Unit 4 - Financial Institution

Engaging Activity
Name: _____Yuno M.______
Section: ________BSA-2________

Instruction: Answer the following questions:

1. Describe the nature of the basic services of financial institutions.

The nature of financial institutions can be described as organizations or business entities which
are engaged in collecting funds from individuals, businesses and other institutions wherein they use the
funds to lend or invest in others. Basically, they offer services constituted of dealing with financial and
monetary transactions including loans, deposits, investments and currency exchange but their business
operations also encompass a broad range. As regards to that, it consists of banks, insurance companies,
trust companies, brokerage firms and investment dealers within the financial sector. Thus, the nature of
those financial services are vital for the facilitation of the flow and movement of money throughout the
economy.

2. Identify the different types of Institutions/Intermediaries that are under

a) Depository Institutions
There are five types under this which are commercial banks, universal banks, savings and
loan associations, mutual savings bank and credit unions. Commercial Banks pertains to the ones where
most people do their banking compared to the investment bank. Universal Banks are the ones that
provides a large array of services including those of a commercial banks and investments banks. Savings
and Loan Associations are the ones that specializes in accepting savings deposit, making mortgages and
other loans. Mutual Savings Bank are the ones that allow its customers to maintain accounts with low
balances while earning interest. Credit Unions are cooperative institutions wherein they provide a safe
place to save and borrow at reasonable rates as members of it have common bond.

b) Contractual Savings Institutions

There are two types under this which includes insurance companies and pension funds.
Insurance companies are the ones that provides financial protection from possible hazards in the future as
they provide insurance or reinsurance services from two segments consisting of life insurance companies
and property and casualty companies. Pension funds is a type of financial intermediary that invests
contributions of firms and workers in stocks.

c) Investment Intermediaries
There are five types under this consisting of investment banks, mutual funds, hedge
funds, finance companies and money market mutual funds. Investment banks are the ones that specialize
in providing services that are designed to facilitate business operations, including capital expenditure
financing and equity offerings, and also initial public offerings. Mutual funds are the ones that accepts
money from savers and then use these funds to buy stocks, long-term bonds, or short-term debt
instruments issued by businesses or government units, thus reduce risks also by diversification. Hedge
funds are the ones that are organized as a partnership of wealthy investors in which they make speculative
and relatively high risk investments. Finance companies are financial intermediaries which are non-bank
that sell commercial paper and other securities to raise funds and use these to make small loans offered to
firms and households. Money market mutual funds are the ones that invests in high-quality, short-term
debt instruments, cash, and cash equivalents and are also considered extremely low risk.

3. What are the primary sources and use of funds of a commercial bank?

Commercial banks are financial institutions that provide basic banking services to the general
public, both individuals and business from small to mid-sized. The primary sources of their funds are
from deposits, shareholder’s funds and borrowed capital. On the other hand, the primary uses of their
funds are for loans and investments and required reserves. Those are embroidered in its balance sheet
which is what indicates their financial position on a particular period.

4. Give and explain the nature of a commercial bank’s assets and liabilities of a bank.

The nature of the assets of a commercial bank is mainly something of value that it owns. This
includes reserves or holding of deposits, physical assets such as land or equipment, other cash assets,
loans receivable including business loans and interest from customers, and other assets like investments
and securities. On the other hand, the nature of the liabilities of a commercial bank can be described as
something of value that the institution owes to others. This includes borrowings, demand or current
account deposits, mortgage payments, interest payments to customers for savings and certificate of
deposits.

5. What basic strategy do commercial banks follows to maximize return on its assets?

Commercial banks also have a main goal to accumulate more gains and maximize returns on its
assets through its operation so they try to attain that by using strategies. Firstly, these banks try to find a
borrower who will most likely settle their loans on time and are willing to pay with high interest rates.
Then, they could adapt consecutive loan policies. Another one is that they balance the desire for liquidity
against increased earnings which can be obtained from assets that are less liquid, like loans, and they
manage the liquidity of assets so that it can met the reserve requirements without incurring huge costs
from it. Also, these banks tend to diversify and purchase many different types of assets as they try to
lower the risk of securities and get higher returns.