TOPIC 1: THE PHILIPPINE FINANCIAL SYSTEM Financial Institution 5.

Private Insurance
6. The Pawnshop
HISTORY OF PHILIPPINE BANKING  known as any bank which performs banking, primarily 7. Trust Companies
 Born on 16th century concerned with the safekeeping of funds through the 8. Non-Stock Savings and Loans Association
 Obras Pias (from the Latin word “Obra” and “Pious”) acceptance of deposits of money, and the provision of 9. Financing Companies
 Main source of commercial credit credit through the lending of money. 10. Other Non-Bank Financial Institutions
 Rodriguez Bank  Financial Institutions can be categorized into two:
 Banco Espanol-Filipino de Isabel II Government Non-Banking Institution
1. Banking Institution
 British-Orient Bank
a. Private Banking Institution
 Chartered Bank of India, China, and Australia 1. The Government Service Insurance System
b. Government Banking Institution
 Hongkong and Shanghai Banking Corporation 2. The Social Security System
2. Non-Banking Institution
a Private Non-Banking Institution 3. Philippine Export and Foreign Loan Guarantee
b. Government Non-banking Institution Corporation
Financial System: Definition
Private Banking Institutions 4. The National Home Mortgage Finance
 It is an economic arrangement wherein financial institutions Corporation(NHMFC)
facilitate the transfer of funds and assets between 1. Commercial Banking Institutions
borrowers, lenders, and investors. 2. The Thrift Banks The Bangko Sentral ng Pilipinas
 Consists of individuals like borrowers and lenders and a. The Savings and Mortgages Banks
BSP is the central bank of the
institutions like banks, stock exchanges, and insurance b. The Savings and Loan Association Philippines
companies actively involved in the funds and assets c. The Private Development Banks
transfer. d. The Rural Banks
3. Universal Bank The BSP is now the Philippines
 It gives investors the ability to grow their wealth and assets, Central monetary authority
thus contributing to economic development. that provides policy directions
Government Banking Institutions
Financial System: Participants/Components 1. The Development Bank of the Philippines The BSP powers and functions
2. The Land Bank of the Philippines are exercised by its monetary
Household board
3. The Al-Amanah Islamic Investment Bank of the Philippines
Financial Intermediaries/Institutions 4. Offshore Bank Unit

Non-Financial Institutions
Non-Banking Financial Institutions
Government PRIVATE
1. Investment House/Banks
Central Bank
2. Securities Brokers/Dealers
Foreign Participants 3. Building and Loan Associations
4. Credit Unions
Objectives of BSP The different Institutions governed by BSP basically divided into
Banking System and Non-banking System:  Adopt an annual budget for and authorize such
expenditures in Bangko Sentral
Monetary Board
Maintain monetary
Promote and maintain
policies conductive to a
balanced and
monetary stability and  Direct the management, operations, and
the convertibility of the
sustainable growth of
the economy.
peso Monetary Stability Sector administration of Bankgo Sentral
 Establish a human resource management
Supervision and
 system
Examination Sector
Provide payment and
other financial services
Three Main Pillars of BSP
Maintain stability of the
financial system
to the government, the
public, financial
Resource Management
Sector
institutions and foreign
official institutions BSP manage inflation and price
fluctuations for conducise balanced and
The Structure of Different Price
Stability sustainable growth of the economy.
Sector
BSP plays a great role in the flow of
money in the system from the people who
Financial
Functions of Bangko sentral ng Pilipinas Stability have extra money.
Bank of issue Efficient Transactions settled in cash, check, stored
Payments value cards and involving small
and amounts.
Government's banker, agent and adviser
Settlemen
t System
Custodian of the cash reserves of banks

Philippine Financial Market

Custodians of the nations reserves of
International currency Classified into two markets:
1. Money market
Bank of rediscount and leader of last resort 2. Capital market

Bank of Sentral clearance and settlement
Controller of credit
Functions of the Monetary Board What are the primary and secondary markets?
 Issue rules and regulations it considers necessary for the
effective discharge of the responsibilities  Primary market
 Indemnity its members and other official's at Bangko - new shares are issued and sold to the investing public
Sentral for the first time.
- Initial Public Offering (IPO)
 Secondary market
- where securities can be bought and sold after they have been
issued to the public in the primary market.
Under the New Central Bank Act, the BSP performs the following
functions, all of which relate to its status as the Philippines’ central
monetary authority:
Barter system - is an old method of exchange. This system has been OTHERS CHARACTERISTICS OF MONEY
used for centuries and long before money was invented. People
exchanged services and goods for other services and good in return.  Uniformity - means that each individual unit holds
the same value.
Fiat money – also known as “mickey mouse money”, currency  Limited supply - money must be available only in
established as money, often by government regulation, that does limited supply
not have intrinsic value.  Non-counterfeit ability - means money can't be
easily duplicated.
Commodity money - This is when money takes into a form of
commodity that has intrinsic value. KINDS OF MONEY

Liquidity management PROBLEMS IN BARTER SYSTEM  Commodity Money - Under a modern monetary
system, commodity money appears in metallic
Currency issue 1. DOUBLE COINCIDENCE OF MONEY - With such diverse
form, the face value of which approximates that
commodities, it is difficult to find a person who matches the
of the value of the metal itself.
Lender of last resort commodity you have that is open for an exchange to what
they want or need.
Financial supervision  Fiat Money - As its name implies, fiat money is
2. LACK OF A STANDARD UNIT OF ACCOUNT - When you
money issued by command. “FIAT” came from
already found someone that matches what you have to
Management of foreign currency reserves latin word which means "let it be done"
what they need/want, it is quite a challenge to quantify the
Determination of exchange rate policy
value of a certain commodity. USES OF MONEY
4 FUNCTIONS OF MONEY  To save - Provides financial backbone to an
Other activities
individual in times of needs & security.
 Medium of exchange - used as an intermediary to avoid the
 To pay taxes - Contributions by individuals
inconveniences of the coincidence of wants
given to the government for revenue.
 Unit of account - providing a common measure of the value
TOPIC 2: MONEY & INFLATION  To purchase goods and services - currency
of goods and services being exchanged.
established as money, often by government
OVERVIEW ABOUT MONEY  Store of value - In order to be a medium of exchange,
regulation, that does not have intrinsic value.
money must hold its value over time; that is, it must be
• Money is the set of assets in the economy that people stored of value. If money could not be stored for some WHAT IS INFLATION?
regularly use to buy goods and services from other people. period of time and still remain valuable in exchange.
 Standard for deferred payment - the function of being It is a rise in the general level of prices of goods
• In modern monetary system, every country has a currency and services in an economy over a period of time.
widely accepted
that serves as their legal tender.

HISTORY OF MONEY
TYPES OF INFLATION
 CREEPING OR MILD INFLATION - The price level rises over a
period of time at a mild rate. The inflationary rate is less
than 2%
 WALKING INFLATION - When the rate of rising prices is
more than the Creeping Inflation. The inflationary rate is
around 5%
 RUNNING INFLATION - A rapid acceleration in the rate of
rising prices. The inflationary rate is more than 10%
 GALLOPING OR HYPER INFLATION - The price level goes on
rising at a very fast rate. The inflationary rate is more than
25% and 50%
CLARIFICATION THROUGH DIAGRAM
DEMAND-PULL INFLATION
• Occurs when aggregate demand rises more rapidly than the PPI – PRODUCER PRICE INDEX
economy’s productive potential, pulling prices up to
It is an index of prices that measures average
equilibrate aggregate supply and demand
change in the selling prices received by domestic
producers of goods and services over time.
GDP Deflator
It is an index of the price level of aggregate output,
or the average price of the components in GDP relative
to a base year.
COST-PUSH INFLATION
PRICE INDEX FORMULA
• It is a rise in the general level of prices resulting from an
increase in the cost production.
Price index ∈a given year
Cost of market basket ∈a given year
¿ × 100
Cost of market basket ∈base year
MEASURING INFLATION RATE
The rate of inflation is the rate of change of the general
PRICE INDEX price level and is measured as follows:
It is a weighted average of the prices of a selected basket of goods
and services between two periods relative to their prices in some Price level ( year t ) −Pricelevel ( year t−1 )
Inflation Rate = × 100
base year. Price level ( year t−1 )
WPI – WHOLESALE PRICE INDEX
measures the changes in the prices of goods sold and traded in bulk
by wholesale businesses to other businesses.
CPI – CONSUMER PRICE INDEX
Measures the prices of a fixed basket of consumer goods, weighted
according to each component’s share of an average consumer’s
expenditures

FACTORS THAT INFLUENCES INFLATION
 PRODUCTION COST
 DEMAND
 FISCAL POLICY
CORRELATION BETWEEN MONEY & INFLATION
The money supply of a country is a major contributor to
whether inflation occurs. The government overall uses
monetary policy instruments that will help the economy to
adjust to the economic challenges that a country face.
As a government evaluates economic conditions, price
stability goals, and public unemployment, it enacts specific
monetary and fiscal policies to promote the long-term
well-being of its citizens.
Monetary and fiscal policies may change the money supply,
and changes to the money supply may cause inflation.
TOPIC 4: INTEREST RATE AND ITS ROLE IN FINANCE
DEFINITION OF TERMS
Variable - a quantity that may assume any one of a
set of values
Market – where buyers and sellers interact.
Debts - anything owed by one person to another.
Lender – are the one who makes funds available
to a person or business with the expectation that the
funds will be repaid.
Borrower - a person or business that receives
money from a lender with the agreement to pay it back
within a specified period of time.
Loans - when money is given to another party in exchange for THE INTERNAL RATE OF RETURN FORMULA  Real Interest Rate =Nominal Rate -Expected Rate of
repayment of the loan principal amount plus interest. Inflation

FIXED INTEREST RATE - A fixed interest rate means

Internal Rate of Return (IRR) - measures your rate of return on a
that the interest rate you will be charged will not
project or investment while excluding external factors. It can be used change over the term of your loan, regardless of how
to estimate the profitability of investments high or low the market may drive interest rates.

Simple Interest - the interest charge on borrowing that's calculated VARIABLE INTEREST RATE - Also called floating rate, a
using an original principal amount only and an interest rate that variable interest rate means that the interest you are
never changes. charged changes as whatever index your loan is based
on changes. Loans can be based on the rate of the 1-year
Compound Interest - Compound interest is the interest calculated T-bill or the prime lending rate among other factors.
on the principal and the interest accumulated over the previous HOW TO CALCULATE IRR
• Trial-and-error
period.
• Financial Calculator FACTORS AFFECTING INTEREST RATES
• Using Software Programmed
INTEREST RATE  Inflation
 Monetary Policy
RULE OF ACCEPTANCE OF IRR
• Interest rate denotes percentage earnings or yield on  Economic Growth
investment. • IRR > r., ACCEPT, NPV > 0
• IRR < r., REJECT, NPV < 0  Market Competition
• Interest rates are one of the most important numbers in the  International Factors
economy because they influence how likely people are to
When to (and Why) Use IRR? MAJOR TYPE OF DEBTS
borrow money.
• Use IRR to evaluate and compare the returns of business
investment projects to select the best investment from
these competing projects.
TYPES OF INTEREST
NOMINAL INTEREST RATE - A nominal interest rate refers to the
total of the real interest rate plus a projected rate of inflation.
INTERNAL RATE OF RETURN (IRR)
• The internal rate of return (IRR) is a metric used in financial REAL INTEREST RATE - States the “REAL” rate that the lender or
investor receives or borrowers pay after considering inflation.
analysis to estimate the profitability of potential
investments. FISHER EQUATION
• IRR is a discount rate that makes the net present value
(NPV) of all cash flows equal to zero in a discounted cash  Nominal Rate = Real Interest + Expected rate of inflation
flow analysis.
 n = Number of compounding periods for a year  Ensure that current savings will flow into the investment to
promote economic growth
t = number of years
 Ration the available supply of credit to provide
COST OF BORROWING
loanable funds to those investment projects with
SIMPLE INTEREST the highest expected returns
 Bring into balance the supply of money with the
This type of interest is calculated on the original or principal amount public’s demand for money
of loan.  Act as an important government tool through its
influence on the volume of savings and investment.
The formula for calculating simple interest is:
If the economy is growing too slowly and
Simple Interest Formula = principal x rate x time unemployment is rising, the government can use its
policy tools to lower interest rates in order to
For example, let's say you were to invest $10,000 at an annual rate
stimulate borrowing and investment which will
of return of 3.875%, compounding monthly over the span of one
eventually encourage production and create
year.
employment.
Compound interest = p x (1 + r/n)nt
WHAT IF THE TERM OF THE LOAN IS 30 YEARS? ROLE OF INTEREST RATES IN FINANCE
p = 10,000
The earnings on money lent and the cost of borrowed are
r = 3.875% expressed as percentage of the principal amount of money
lent or borrowed is called interest rate.
n = 12 months

t=1 The level of investment spending, level of consumer

expenditures, redistribution of wealth between borrowers
Compound interest = $10,000 x (1 + 3.875%/12)12x1 and lender, and prices of financial securities, are among
COMPOUND INTEREST = $10,000 x (1 + 0.003229167)12 the ones affected by any changes in the interest rate.

Compound interest is calculated not just on the basis of the principal = $10,000 x (1.003229167)12
amount but also on the accumulated interest of previous periods. TOPIC 6: FINANCIAL SYSTEM
This is the reason why it is also called “interest on interest.”  = $10,000 x (1.03944568227)
• A financial system is a set of institutions and practices
Compound interest  = p x (1 + r/n)nt = $10,394.46 that facilitate and allow for the exchange of funds
between borrowers,lenders and investors.
p = Principal amount
• A financial system is the system that allows the
r = interest rate IMPORTANCE OF INTEREST RATE IN THE ECONOMY transfer of money between savers and borrowers.
 • 1 year or less
Capital Market - A financial market where capital market
instruments are traded
COMPONENTS OF FINANCIAL SYSTEM

1. Financial Instrument - Financial instruments are contracts

for monetary assets that can be purchased, traded, created,
modified, or settled for.

TYPES OF FINANCIAL INSTRUMENT

 Cash Instruments - are financial instruments with values
directly influenced by the condition of the markets.
2 TYPES OF CASH INSTRUMENTS
- SECURITIES
- DEPOSIT AND LOANS
-  It is where capital is actually raised by
 Derivative Instruments - are financial instruments that have
values determined from underlying assets, such as
resources, currency, bonds, stocks, and stock indexes.
 Foreign Exchange Instruments - are financial instruments
that are represented on the foreign market and primarily
consist of currency agreements and derivatives.
Primary Market
 New shares are issued and sold to the
investing public for the first time.
the company selling stock directly to
investors through an initial public
offering (IPO).
Secondary Market
• Financial market in which securities
that have PREVIOUSLY been issued
can be resold.
• No new funds are raised.

2. Financial Market - Financial markets refer broadly to any

marketplace where the trading of securities occurs,
including the stock market, bond market, forex market, and
derivatives market, among others. Financial markets are
vital to the smooth operation of capitalist economies.

Money Market - A financial market where money market

instruments are traded.

Short term DEBT instruments

 2. Pension Funds - collect contributions from workers and
businesses to invest so that workers can retire with an income
provided from the invested funds.
3. Loan Companies - sometimes called finance companies. They are
private companies that lend money and make a profit on the
interest.
4. Investment Banks - a financial institution that assists individuals,
corporations, and governments in raising capital by underwriting
3. Financial Institutions - an establishment that completes and and/or acting as the client's agent in the issuance of securities.
facilitates monetary transactions, such as loans, mortgages, and 5. Currency Exchanges - Currency exchanges do not make loans or
deposits. receive deposits. Currency exchanges are private companies that
cash checks, sell money orders, or perform other exchange services.
DEPOSITORY INSTITUTIONS 6. Brokerage Houses - Simply known as brokerage, is a financial 2. Indirectly (Indirect Financing)
1. Commercial Banks institution that facilitates the buying and selling of financial
Banks that accept deposits and grant commercial or business securities between a buyer & a seller.
loans.
2. Thrifts 4. FINANCIAL SERVICES - a broad range of more specific activities
• Includes savings and loans associations and savings such as banking, investing, and insurance. Financial services are
banks. limited to the activity of financial services firms and their
• Accept deposits and grants loans except professionals, while financial products are the actual goods,
commercial loans. accounts, or investments they provide.
3. Credit Unions
• Nonprofit and are exclusive for credit union HOW FUNDS FLOW THROUGH THE FINANCIAL SYSTEM
ROLE OF FINANCIAL SYSTEM
members
4. Mutual Saving Bank The flow of funds happens in 2 ways:
 Savings-Investment Relationship
 Depositor owned. 1. Directly (Direct Financing)
 Growth of Capital Market
- Fixed Capital
- Working Capital
 Government Securities
 Infrastructure and Growth
Non-Depository Institutions  Trade and Development
 Employment Growth
1. Insurance Companies - protect their customers from the financial
distress that can be caused by unforeseen events.
  Balanced Economic Growth
TOPIC 7: FINANCIAL ENVIRONMENT
A financial environment is a part of an economy with the
major players being firms, investors, and markets.
• Firms, are any business that offer goods or services
to consumers.
• Investors, are individuals or businesses that place
capital into businesses for financial returns.
• Markets, represent the financial environment
that makes this all possible.
Importance of Financial Environment
• Enables the financial intermediation process
• Ensuring that financial resources are allocated
efficiently towards promoting economic development
COMPONENTS OF FINANCIAL SYSTEM
• Financial Markets
• Financial Intermediaries
• Financial Services
• Financial Instruments
Figure 1: Illustrate the position of bank as financial Intermediaries
DEBT MARKET vs. EQUITY MARKET
DEBT MARKET
The debt market, or bond market, is the arena in which investment
in loans are bought and sold. It describes a marketplace where
investors buy debt securities that are brought to the market by
either governmental entities or corporations.
EQUITY MARKET
The equity market, or the stock market, is the arena in which stocks
are bought and sold. The owner of an equity stake may profit
from dividends.
EXCHANGE-TRADED MARKET
An exchange-traded option is a standardized derivative contract,
traded on an exchange, that settles through a clearinghouse and is
guaranteed that options contract buyers will be able to exercise their
options.
OVER THE COUNTER MARKET(OTC)
A marketplace in which the participants’ trades are carried out by a
network of dealers or by the trading parties themselves.
FINANCIAL SERVICES
BANKING INSTITUTION SAFE (SYNTHETIC AGREEMENT FOR FOREIGN EXCHANGE) -Is an FINANCIAL CRISIS EXAMPLES:
agreement that guarantees a specified exchange rate.
 Land Banks - BLACK DEATH 1346 - 1353
FORWARD – contract between 2 parties, has customizable
 PNB - CREDIT CRISIS of 1772
derivatives
 BPI - STOCK CRASH OF 1929
FUTURE – exchange of derivatives on future date at a
 BDO - ASIAN CRISIS OF 1997 - 1998
predetermined price.
 Union Bank - 2007- 2008 GLOBAL FINANCIAL CRISIS
OPTIONS – seller grants buyer to whether buy or sell derivatives.
NON-BANKING INSTITUTION - COVID 19 PANDEMIC
INTREST RATE SWAP – involves on swapping of interest rate and is
 GSIS
willing to pay the rate of loans in different currencies.
 SSS
 National home Mortgage Finance Corporation FINANCIAL CRISIS
 Philippines Veterans Investment
“In a financial crisis, asset prices see a steep decline in value, TOPIC 8: FINANCIAL ASSETS
Development Corporation
businesses and consumers are unable to pay their debts, and
 National Development Corporation
financial institutions experience liquidity shortages” FINANCIAL ASSET
FINANCIAL INSTRUMENT
- Are assets you own that you can convert to cash quickly.
“LEGAL DOCUMENTS THAT PRESENTS A LEGAL - A liquid asset that gets its value from a contractual right
AGREEMENT BETWEEN PARTIES THAT INVOLVES MONETARY or ownership claim.
VALUE”
A Legal Documents Identified by EXAMPLES
 Cheques
• Cash
 Bonds
• Shares
 Shares
• Bonds
 Bills of Exchange
• Stocks
 Future or Options Contracts
• Bank Deposits
W • Mutual Funds
HAT CAUSES A FINANCIAL CRISIS?
FINANCIAL ASSET IS ANY ASSET THAT IS:
TYPES OF FINANCIAL INSTRUMENT • ASSETS OR INSTITUTIONS ARE a. Cash
CASH INSTRUMENTS OVERVALUED b. A contractual right to receive cash or another financial asset
Securities – has a monetary value, used in stock market • INVESTORS IRRATIONAL BEHAVIOR from another entity.
Loans and Deposits – represents a monetary asset that have sort of • SYSTEMIC FAILURES c. A contractual right to exchange financial instrument with
contractual agreement. • ABSENCES OF REGULATORY another entity under conditions that are potentially favorable.
• MICROSCOPIC OR VIRUS d. An equity instrument of another entity.
DERIVATIVE INSTRUMENTS SPREADING WORLDWIDE
CHARACTERISTICS OF FINANCIAL ASSETS
 1. MONEYLESS On the basis of purpose they serve, bank deposit accounts CURRENT ASSETS - The Current Assets account is a balance
2. DIVISIBILITY & DENOMINATION may be classified as follows: sheet line item listed under the Assets section, which
3. REVERSIBILITY • Savings Bank Account accounts for all company-owned assets that can be
4. CASH FLOWS • Current Deposit Account converted to cash within one year. Assets whose value is
5. TERM TO MATURITY • Fixed Deposit Account recorded in the Current Assets account are considered current
6. CONVERTIBILITY • Recurring Deposit Account assets.
7. CURRENCY TYPES OF CURRENT ASSETS:
8. LIQUIDITY - LOANS AND RECEIVABLES - Are those assets arising from a
• Cash and Cash Equivalents
9. RISK/RETURN PREDICTABILITY loan granted by a bank or other financial institution to a
10. TAX STATUS borrower or client. • Marketable Securities

TYPES OF FINANCIAL ASSETS - DERIVATIVES - Are contracts whose value is derived from • Accounts Receivable
- STOCKS - Are financial assets with no set ending or the underlying assets used for hedging, speculation,
• Inventory
expiration date. An investor buying stocks becomes part- arbitrage opportunities, etc.
owner of a company and shares in its profits and losses. • Prepaid Liabilities/Expenses
-
- BONDS - A fixed-income instrument that represents a loan • Other Short-Term Investments
made by an investor to a borrower. FORMULA OF CURRENT ASSETS
Are one way that companies or governments finance short-
term projects. • Current Assets = C + CE + I + AR + MS + PE

NON-CURRENT ASSETS - Noncurrent assets are a company's

- CERTIFICATE OF DEPOSIT - A product offered by banks and
long-term investments for which the full value will not be
credit unions that provides an interest rate premium in
realized within the accounting year. They are typically highly
exchange of the customer agreeing to leave a lump-sum
illiquid, meaning these assets cannot easily be converted into
deposit untouched for a predetermined period of time.
cash.

- CASH OR CASH EQUIVALENT - Are liquid assets that include

all cash as well as investments securities utilized for short- EXAMPLES NON-CURRENT ASSETS:
term investing.
FINANCIAL ASSETS CLASSIFICATION • Investments

• Current Assets • Intellectual Property

- BANK DEPOSIT - Are money placed into a deposit account at
a banking institution, such as savings accounts, checking • Non-Current Assets • Real estate
accounts and money market.
• Equipment
- TYPES OF DEPOSITS:
DIFFERENT TYPES OF NON-CURRENT ASSETS: CONS

• Tangible Assets • There’s little risk with highly liquid assets, which
means little return.
• Intangible Assets
• Investing in a non-FDIC insured account could put
• Natural Resources
your money at risk.

COMMON MISCONCEPTIONS ABOUT FINANCIAL ASSETS

1. Financial assets are always safe.

2. Financial assets always increase in value.

3. Financial assets are only for the wealthy.

4. Financial assets are only for experienced investors.

5. Financial assets are too complicated for the average person to

understand.

PROS & CONS OF HIGHLY LIQUID FINANCIAL ASSET

PROS

• You can immediately convert the assets to cash.

• Some liquid assets earn interest, increasing their

value.

• Most liquid assets, such as checking, savings, and

money market accounts, are FDIC insured,
protecting your investment up to 250, 000 dollars
per account.