Instruction: Kindly answer the following questions based on the topic discussed.

Item No.1 (20%)

Concept Check
1. Explain the main difference between a bond and a common shares?
Stocks give you partial ownership of a business, while bonds are loans you
make to a business or the government. The most significant difference is how they
profit: Stocks must increase in value and then be sold on the stock market, while
most bonds have fixed interest rates over time.

2. How do you think financial institutions help financial market to work?

In businesses' quest to achieve higher returns, financial institutions help channel
money to successful and struggling companies, enabling them to progress faster and offer
even more desirable goods and services. In this way, financial institutions contribute
significantly to the efficient allocation of economic resources. Therefore, financial
institutions are also financial intermediaries because they become the bridge in saving and
investing excess resources from successful companies and lending money to businesses
that need extra financing activities while earning a profit.

3. Why is there a need to manage risk in financial institutions?

Given that taking risks is an integral part of establishing financial institutions or
any business, it is not surprising that financial institutions have been practicing risk
management since their establishment, without which the industry could not have
survived. The only real change is the sophistication level required to reflect the more
complex and fast-paced environment. Risk management is the process of understanding,
analyzing, and managing potential risks to ensure that objectives are achieved. It is vital
to practice risk management as it will help you prepare and plan unexpected things.
Preparation and planning will not eliminate risk or loss, but they can help minimize the
unfavorable effects of such circumstances. Moreover, as a financial institution, it will help
you manage your finances in unfortunate situations.

4. Discuss the role of banks as financial institutions that fuel the economic growth of
a nation?
Banks help the economic growth of a country in different ways. The banking
system plays a vital role in the modern business world. Banks collect savings from
individuals and lend them to entrepreneurs and manufacturers. Bank loans facilitate
trade. Banks help stimulate economic growth as a safe financial institution where people
and businesses can save money. Savings plus the growing interest can be utilized as
capital that helps in economic growth. Simultaneously, some banks assist in forming new
enterprises and businesses by providing long-term loans that can be used as starting
capital. Furthermore, banking systems can generate money. Legal tender of money in a
country cannot usually expand quickly, but bank money can be generated when needed.
According to the Monetarist Theory, changes in the supply of money are vital
 determinants of economic growth and banks can exert power to stimulate economic
growth by saving and providing cash to businesses.

Item No. 2 (20%)

Concept Check:
1. What are the risks and rewards of investing in the stock market as compared to bond
market?
Stocks and bonds have their share of risks and rewards that investor should
consider. In investing in stocks, risks such as geographical risk where the company
operates, risk-on currency, liquidity risk, and change in interest rate risk are the risk that
may affect the company where the investors will buy stocks that will affect the amount of
dividends that may get in the company. Simultaneously, if the company generates a high
profit, the reward of investing in stocks is higher dividends from the company. While in
bonds, it is more susceptible to risk such as a change in interest rates and inflation rates.
Bond prices tend to fall when interest rates rise. If interest rates are high and investors
must sell their bonds before it matures, they can get less than they paid for it. When an
investor purchases a bond from a financially troubled corporation, it exposes itself to
credit risk. In this instance, the bond's issuer cannot make interest payments, putting them
at risk of default. However, in terms of rewards, bonds can generate income even interest
rates are low. Like loans from banks, bonds generate interest income in favor of the
investor.

2. What is the main purpose of financial regulation? What kind of instruments may a
government use to protect the economy and country from financial panic?
Securing the integrity of the financial system is one of the fundamental
goals of financial regulations. If a bank fails, it cannot satisfy its obligations to
depositors and other creditors, posing a risk to the economy as a whole. Financial
regulations are intended to: enforce applicable laws, prosecute incidents of market
misconduct; license financial service providers, safeguard clients; investigate
complaints, and preserve trust in the financial system. Laws and regulations are
the government's instrument in controlling and managing financial institutions
such as banking and non-banking financial institutions. These laws and
regulations set standards and frameworks on limitations and things that financial
institutions may do to help grow while protecting public security on high risks
and interests to prevent economic and financial panic.

Item No. 3 (20%)

Concept Check:
1. What is the concept of present value? What is discounting?
The current worth of funds to be received in the future with one or more payments,
discounted at a market rate of interest, is known as present value. Because someone can
invest cash received now and earn a higher return than a promise to receive cash in the
future, the present value of future cash flows is always less than the same amount of future
 cash flows. Furthermore, amounts of money today are worth more than the same amount
in the future, according to present value. Nevertheless, present value shows that money
acquired in the future is worth less than money obtained today. Unspent money today
may lose value in the future at an assumed yearly rate due to inflation or the rate of return
in investments. At the same time, the discount is a financial mechanism that gives the
debtor the right to defer payments to a creditor for a period of time for a fee or fee. Also,
the discount or margin is the difference between the amount owed initially and the
amount payable in the future to settle the debt.

2. Property investment constitutes a large and long-term commitment to an individual.

Describe the outcome of taking a property loan during fluctuating interest rates?
Taking a property loan during the fluctuation of interest rates may sound risky.
During fluctuation of interest rates, variable interest rates are present. In a dropping interest
rate market, borrowers who take out a variable rate loan gain since their loan payments will
also reduce. However, when interest rates escalate, borrowers with variable rate loans will
see that the amount owing on their loan payments also rises.

Item No. 4 (40%)

1. Calculate the present value of a $1,000 zero-coupon bond with six years to maturity if the
yield to maturity is 7%.

2. You are willing to pay $31,250 now to purchase a perpetuity that will pay you and your
heirs $2,500 each year, forever, starting at the end of this year. If you’re required rate of
return does not change, how much would you be willing to pay if this were a 40-year,
annual payment, ordinary annuity instead of perpetuity?
3. Anna bought a bond with a par value of $10,000 and a coupon rate of 8% at par. After a
year, she was able to sell her bond for $11,000. Calculate the rate of return on Anna’s
investment. What is the current yield and capital gain on her investment?

4. Calculate the duration of a five-year bond with a face value of $1,000 and a coupon rate of
8%. Assume that the current interest rates are 10%. What will your answer be if the current
interest rates fall to 7%? Show all your calculations.
 References

Digermenci, A. (2019, May 19). What is financial regulation and why is it important? Leasing Life
https://www.leasinglife.com/news/industry-news/what-is-financial-regulation/

Financial Institutions (n.d.). this Matter.com.

https://thismatter.com/money/banking/financial-institutions.htm

Meyer, L. (n.d.). Why risk management is important for global financial institutions.
https://www.bis.org/review/r000904b.pdf
Morah, C. (2021. February 22). Bond Market vs. Stock Market: What's the Difference? Investopedia.
Bond Market vs. Stock Market: Key Differences (investopedia.com)

Nipun, S. (n.d.). Role of Banks in the Economic Development of a Country. Economics discussion.net.
Role of Banks in the Economic Development of a Country (economicsdiscussion.net)

Why Risk Management is Important ( 2018, July 11). Financial Advisors.

https://purefinancial.com/learning-center/blog/why-risk-management-is-important/