Business Finance

CHAPTER 1
Introduction to Financial
Management
Financial System
 Learning Objective
• To present an overview of the financial system
and discuss the different functions of the
financial intermediaries
 Financial System
To have an OVERVIEW OF THE FINANCIAL
SYSTEM, let us study this chart.
 Financial Intermediary: Banks
What FUNCTION(S) do BANKS as a
financial intermediary perform in the
financial system?
 Banks provide mechanism where savers can put their
excess funds through deposits, which will earn interests as
incentives. To cover for the interests, banks lend the money
to borrowers after performing a credit investigation. Some
of the deposits can also be invested in some financial
instruments like government securities and corporate
bonds.
 Banks can also serve as conduits of investors in buying
and selling both government securities and corporate
bonds.
 Financial Intermediary:
Insurance Companies
WHAT FUNCTION(S) do INSURANCE
COMPANIES as a financial intermediary
perform in the financial system?

Insurance companies offer different products, which may be

broadly categorized into life insurance and non-life insurance
products. In exchange for the protection, the insured pays
premiums to the insurance companies. These premiums are
used to fund claims. Generally, the cash collected from the
premiums may more than cover claims for most periods.
Hence, the excess cash can be invested by insurance
companies.
 Financial Intermediary:
Stock Exchange
What FUNCTION(S) does STOCK
EXCHANGE as a financial intermediary
perform in the financial system?

 The Philippine Stock Exchange (PSE) provides a system for

the trading of equity securities of publicly listed companies.
These equity securities are common stocks and preferred
stocks.
 An individual who wants to invest and trade in the stock
market cannot go directly to PSE to buy and sell stocks.
He/she has to open an account with an accredited stock
brokerage firm where he/she can channel his/her buy and
sell orders of equity securities.
 Financial Intermediary:
Stock Brokerage Firms
At present, there are ONLINE
BROKERS and LIVE BROKERS.

 Online brokers:  Live brokers:

 With online brokers, one  With live brokers, one needs a
can trade in the stock telephone to call brokers and
market through the place orders.
Internet.  Settlement of the transaction
can be arranged with the
 To trade online, one must
broker.
have an account and
deposit with the online  Live brokers normally have
broker. their messengers who deliver
confirmation receipts as well
as collect and deliver checks.
 Financial Intermediary:
Mutual Funds
What are the important concepts we
need to know about MUTUAL FUNDS?

 Mutual funds provide opportunities for big and small

investors to invest in financial instruments which they would
not have considered on their own, or they may have
considered but do not have the time or the expertise to do it
including investments in the stock market, bonds, treasury
notes, and other money market instruments like treasury
bills.
 With mutual funds, investments are pooled and the funds
are invested by professional managers for a fee. The fees
are a small percentage of the funds invested.
 Financial Intermediary:
Mutual Funds
What different INVESTMENT
OBJECTIVES do mutual funds cater to?

 There are mutual funds which are limited only to stocks.

 There are also mutual funds that are restricted to fixed

income instruments like bonds and treasury notes.

 Other mutual funds provide a combination of both stocks

and fixed income instruments.
 Financial Intermediary:
Other Financial Institutions
What are some of the more PROMINENT
FINANCIAL INSTITUTIONS in the Philippines?

Other financial institutions in the Philippines include pension

funds like Government Service Insurance System (GSIS) and
Social Security System (SSS), Unit Investment Trust Fund
(UITF), investment banks, and credit unions, among others.
 Self-Test Questions
1. Why is it that the same company can be a saver and
a user of funds?
2. What is the role of financial intermediaries in the
financial system?
3. What is the role or function of the Philippine Stock
Exchange in the financial system?
4. What are the differences between the Philippine
Stock Exchange and the stock brokerage firms?
5. How can you describe the role of the banks in the
financial system?