently, the majority of large banks offer deposit

accounts, lending and limited financial advice to both demographics.

Products offered at retail and commercial banks include checking and savings accounts,

certificates of deposit (CDs), personal and mortgage loans, credit cards, and business

banking accounts.

C.Internet Banks

A newer entrant to the financial institution market are internet banks, which work similarly

to retail banks. Internet banks offer the same products and services as conventional

banks, but they do so through online platforms instead of brick and mortar locations.

D.Credit Unions
Credit unions serve a specific demographic per their field of membership, such as

teachers or members of the military. While products offered resemble retail bank

offerings, credit unions are owned by their members and operate for their benefit.

E.Savings and Loan Associations

Financial institutions that are mutually held and provide no more than 20% of total lending

to businesses fall under the category of savings and loan associations. Individual

consumers use savings and loan associations for deposit accounts, personal loans, and

mortgage lending.

F.Investment Banks and Companies

Investment banks do not take deposits; instead, they help individuals, businesses and

governments raise capital through the issuance of securities. Investment companies,

more commonly known as mutual fund companies, pool funds from individual and

institutional investors to provide them access to the broader securities market.

G.Brokerage Firms
Brokerage firms assist individuals and institutions in buying and selling securities among

available investors. Customers of brokerage firms can place trades of stocks, bonds,

mutual funds, exchange-traded funds (ETFs), and some alternative investments.

H.Insurance Companies

Financial institutions that help individuals transfer risk of loss are known as insurance

companies. Individuals and businesses use insurance companies to protect against

financial loss due to death, disability, accidents, property damage, and other misfortunes.

I.Mortgage Companies

Financial institutions that originate or fund mortgage loans are mortgage companies.

While most mortgage companies serve the individual consumer market, some specialize

in lending options for commercial real estate only.

5. Define the different types of Financial Instruments

Types of Financial Instruments

Financial instruments may be divided into two types: cash instruments and derivative

instruments.

A.Cash Instruments

- The values of cash instruments are directly influenced and determined by the

markets. These can be securities that are easily transferable.

- Cash instruments may also be deposits and loans agreed upon by borrowers and

lenders.

B.Derivative Instruments

- The value and characteristics of derivative instruments are based on the vehicle’s

underlying components, such as assets, interest rates, or indices.

- These can be over-the-counter (OTC) derivatives or exchange-traded derivatives.

6. Define the different types of Debit Instrument

A.Loans
Loans are possibly the most easily understood debt instrument. Most people utilize this

type of financing at some point during their lives. Loans can be acquired from financial

institutions or individuals and can be used for a variety of purposes, such as the purchase

of a home or vehicle or to finance a business venture.

Under the terms of a simple loan, the purchaser is allowed to borrow a given sum from

the lender in exchange for repayment over a specified period of time. The purchaser

agrees to repay the total amount of the loan, plus a pre-determined amount of interest for

the privilege.

B.Bonds

Bonds are another common type of debt instrument issued by governments or

businesses. Investors pay the issuer the market value of the bond in exchange for

guaranteed loan repayment and the promise of scheduled coupon payments.

This type of investment is backed by the assets of the issuing entity. If a company issues

bonds to raise debt capital and subsequently declares bankruptcy, the bondholders are

entitled to repayment of their investments from the company's assets.

C.Debentures
The primary difference between debentures and other types of bonds is that the former

have no such asset backing. Debentures are most often used as a means of raising short-

term capital to fund specific projects. The bondholders' investment is expected to be

repaid with the revenue those projects generate. This type of debt instrument is backed

only by the credit and general trustworthiness of the issuer. Both bonds and debentures

are popular among investors because of their guaranteed fixed rates of income.

7. Define the different types of Equity Instruments

A.Common Stock

Common stock is one of the equity instruments issued by a public company to raise funds

from the public. The shareholders have the privilege of being entitled to co-ownership of

the company in addition to having the right to vote at the shareholders meeting as per the

proportion of shares. Besides, they also have rights to take decision in important issues

like raising capital to pay dividends and merging business. Moreover, the shareholders

can also apply for new shares when the company has increased capital or issues a new

allocation to the shareholders.

B.Convertible debenture
Similar to common bonds, the only difference being that a convertible debenture can be

converted into common stock during the particular rates and prices mentioned in the

prospectus. Convertible debentures are quite popular for profitable returns from

converted stock are higher than those form common bonds.

C.Preferred Stock

Involves shareholders’ participation as a business owner as in common stock. The

variation lies in that the preferred shareholders are entitled to receive repayment of capital

prior to the common shareholders.

D.Depository Receipt

Is an equity instrument which entitles the rights to reference common bonds, ordinary

debentures, and convertible debentures. Investors holding a depository receipt get

benefits as shareholders of listed companies in every respects, be it the voting rights or

financial rights in the listed companies.

E. Transferable Subscription Rights (TSR)

Is an equity instrument issued by a company to all shareholders in proporti8on numbers

of shares already held by them. This instrument is used as evidence in shares of the

company. The existing shareholders can sell/transfer their rights to others if they do not

want to exercise their shares.

8.Define the two groups of Financial Markets

9.Cite and Identify the different examples of financial institutions.
 10.How would you relate the role of financial managers, role of financial markets and role

of investors? Tabulate it into three columns

FINANCIAL MANAGER FINANCIAL MARKETS INVESTORS

They analyze financial Creates a bridge the gap

data prepared by between borrowers and A major and vital role in the

MAIN ROLE accountants, monitor lenders by offering success and growth of a

company.
the firm’s financial borrowers of money loans

status, and prepare and which are taken from the

implement financial money in which savers

plans deposited

To monitor a

ECONOMY company’s finances , To measures the economy Making investment in

,data analysis and stability companies which will

advise senior managers become results to become

on ideas to maximize assets of the economy and

profits. lead to growth of the

economy.

To maintain stability in Provide funds in exchange

BUSINESS To maximize the value order to ensure that the for an ownership stake or

of the firm to its owner funds are utilized in the future return.

most efficient manner.

11.Draw the schematic diagram on how financial institutions provide financing for

companies or firms? Explain each diagram and process flow of the transactions.