CHAPTER 5 [Bali, ‘yung mobilization of savings kasi matters
most to a low-income economy or to those that are
1. Explain what financial system is as well as
its objective.
[Financial system is a system where there is an
exchange of financial medium or funds between the
lenders, investors, and borrowers.]
[Bali, may tinatawag kasi tayong budget balance
which refers to both budget surplus and budget
deficit. This budget balance is commonly used in
reference to government budgets but this can also be
applied to households or individuals or businesses.
When we say balanced budget kasi, it means that
your total expected revenues or your total income is
equal to your total spendings. So, when you can save
money because you spend less than your income,
then may budget surplus; budget deficit naman if it’s
the other way around.]
[CONNECTION TO FINANCIAL SYSTEM]
 The mechanism of financial system kasi is,
as I have defined it earlier, may exchange or
reallocation of funds, and the parties
involved here are those na may budget
surplus which are the lenders and those na
may budget deficit which are the borrowers
naman. Those lender-savers will offer their
surplus either directly or indirectly to the
borrower-spenders to aid the latter with their
shortage of funds kasi parang they want or
wish to spend more nga.
 So, basically, the objective of financial
system is to efficiently distribute funds to
their most productive uses.
2. Explain how the financial system affects a
nation’s economy.
[A well-functioning financial system is very crucial
for the development of a nation’s economy. Why?
Because, a sound financial system make way for
better mobilization of savings of the people and the
government which creates a larger pool of savings,
and if there’s a large pool of savings then, maganda
or marami rin ang pwedeng ioffer na investments to
the public, even to the foreigners, which will also
results to a faster rate of capital accumulation.]
suffering from capital scarcity. Hence, if a nation can
build a sound financial system, they are also building
a larger scope for their capital sources, which will
eventually lead to a faster economic growth.]
3. Discuss the flow of funds through the
financial system.
[Based on the illustration in the book, the lender-
savers or those who have acquired surplus or those
who spend less than their income are on the left side,
while the borrower-spenders who wish to spend more
than their income but can’t afford are on the right
side. Sa direct finance ‘yung lender-savers are
directly na nakikipagtransact sa mga borrower-
spenders. Diba doon sa financial market, kumbaga
palengke siya pero ang tinda are stocks, bonds, or
other securities or financial instruments. Direct
finance siya, bakit? Kasi ‘yung lender-savers pa rin
naman ang nakikipagtransact directly sa borrower-
spender, para lang silang nagrenta ng place nila sa
market. Kasi diba channel or medium lang naman
ang financial market. Ang ginagawa lang ng lender-
savers is pinuput nila on public sale sa market ang
surplus nila.]
[On the other hand naman, we have the indirect
finance, dito is my third party nang involved which
are the financial intermediaries who are serving as the
agents or middleman between the lender-savers and
borrower-spenders. Example nito is ‘yung sa mutual
funds, so this financial intermediary kasi ang
ginagawa niya is it creates a stock portfolio then ayon
ang binebenta niya sa individual investors. Ano ba
ang stock portfolio? Collection siya ng stocks na
pinag-investan mo typically from different
companies.]
4. Enumerate the key components of the
financial system.
[FINANCIAL INSTRUMENTS]
 As defined in chapter 4, is any contract that
gives rise to a financial asset of one entity
and a financial liability or equity instrument
to the other entity.
 Examples ng anito ay ‘yung sa derivatives
such as future contracts, forward contracts,
and options.

[FINANCIAL MARKET & FINANCIAL
INSTITUTIONS]
[THE CENTRAL BANK & OTHER FINANCIAL
REGULATORS]
 This will be discussed pa in the latter
chapters, 16 and 17. Pero just to give an
overview, ‘yung 4 principal regulatory
agencies ng Philippine Financial System ay
ang BSP, Philippine Deposit Insurance
Corporation, SEC, & Insurance
Commission.
 The main objectives of these financial
regulators is to:
a. Ensure the soundness of the
financial system.
b. Increase the information
available to investors.
c. Improve the control of the
financial system.
5. Give and describe examples of financial
assets and financial liabilities
 when an invoice is issued on the sale of
goods on credit, the entity that has sold the
goods has a financial asset – the receivable –
while the buyer has to account for a
financial liability – the payable. Another
example is when an entity raises finance by
issuing equity shares.
6. Explain the main functions of financial
system.
[RISK SHARING]
 Financial system helps people reduce their
exposure to risk through allowing them to
engage in diversification.
 Diversification is the splitting of wealth into
many assets or spreading your investments
instead of concentrating them in a single
company. Basically, parang ito ‘yung saying
na “don’t put all your eggs in one basket”
kasi in one wrong move you could lose
everything.
[LIQUIDITY]
 it is said that stocks, bonds, or other assets
created by the financial system are more
liquid than physical assets. In order to make
those illiquid assets liquid, financial system
introduced the process of securitization.
 Securitization is the process of combining
illiquid assets with other assets to create a
more liquid assets that can be sold to another
party.
[INFORMATION]
 Collecting and communicating information
help the borrowers to decide whether they
will push through with the investment and
help the lenders to assess the credit
worthiness of the borrower.
7. Distinguish between adverse selection and
moral hazard.
[these are two problems arising from asymmetric
information; so, ‘yung asymmetric information is
when one party in a economic transaction has better
information than does the other party, kumbaga,
parang mas kilala ni borrower si lender or mas kilala
ni lender si borrower.]
[ADVERSE SELECTION]
 This happens before the construction of the
contract wherein the investors or lenders are
having a hard time distinguishing the low-
risk borrowers from high-risk borrowers.
[MORAL HAZARD]
 This happens naman after the construction
of contract. Ang problema naman dito ay
hindi alam ng investors or ng lenders if the
borrowers are using the fund they had lent as
intended. There are tendencies kasi na very
capable si borrower, kahit pa he/she was
determined beforehand as a good borrower,
to conceal relevant information or to act in a
way that is outside the interest of the lender
or taliwas sa napag-usapan nila.
8. Describe how financial intermediaries:
[REDUCE ADVERSE SELECTION]
1. Requiring the borrowers to disclose material
information on their financial performance
and position.
2. Collecting information firms and selling that
information to investors.
 3. Requiring borrowers to pledge some of their
assets as collateral.
[REDUCE MORAL HAZARD PROBLEMS]
1. Monitoring borrowers.
2. Imposing restrictive covenants.
[REDUCE TRANSACTION COSTS]
1. Economies of scale: these are cost
advantages that companies experience when
production becomes efficient, the cost is
being spread out over a larger amount of
goods or services.
2. Technology
3. Reliance on sophisticated software to
evaluate the creditworthiness of loan
applicants.
CHAPTER 6
1.Explain the structure of the Philippine Financial
System
- The structure of Philippine Financial system is
consist of different banking and financial institutions
which as distinct function when it comes to
distribution of funds from savers and lenders to those
people of sector in need in the economy.
2.Describe the nature and basic functions of:
[BANKING INSTITUTIONS]
1. Private Banking Institutions
[UNIVERSAL BANK]
[COMMERCIAL BANK]
Both of them are the kinds of banking
institution that are primarily concerned with
receiving deposits from individuals, then
utilizing those deposits to extend credit to
businesses and offer related services. The
only difference is that as universal bank or
extended commercial bank, they have the
power of investment house wherein they are
allowed to engage in the primary selling of
underwritten securities; the commercial
bank doesn’t have this authority.
[THRIFT BANKS]
These banks focused primarily on financing
MSME’s & Home Building and Home
Development. Kaya Thrift Banks are also
known as savings and mortgage banks as
they accept savings and provide mortgage
loans. Diba ang familiar na mortgage sa atin
is using our houses as collateral for our
liabilities. But, ‘yung mortgage loans na
tinutukoy kasi rito is naka lean siya more on
house loans kasi nga thrifts banks promote
homeownership among Filipinos.
Examples nito ay:
Stock Savings and Mortgage Bank
Private Development Bank
Stock Savings and Loan Association
[RURAL BANK]
Dito naman sa rural banks, from the name
itself for rural areas siya or like provinces
ganiyan. Bali, they accept deposits and lend
credits to farmers, businessmen, and cottage
industries na nasa rural areas. So ‘yung sa
cottage industries pala are those small
manufacturing units producing goods and
services using conventional and low-
technology methods. Examples are locally
produced handicrafts and textiles.
[COOPERATIVE BANKS]
These are small financial institutions naman
that are owned by their members with
primary purpose of providing wide range of
financial services and credits to aid the
members in their capital needs.
2. Government Banks
[DEVELOPMENT BANK OF THE
PHILIPPINES]
The primary objective naman of this
government bank is to provide loans to
MSME’s inclined in agricultural and
industrial enterprises to help them cater their
medium and long-term needs.
[LANBANK OF THE PHILIPPINES]
This government bank naman ay naka-align
ang purpose sa CARP or the Comprehensive
Agrarian Reform Program. This act is
founded on the right of farmers and regular
 farmworkers, who are landless. Bali, this
program aims to grant those landless farmers
and farm workers ownership of agricultural
lands.
[AL-AMANAH ISLAMIC INVESTMENT
BANK]
Its mandate is primarily to participate in the
socio-economic development of the
Autonomous Region of Muslim Mindanao
(ARMM) by promoting and utilizing Islamic
banking, financing and investment in
agricultural, commercial and industrial
ventures in the ARMM.
[NON-BANK FINANCIAL INSTITUTIONS]
1. Private Non-Bank Financial Institutions
[INVESTMENT HOUSE]
[INVESTMENT BANK]
[FINANCING COMPANY]
They extend credit facilities to consumers,
as well as to industrial, commercial, and
agricultural entities. Bali, ano ba ‘yung
credit facilities? Kapag sinabi kasing credit
facilities ito ‘yung pre-approved loans that
allow the borrower to borrow money on an
on-going basis over an extended period of
time. ‘Yung point niya is para siyang credit
card, these don’t make the borrowers
reapply for a loan every time kakailanganin
nila.
[SECURITIES DEALER]
Serves like an agent in a way na engaged
siya sa buying and selling ng securities.
[SAVINGS AND LOAN ASSOCIATION]
[MUTUAL FUNDS]
[PAWNSHOPS]
[LENDING INVESTORS]
[PENSION FUNDS]
[INSURANCE COMPANIES]
[CREDIT UNIONS]
2. Government Non-Bank Financial
Institutions
[GOVERNMENT SERVICE INSURANCE
SYSTEM]
Grants life insurance, retirement, and all
other social security protection provided
under R.A. No. 8291 to all government
employees except the ff:
a. Members of Judiciary & Constitutional
Commissions (life insurance lang
granted sa kanila)
b. Contractual employees
c. Uniformed members of the Armed
Forces of the Philippines and the PNP,
including the Bureau of Jail
Management and Penology and the
Bureau of Fire Protection
Regarding contributions naman, sa
employee ay 9% of his/her actual monthly
salary and 12% naman sa government
agency.
Sa retirement benefits naman ng GSIS, dapat
ay the employee already rendered 15 years
of service and must be at least 60 years old.
(Cash payment equivalent to 18 times the
Basic Monthly Pension (BMP) payable upon
separation and monthly pension for life
starting at age 60)
[SOCIAL SECURITY SYSTEM]
Granted naman to employees who are
working in private companies and offers.
This provides lifetime pensions to members
who have reached the age of 65 and have at
least 10 years of contributions. (‘yung
contributions nito ay nakadepende sa
monthly income, which is ‘yung nakatable)
[PAG-IBIG]
Housing loans to both government and
private employees.
200 g monthly contribution; 100 kay
employee and 100 kay employer.
 3. Understand the evolving Philippine 1. Compare the function of a commercial
Financial System bank with the function of a universal
o Signs of growth in the domestic bank.
market - Both of them are the kinds of
o Regulatory landscape banking institution that are
primarily concerned with receiving
4. Learn the Financial Stability Assessment of deposits from individuals, then
the Philippine Financial System as of the utilizing those deposits to extend
end of Second Semester, 2018 prepared by credit to businesses and offer
the BSP related services. The only
difference is that as universal bank
or extended commercial bank, they
5.Be familiar with the current risks in the have the power of investment house
Philippine Finance System. wherein they are allowed to engage
in the primary selling of
[REPRICING, REFINANCING, & REPAYMENT underwritten securities; the
RISKS (3Rs)] commercial bank doesn’t have this
authority.
Based on my understanding, these risks are directly
proportional to market changes. For the repricing, 2. Enumerate 3 government banks
from the term itself, pwedeng mabago ‘yung price ng  Development Bank of the
let’s say loans na kailangan mong bayaran. For Philippines (DBP)
example, may loan ka tapos may fixed interest rate  Land Bank of the Philippines
ito na 3% for let’s say 3 years. Now, if that fixing (LBP)
period ends, pwede na maging subject to changes or  Philippine Al-Amanah Islamic
repricing ‘yung interest rate depende sa galaw ng Investment Bank
interest rate sa market. 3. Which of the following is not a thrift
Sa refinancing naman, ito ‘yung risks of being unable bank?
to refinance an existing debt with a new debt. Ang a. Cooperative
refinancing debt kasi is where the borrower applies 4. A bank which caters to farmers
for a new loan with better terms, and then used the businessmen and cottage industries in the
proceeds from that loan to pay the other existing debt. rural areas.
So kapag nagsusuffer na sa refinancing risk most a. Rural bank
probably is wala ng credit worthiness ang isang 5. Which of the following is not a
borrower kasi hindi na ulit siya maka-acquire ng government bank?
bagong loan or makautang. c. Philippine National Bank
6. Which of the following is not a
Repayment risk naman ay ‘yung mga borrowers na government agency that regulates
malaki ang potential in failing to make the required financial institutions?
payments. d. Bureau of Internal Revenue
7. Explain briefly how the following
[DEVELOPMENTS IN THE CREDIT MARKET] regulatory agencies intend to align their
policies, roles and practices with global
[CONTINUOUS DEMAND FOR CREDIT BY standards
CORPORATE ENTERPRISES & HOUSEHOLDS a. BSP
IS EVIDENT IN THE DOMESTIC ECONOMY] b. SEC
c. Insurance Commission
6. Explain the impact of the COVID-19 8. Discuss briefly the following current risks
Pandemic on the Economy, Global and Local in the Philippine Financial system
a. Repricing, refinancing, and repayment
risks
 b. Development in the credit market
c. Increasing demand for credit by
corporate business and households
9. Describe briefly the impact of the
COVID-19 pandemic
a. On the global economy
b. Human lives
c. Philippine Economy
10. What positive developments are
occurring that could possibly reverse
some unfavorable impact of the COVID-
19 pandemic?
CHAPTER 7
1.Describe what financial market is.
[In simple terms, this is the meeting place of
the lenders, borrowers, and investors.
Hence, this is very essential in catering the
flow of money in the economy, may it be
globally or locally. Also, dito sa financial
markets nagrerely ang mga individuals,
businesses, corporations, even the
government in funding their short-term or
long-term needs and operations.]
2.Distinguish between “primary market”
and “secondary market”.
[Primary Market is where securities are
made. Kumbaga dito nangyayari ang initial
public offering of the firms of their stocks
and bonds. Therefore, may direct ang
transaction dito. On the other hand, in the
Secondary Market, buy and sell na ang
nangyari dito. For example, bumili ako ng
stocks sa Jollibee tapos, let’s say noong
binili ko ‘yon noong January 2023 ang stock
price niya is 100 lang, then ngayong
November 2023 it increased to 200, with
that increase gusto na siyang ibenta. I can
sell them in the Philippine Stock Exchange
through trading. Therefore, obviously, hindi
involved ‘yung Jollibee sa transaction.
Under din nitong Secondary Market iyong
mga Auction Markets.]
3.Enumerate and describe the activities
of financial markets.
[RAISING CAPITAL]
[COMMERCIAL TRANSACTION]
[PRICE SETTING]
[ASSET VALUATION]
[ARBITRAGE]
[INVESTING]
[RISK MANAGEMENT]
4.Enumerate and explain the attributes of
financial markets that investors look for.
[LIQUIDITY]
Investors look for a liquid market. Bakit?
Kasi in a liquid market mas madaling
makahanap ng katransaction and madaling
mag-meet kumbaga ‘yung interests or terms
ng seller and buyer, like sa prices. Despite
the fluctuations sa prices or changes in
supply and demand, ‘yung spread baga
between the price na gusto siyang ibenta
and price na gusto siyang bilhin remains
relatively small. Unlike in an illiquid market
kung saan sobrang laki ng spread which
makes the transaction almost impossible
kasi hindi na nagtatagpo, or at least
naglalapit man lang ‘yung buyer and seller.
Also, sa illiquid market, there’s always a
lacking of interested buyers or available
assets or securities na hinahanap ng
buyers.]
[TRANSPARENCY]
[RELIABILITY]
[SUITABLE INVESTOR PROTECTION &
REGULATION]
Itong tatlo kasi ay kinda related to one
another or they are kumbaga leaning
forward to the same objective which I think
is to make investors feel safe transacting in
the financial market. Doon sa transparency,
although self-explanatory naman siya, ibig
sabihin lang niyan is ‘yung complete
disclosure of information about trades and
prices sa market. Sa reliability naman, is if
‘yung mga makakatransaction ba nila sa
market na ‘yon are really capable of
meeting the terms of their agreement or
their interests in general. Lastly, sa suitable
investor protection and regulation naman,
sinasabi lang dito na ‘yung like rules or
policies or bylaws governing the protection
of the parties and regulation of the
transactions occurring in the market should
not be excessive nor loose. Dapat ‘yung
tama lang.]
[LEGAL PROCEDURES]
[Ofcourse investors want a backup in case
may anomalies or irregularities sa
transaction nila sa market para mayroon
silang available remedies, and also this
legal procedures allow the enforcement of
contracts.]
[LOW TRANSACTION COSTS]
[Syempre kung saan mura, doon ang tao]
5.Enumerate and explain the attributes of
financial markets that investors look for
6.Enumerate and explain the factors that
brought about major changes in the
financial market.
[TECHNOLOGY]
[DEREGULATION]
[LIBERALIZATION]
[CONSOLIDATION]
Itong tatlong ‘to ang effect nila sa financial
market is like a domino effect, from
deregulation, nagkaroon ng liberalization,
and now consolidation. Sa deregulation kasi
kumbaga is nagluwag ‘yung policies or
‘yung controls sa financial markets. Based
on my understanding sa book, nagsimula ito
noong 1975 when the US prohibited the
stockbrokers or ‘yung nagbubuy and sell ng
stocks to sell to clients from setting a
uniform commission or brokerage fee for
share trading. Ever since then mas
nagloosen up na ‘yung restraints sa market
from one country to another.]
Now, dahil nga nagkaroon ng deregulation,
mas maluwag na, mayroon na ngayon ng
tinawatag nating liberalization in the
participation in the market. Kung dati siguro
may rules separating financial institutions
from one another, ngayon wala na kaya
nagkaroon din ng consolidation or merging
of firms. Also, sa liberalization, mas
pinalawak din ‘yung rules governing the
issuance of shares ng mga company, this
time sila na ang bahala kung kanino sila
mag-iisue ng shares nila, sila na bahalang
mag-assess and all.
[GLOBALIZATION]
Globalization extended the scope of a
financial market globally or internationally.
7.Distinguish between “debt market” and
“equity market”.
[These two are sources of funds, parang
sources of financing lang din for a business
which are the credit and capital/equity. Sa
debt market dito nagtatake place ‘yung
buying and selling of bonds or pwede ring
mortgages, tapos sa equity market naman
ay buying and selling of stocks.]
8.Describe what “stock exchange” is.
[Ito ‘yung secondary market na nagpprovide
ng platform for the buying and selling of
securities from listed companies.]
[The national stock exchange in the country
is Philippine Stock Exchange.]
[for further discussion of the PSE & PSEi,
refer to your notebook]

9.Distinguish between the “Organized

Stock Exchnage” and “Over-the—
Counter Exchange”

10.Explain how securities are listed on a

stock exchange