1. What are the sources in inefficiency of a barter system?

- Each goods have many prices

- Exchangeable products are not standardized - Interest rate swaps- there are contracts to exchange cash flows as a specified date or a
- It is difficult to accumulate wealth series of specified dates based on a national amounts and fixed and floating rate.
- Lack of double coincidence of wants
- Inability to make deferred payments 1. Why is there a need for an efficient financial system for a country to have a strong economy?
- Difficulty in storage of goods - An efficient financial system would allow us to have a good allocation of resources,
2. What is fiat money? assess and manage financial risk, maintain employment levels and such that will all
- It is a type of currency that is declared legal tender by a government. contribute to a good circulation of fund to our economy and all of these will produce a
- refers to money such as paper currency that has no value apart from its use as money. proper and wealthy economy
3. Explain the expression “Legal Tender” - There's a need for an efficient financial system for a country to have a strong economy
- It is the declared currency by law that must be accepted and valid as a mode of payments for because a strong country depends on the investment of an individual or country to have
debts and financial obligations. a better economic growth. It helps companies to raise capital funds for those who are in
4. Explain briefly the importance of using checks in paying for goods and services purchased. need. Also, to have a strong economy, a country must need a timely, efficient financial
- Using checks is very important especially if we are going to pay big purchased of goods and system to support the future development of a country
services. It is much safer than the fiat money since if it happens that it lost, without the signature -
of the owner it cannot use. it just requires too much trust since most of the check’s transactions 2. What comprises the financial system?
are those big amounts of money. - Financial instruments, financial markets and financial institutions, and the central bank
5. Describe: and other financial regulators
 E-money - The financial system comprises different financial institutions, including banks, financing
- digital cash people use to buy goods and services. company, insurance company, investment banks and other banks in which regulated by
 Bitcoin government to help investor to borrow money.
- It is another form of e-money in which people performing the complicated calculations necessary 3. Explain the nature and main objective of the financial system
to ensure that online purchases made with bitcoins are legitimate. The currency used here has - The nature and main objective of the financial system is that to have a well- functioning
new units. It is not under or control by banks or governments. financial system in place that direct funds to their most productive uses in times of
 Blockchain crucial prerequisite of economic development.
- underlying technology behind bitcoin. 4. Explain the basic flow of funds through financial system
- a system in which a record of transactions, especially those made in a cryptocurrency. - The lenders-savers are those people who have some excess funds to lend them out
6. Describe cashless society. Is it easily attainable? through there respected banks, the arrow from lender-savers it intersects through
- Cashless society is where the physical money or fiat money we are currently using will be financial intermediaries and the borrower-spenders are those persons who borrowed
replaced by digital currency. Mostly of the payments will occur electronically. It is not money from banks.
easy to attain knowing that not all of the people are aware of using technology. Another 5. What are the key components of the financial system?
thing is that processing of having digital currency account requires a lot of requirements - The key components of the financial system are Financial Instrument, Financial Markets
especially to those who don’t even have such valid ids. it will also be difficult to do small and Financial Institutions and the Central Bank and Other Financial Regulators.
transactions like those in sari-sari stores. Cashless is attainable but talking the CASHLESS 6. Describe the three important functions of the financial system, namely:
SOCIETY, it is really difficult. a. Risk sharing - this is an alternative way of sharing risk in financial system, where as investors are
7. Describe briefly the mechanics and advantages of the new peso real-time gross settlement (RTGS) willing to buy more stocks, bonds and financial assets. In this way they could seek help in an
platform cited on page 37. experts in how to deal with the risks
- RTGS offers the benefit of quick, convenient, and secure transfers. b. Liquidity - it describe in the financial system as easiest way to buy and sell their assets in financial
market, this way more investor are willing to take risk in buying and selling their bonds and stocks
in financial market.
c. Information gathering & sharing - this is the collection and communication of information of
borrowers, a fact that how much is their expectation return on financial assets
1. Define financial instrument
7. Explain what asymmetric information is
- Any contract that gives rise to financial asset of one entity and a financial liability or
- It describes the situation in which one party to an economic transaction has better
equity instrument of another entity.
information other than does the other party
- Any asset which holds capital and can be traded in the market.
8. Describe the two problems arising from asymmetric information, namely:
2. Give example of primary financial instrument
a. Adverse selection - is the problem investors experience in distinguishing low risk borrowers from
- Checks, stock certificate, shares, bonds
high risk borrowers before making an investment.
3. Explain the nature of a derivative
b. Moral hazard - it the problem investors experience in verifying that borrowers are using their
- Are financial instruments that “derive” their value on contractually required cash flows
funds as intended.
from some other security or index
9. What are transactions and information costs?
- Financial instrument that derives its value from the movement of something, can be
- Transaction costs are cost of a trade or the financial transactions and information costs
commodity price, foreign exchange rate of any underlying asset or financial instrument.
are costs that savers incur to determine the credit worthiness of borrowers and also to
4. Indicate whether the following instruments are examples of money market or capital market securities.
monitor how they used the funds acquired
o BSP treasury bills – MONEY MARKET
10. Explain how financial intermediaries
o Long-term corporate bonds – CAPITAL MARKET
a. Reduce “adverse selection” - by requiring borrowers to disclose material information on thier
o Ordinary shares (common stocks) – CAPITAL MARKET financial performance and financial position, to collect information on firms and selling and by
o Preferred shares – CAPITAL MARKET convincing lenders to require borrower to pledge some of their assets as collateral.
o Dealer commercial paper – MONEY MARKET b. Moral “hazard problem” - it can be reduce by specializing in monitoring borrowers and
5. Distinguish between financial assets and non-financial assets developing effective techniques to ensure funds and also by imposing restrictive covenants
- Financial asset is valued based on their contractual claim, their value can be easily c. Reduce “transaction and information costs”- it can be reduce by taking advantage of economic
determined in the financial market, while non-financial asset are those valued by looking scale , which it refers to the reduction in average costs that results from an increase in the volume
at their physical and tangible characteristics and cannot be traded in the market of a good and also by taking advantage of technology to provide financial services
6. Give examples of financial instruments represented by financial assets and explain each briefly.
- Cash on hand and in banks
 Petty cash – to pay minor expenditures
 Demand savings and time deposits – deposit in checking, savings and
time deposit respectively. Time deposit are replacements covering a
relatively long period of time
 Undeposited check- not yet presented to the bank for payment
 Foreign currencies
 Money orders- similar to bank drafts but drawn generally form
authorized post offices or other financial institutions
 Bank drafts- commitments by banking institutions to advance funds on
demand by the party to whom the draft was directed.
- Accounts, notes and loans receivable and investment
 Trade receivable
 Promissory notes
 Bonds certificates
- Interest in shares or equity instruments
 Stock certificates
 Publicly listed securities
- Derivatives financial assets
 Future contracts
 Forward contracts
 Call options
 Foreign currency futures
 Interest rate swaos
7. Distinguish between financial liabilities and non-financial liabilities
- Financial liability is an obligation to pay another entity while non-financial liability is a
non-cash obligation such as warranties, settled through delivery of something other than
cash
8. Give examples of financial equity instruments and explain each briefly
- Ordinary shares- used by companies to raise capital that comes with voting rights for
shareholders
- Preference shares- used by companies to raise capital that comes with the dividend
option for shareholders
9. Give examples of derivatives and explain each briefly.
- Future contracts- agreement by seller and buyer that requires seller to deliver a
particular commodity at a designated future date, at a predetermined price
- Forward contracts- calls for delivery on a specific date, not traded on a market exchange,
does not call for daily cash settlement for price changes in the underlying contracts.
- Call options-give its holder a right to buy or sell an instrument
- Foreign currency futures- when loans must be repaid in foreign currencies, a new
element of risk is introduced