LEARNING ACTIVITY SHEET

BUSINESS FINANCE
Quarter 1, Week 2

Name: Date:

Grade and Section: ______

Finance and the Activities of Financial Manager, and Financial

Institutions and Markets

I. Learning Competencies:
1. Distinguish a financial institution from financial instrument and
financial market.
2. Explain the flows of funds within an organization-through and from
the enterprise-and the role of financial manager

II. Objectives
1. Distinguish a financial institution from financial instrument and
financial market (ABM_BF12-IIIa-2)
2. Explain the flows of funds within an organization-through and from the
enterprise-and the role of financial manager (ABM_BF12-IIIa-5)

III. Key Concepts:

Financial Markets – organized forums in which the suppliers and users of
varioustypes of funds can make transactions directly
Financial Institutions – intermediaries that channel the savings of individuals,
businesses, and governments into loans or investments.
Private Placements - the sale of a new security directly to an investor or group
of investors.
Public Offering - The sale of either bonds or stocks to the general public.
Financial Instruments – is a real or a virtual document representing a legal
agreement involving some sort-of monetary value These can be debt securities
like corporate bonds or equity like shares of stock.

The Financial System

Financial Instruments- 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.

Financial Market Comparative Groups

Primary Market - Financial market in which securities are initially issued; the
only market in which the issuer is directly involved in the transaction.

Public offering - The sale of either bonds or stocks to the general public.

Private placement - The sale of a new security directly to an investor or group

of investors.

Secondary market - Financial market in which preowned securities (those that

are not new issues) are traded.

Money market - A financial relationship created between suppliers and users of

short-term funds.

Capital market - A market that enables suppliers and users of long-term funds
to make transactions.

Debt Instruments generally have fixed returns due to fixed interest rates.
Examples of debt instruments are as follows:

• Treasury Bonds and Treasury Bills 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.

• 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.

- 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:

• 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 stock stockholders unless
all the dividends due to preferred stockholders are paid first. (Cayanan, 2015)

• 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.
 How Financial Institutions Provide Financing for Firms
(Gitman & Zutter, 2012)

Activity 1

True/False. Direction: Write TRUE if the statement is correct and FALSE if is

not. Write your answer on a separate sheet of paper.
_____1. Primary and secondary markets are markets for short-term and long-
term securities, respectively.
_____2. Financial markets are intermediaries that channel the savings of
individuals, businesses, and government into loans or investments.
_____3. The money market involves trading of securities with maturities of one
year or less while the capital market involves the buying and selling of
securities with maturities of more than one year.
_____4. Holders of equity have claims on both income and assets that are
secondary to the claims of creditors.
_____5. Preferred stock is a special form of stock having a fixed periodic
dividend that must be paid prior to payment of any interest to
outstanding bonds.
_____6. Commercial banks obtain most of their funds from borrowing in the
capital markets.
_____7. Credit unions are the largest type of financial intermediary handling
individual savings.
_____8. A mutual fund is a type of financial intermediary that obtains funds
through the sale of shares and uses the proceeds to acquire bonds and
stocks issued by various business and governmental units.
_____9. IPO stands for Interest and Principal Obligation.
_____10. Dividends to preferred stockholders are usually in a fixed rate
Activity 2

Question for reflection: How would you relate the role of financial managers,
role of financial markets and role of investors? Write your answer on a separate
sheet of paper.

Role of Financial Managers Role of Financial Markets Role of Investors

Financial managers make The financial markets Investors provide the funds
financing decisions that provide a forum in which that are to be used by
require funding from firms can issue securities financial managers to
investors in the financial to obtain the funds that finance corporate growth.
markets they need and in which
investors can purchase
securities to invest their
funds.

Activity 3
Multiple Choice. Choose the letter of the correct answer. Write your answer on
a separate sheet of paper.

1. The ______ is created by a financial relationship between suppliers and users

of short-term funds.
a. financial market
b. money market
c. stock market
d. capital market
2. Firms that require funds from external sources can obtain them from _____.
a. financial markets.
b. private placement.
c. financial institutions.
d. All of the above.
3. The major securities traded in the capital markets are ____.
a. stocks and bonds.
b. bonds and commercial paper.
c. commercial paper and Treasury bills.
d. Treasury bills and certificates of deposit.
4. The primary goal of the financial manager is _____.
a. minimizing risk.
b. maximizing profit.
c. maximizing wealth.
d. minimizing return.
5. A financial manager must choose between four alternative Assets: 1, 2, 3,
and 4. Each asset costs $35,000 and is expected to provide earnings over a
three-year period as described below. Based on the profit maximization goal,
the financial manager would choose _____.
a. Asset 1. Asset Year 1 Year 2 Year 3
b. Asset 2. 1 21,000 15,000 6,000
c. Asset 3. 2 9,000 15,000 21,000
d. Asset 4. 3 3,000 20,000 19,000
4 6,000 12,000 12,000
Reference

Sharper Insight. Smarter Investing. | Investopedia. (2016). Investopedia.

Retrieved 8 May 2016, from http://investopedia.com).
Answer Key

10. F 5. T 5.b
9. F 4. F 4.c
8. F 3. T 3.a
7. T 2. F 2.d
6. T 1. T 1.b
Activity 1 Activity 3

Prepared by

DIANA S. SIMON
Writer
Reviewed by:

FLORENTINO O. RAMOS, JR., Ph.D.

EPS, Mathematics