BUSINESS FINANCE

Click to edit Master subtitle style

 TOPICS

• FINANCIAL
INSTRUMENTS
• FINANCIAL
INSTITUTIONS
• FINANCIAL MARKETS
LESSON OBJECTIVES:

• Distinguish a financial institution from

financial instrument and financial
market
• Enumerate varied financial institutions
and their corresponding services
• Compare and contrast the varied
financial instruments
FINANCIAL INSTRUMENTS

are monetary contracts

between parties. They can be
created, traded, modified and
settled. They can be cash
(currency), evidence of an
ownerhip interest in an entity
(share), or a contractual right to
receive or deliver cash (bond).
FINANCIAL INSTRUMENTS

“any contract that gives rise to

a financial asset of one entity
and a financial liability or equity
instrument of another entity --
(IAS 32)
FINANCIAL INSTRUMENTS

“cash, evidence of an
ownership interest in a
company or another entity, or a
contract that does both of the
following: imposes on one
entity a contractual obligation
either to deliver cash or
another financial instrumet to a
second entity.” --GAAP
FINANCIAL INSTRUMENTS

CASH instruments--instruments which

value is determined directly by the
markets. They can be securities, which
are readily transferable, and instruments
such as loans and deposits, where both
borrower and lender have to agree on a
transfer.
FINANCIAL INSTRUMENTS

DERIVATIVE instruments--instruments
which derive their value and
characteristics of one or more
underlying entities such as an asset,
index, or interest rate. They can be
exchange-traded derivatives and over-
the-counter (OTC)derivatives
FINANCIAL INSTRUMENTS

DERIVATIVE instruments--is a contract

between two or more parties whose
value is based on an agreed-upon
underlying financial asset (like a security)
or set of assets (like an index).
Common underlying instruments include
bonds, commodities, currencies, interest
rates, market indexes, and stocks.
FINANCIAL INSTITUTIONS

is an establishment that conducts

financila transactions such as
investments, load and deposits.
*everything from depositing money to
taking out loans and exchanging
currencies must be done through
financial institutions.
TYPES OF FINANCIAL INSTITUTIONS

1. COMMERCIAL BANKS
--accepts deposits
--provide security & convenience to
customers
--transactions handled with checks,
debit cards or credit cards
--makes loans for individuals and
businesses
--payment agents within a country or
between nations
TYPES OF FINANCIAL INSTITUTIONS

2. INVESTMENT BANKS
--a financial intermediary that performs a
variety of services for businesses and some
governments
*focused on initial public offerings (IPOs)
and large public and private share offerings
services: underwriting debt and equity
offerings, facilitating mergers and other
corporate reorganizations, provide research
and financial advisory services to companies.
TYPES OF FINANCIAL INSTITUTIONS

3. INSURANCE COMPANIES
--operates profitably and pay for claims
by insuring a large number of people.
*pool risk by collecting premiums from a
large group of people who want to
protect themselves against a particular
loss (fire, sar accident, illnes, lawsuit,
disability or death).
* helps individuals and companies
manage risk and preserve wealth.
TYPES OF FINANCIAL INSTITUTIONS

4. BROKERAGES
--an intermediary between buyerd and
sellers to facilitate securities
transactions.
*brokerage companies are compensated
via commission after the transaction has
been successfully completed
TYPES OF FINANCIAL INSTITUTIONS

5. INVESTEMENT COMPANIES
--a corporation or a trust which
individuals invest in diversified,
professionally managed portfolios of
securities by pooling their funds with
those of other investors
*Unit Investment Trusts (UITs)
*Face Amount Certificates
*Management Investment
--Closed-end investment
--Open-end investment
TYPES OF FINANCIAL INSTITUTIONS

6. NONBANK FINANCIAL INSTITUTIONS

--provides some of the same services of
the banks
* savings and loan associations
* known as S&L or thrifts
*65% or mor of their lending in
residential mortgages
TYPES OF FINANCIAL INSTITUTIONS

7. CREDIT UNIONS
--organized as not-for-profit
cooperatives
*typically offer higher rates on deposits
and charge lower rates on loans
*membership is not open to the public,
restricted to a particular membership
group.
TYPES OF FINANCIAL INSTITUTIONS

8. SHADOW BANKS
“shadow banking system”
“borrowed short” to “lend long”
*absence of regulation and reporting
requirements
*no access to emergency funding
facilities
TYPES OF FINANCIAL MARKETS
 Slide Title

Product A Product B
• Feature 1 • Feature 1
• Feature 2 • Feature 2
• Feature 3 • Feature 3