ABM
BUSINESS FINANCE
INTRODUCTION TO
FINANCIAL
MANAGEMENT
CONTENT STANDARDS THE
LEARNERS DEMONSTRATE AN
UNDERSTANDING OF THE
DEFINITION OF FINANCE, THE
ACTIVITIES OF THE FINANCIAL
MANAGER, AND THE FINANCIAL
INSTITUTIONS AND MARKETS.
PERFORMANCE STANDARDS
THE LEARNERS WILL BE ABLE TO
DESCRIBE THE ROLE OF FINANCIAL
INSTITUTIONS AND MARKETS.
LEARNING COMPETENCY THE LEARNERS
• DISTINGUISH A FINANCIAL INSTITUTION
FROM FINANCIAL INSTRUMENT AND
FINANCIAL MARKET. (ABM_BF12-IIIA-2)
• ENUMERATE THE VARIED FINANCIAL
INSTITUTIONS AND THEIR CORRESPONDING
SERVICES. (ABM_BF12-IIIA-3)
• COMPARE AND CONTRAST THE VARIED
FINANCIAL INSTRUMENTS. (ABM_BF12-IIIA-4)
• EXPLAIN THE FLOW OF FUNDS WITHIN AN
ORGANIZATION – THROUGH AND FROM THE
ENTERPRISE—AND THE ROLE OF THE
FINANCIAL MANAGER. (ABM_BF12-IIIA-5)
MELVIN J. REYE
SPECIFIC LEARNING OUTCOMES
THE LEARNERS WILL BE ABLE TO:
• PREPARE A DIAGRAM
ILLUSTRATING HOW THE FINANCIAL
SYSTEM WORKS.
• DEFINE FINANCIAL MARKETS,
FINANCIAL INSTITUTIONS AND
FINANCIAL INSTRUMENTS.
• IDENTIFY THE TYPES OF FINANCIAL
MARKETS, FINANCIAL INSTITUTIONS
AND FINANCIAL INSTRUMENTS.
SAVINGS AND SHORTAGES
SCENARIO:

DURING YOUR MANAGEMENT OF MONEY,

SOME CASH WILL REMAIN. WHAT YOU
SHOULD DO WITH THAT CASH?
SAVINGS AND SHORTAGES
IF YOU ARE GOING TO SAVE YOUR
MONEY, WHERE WOULD YOU KEEP IT?
SAVINGS AND SHORTAGES
WHAT BUSINESS YOU WOULD LIKE TO TRY?
NOW, SUPPOSE THAT YOU HAD THE BUSINESS RUNNING
AND IS PROFITABLE FOR SOME TIME.
THEN YOU DECIDED TO EXPAND YOUR BUSINESS BUT
DOES NOT HAVE ENOUGH CASH TO PAY FOR THE
EXPANSION. WHERE CAN ______ GET THE ADDITIONAL
FUNDING?
SAVINGS AND SHORTAGES
SUPPOSE B KNEW THAT A HAD EXCESS MONEY AND
APPROACHED A TO LEND HIM/HER THE CAPITAL HE/SHE NEEDS
TO EXPAND HIS/HER BUSINESS FOR A 20% INTEREST. SINCE A
OBSERVED THAT B’S BUSINESS HAS BEEN PROFITABLE, A IS
WILLING TO LEND B THE MONEY SINCE HE/SHE IS CONFIDENT
THAT B CAN REPAY HIS LOAN. A IS NOW EXPECTING TO BE 20%
RICHER FROM HIS LENDING TO B AND B CAN NOW EXPAND HIS
OPERATIONS TO GAIN MORE PROFIT FROM HIS BUSINESS.
SAVINGS AND SHORTAGES
SAVINGS AND SHORTAGES
FINANCIAL MARKETS – ORGANIZED FORUMS IN WHICH THE
SUPPLIERS AND USERS OF VARIOUS TYPES OF FUNDS CAN MAKE
TRANSACTIONS DIRECTLY.
PRIVATE PLACEMENTS - THE SALE OF A NEW SECURITY DIRECTLY
TO AN INVESTOR OR GROUP OF INVESTORS.
FINANCIAL INSTITUTIONS – INTERMEDIARIES THAT CHANNEL
THE SAVINGS OF INDIVIDUALS, BUSINESSES, AND
GOVERNMENTS INTO LOANS OR INVESTMENTS.
SAVINGS AND SHORTAGES
HOW TRANSACTIONS BETWEEN SUPPLIERS AND
USERS OF FUNDS TAKE PLACE?
HOW WOULD YOU PROVE THAT THERE WAS A
TRANSACTION SO THAT THE DEMANDER WILL
BE ABLE TO REPAY THE SUPPLIER ON TIME AND
AT THE RIGHT AMOUNT?
SAVINGS AND SHORTAGES
FINANCIAL INSTRUMENTS
• WHEN A FINANCIAL INSTRUMENT IS
ISSUED, IT GIVES RISE TO A FINANCIAL
ASSET ON ONE HAND AND A FINANCIAL
LIABILITY OR EQUITY INSTRUMENT ON
THE OTHER.
 FINANCIAL INSTRUMENTS
WHEN COMPANIES ARE IN NEED OF FUNDING, THEY EITHER
SELL DEBT SECURITIES (OR BONDS) OR ISSUE EQUITY
INSTRUMENTS. THE PROCEEDS FROM THE SALE OF THE DEBT
SECURITIES AND ISSUANCE OF BONDS WILL BE USED TO
FINANCE THE COMPANY’S PLANS. ON THE OTHER HAND,
INVESTORS BUY DEBT SECURITIES OF EQUITY INSTRUMENTS IN
HOPES OF RECEIVING RETURNS THROUGH INTEREST, DIVIDEND
INCOME OR APPRECIATION IN THE FINANCIAL ASSET’S PRICE.
 FINANCIAL INSTRUMENTS
DEBT INSTRUMENTS GENERALLY HAVE FIXED RETURNS DUE TO FIXED INTEREST
RATES. EXAMPLES OF DEBT INSTRUMENTS ARE AS FOLLOWS:
•TREASURY BONDS AND TREASURY BILLS ARE ISSUED BY THE PHILIPPINE
GOVERNMENT. THESE BONDS AND BILLS HAVE USUALLY LOW INTEREST RATES AND
HAVE VERY LOW RISK OF DEFAULT SINCE THE GOVERNMENT ASSURES THAT THESE WILL
BE PAID.
•CORPORATE BONDS ARE ISSUED BY PUBLICLY LISTED COMPANIES. THESE BONDS
USUALLY HAVE HIGHER INTEREST RATES THAN TREASURY BONDS. HOWEVER, THESE
BONDS ARE NOT RISK FREE. IF THE COMPANY WHICH ISSUED THE BONDS GOES
BANKRUPT, THE HOLDER OF THE BONDS WILL NO LONGER RECEIVE ANY RETURN FROM
THEIR INVESTMENT AND EVEN THEIR PRINCIPAL INVESTMENT CAN BE WIPED OUT.
 FINANCIAL INSTRUMENTS
EQUITY INSTRUMENTS GENERALLY HAVE VARIED RETURNS BASED ON THE PERFORMANCE OF THE
ISSUING COMPANY. RETURNS FROM EQUITY INSTRUMENTS COME FROM EITHER DIVIDENDS OR STOCK
PRICE APPRECIATION. THE FOLLOWING ARE TYPES OF EQUITY INSTRUMENTS:
•PREFERRED STOCK HAS PRIORITY OVER A COMMON STOCK IN TERMS OF CLAIMS OVER THE ASSETS
OF A COMPANY. THIS MEANS THAT IF A COMPANY WERE TO BE LIQUIDATED AND ITS ASSETS HAVE TO
BE DISTRIBUTED, NO ASSET WILL BE DISTRIBUTED TO COMMON STOCKHOLDERS UNLESS ALL THE
CLAIMS OF THE PREFERRED STOCKHOLDERS HAVE BEEN GIVEN. MOREOVER, PREFERRED
STOCKHOLDERS HAVE ALSO PRIORITY OVER COMMON STOCKHOLDERS IN CASH DIVIDEND
DECLARATION. DIVIDENDS TO PREFERRED STOCKHOLDERS ARE USUALLY IN A FIXED RATE. NO CASH
DIVIDENDS WILL BE GIVEN TO COMMON STOCKHOLDERS UNLESS ALL THE DIVIDENDS DUE TO
PREFERRED STOCKHOLDERS ARE PAID FIRST. (CAYANAN, 2015)
• HOLDERS OF COMMON STOCK ON THE OTHER HAND ARE THE REAL OWNERS OF THE COMPANY. IF
THE COMPANY’S GROWTH IS SPURRING, THE COMMON STOCKHOLDERS WILL BENEFIT ON THE
GROWTH. MOREOVER, DURING A PROFITABLE PERIOD FOR WHICH A COMPANY MAY DECIDE TO
DECLARE HIGHER DIVIDENDS, PREFERRED STOCK WILL RECEIVE A FIXED DIVIDEND RATE WHILE
 FINANCIAL MARKETS
CLASSIFICATION FINANCIAL MARKETS INTO COMPARATIVE GROUPS:
- PRIMARY VS. SECONDARY MARKETS
• TO RAISE MONEY, USERS OF FUNDS WILL GO TO A PRIMARY MARKET TO ISSUE NEW
SECURITIES (EITHER DEBT OR EQUITY) THROUGH A PUBLIC OFFERING OR A PRIVATE
PLACEMENT.
• THE SALE OF NEW SECURITIES TO THE GENERAL PUBLIC IS REFERRED TO AS A PUBLIC
OFFERING AND THE FIRST OFFERING OF STOCK IS CALLED AN INITIAL PUBLIC
OFFERING. THE SALE OF NEW SECURITIES TO ONE INVESTOR OR A GROUP OF INVESTORS
(INSTITUTIONAL INVESTORS) IS REFERRED TO AS A PRIVATE PLACEMENT.
• HOWEVER, SUPPLIERS OF FUNDS OR THE HOLDERS OF THE SECURITIES MAY DECIDE TO
SELL THE SECURITIES THAT HAVE PREVIOUSLY BEEN PURCHASED. THE SALE OF
PREVIOUSLY OWNED SECURITIES TAKES PLACE IN SECONDARY MARKETS.
• THE PHILIPPINE STOCK EXCHANGE (PSE) IS BOTH A PRIMARY AND SECONDARY MARKET.
 FINANCIAL MARKETS
PRIMARY MARKET - FINANCIAL MARKET IN WHICH SECURITIES
ARE INITIALLY ISSUED; THE ONLY MARKET IN WHICH THE ISSUER
IS DIRECTLY INVOLVED IN THE TRANSACTION.
PUBLIC OFFERING - THE SALE OF EITHER BONDS OR STOCKS TO
THE GENERAL PUBLIC.
PRIVATE PLACEMENT - THE SALE OF A NEW SECURITY DIRECTLY
TO AN INVESTOR OR GROUP OF INVESTORS.
SECONDARY MARKET - FINANCIAL MARKET IN WHICH
PREOWNED SECURITIES (THOSE THAT ARE NOT NEW ISSUES) ARE
 FINANCIAL MARKETS
- MONEY MARKETS VS. CAPITAL MARKETS
•MONEY MARKETS ARE A VENUE WHEREIN SECURITIES WITH SHORT-TERM
MATURITIES (1 YEAR OR LESS) ARE SOLD. THEY ARE CREATED BECAUSE SOME
INDIVIDUALS, BUSINESSES, GOVERNMENTS, AND FINANCIAL INSTITUTIONS
HAVE TEMPORARILY IDLE FUNDS THAT THEY WISH TO INVEST IN A
RELATIVELY SAFE, INTEREST-BEARING ASSET. AT THE SAME TIME, OTHER
INDIVIDUALS, BUSINESSES, GOVERNMENTS, AND FINANCIAL INSTITUTIONS
FIND THEMSELVES IN NEED OF SEASONAL OR TEMPORARY FINANCING.
• ON THE OTHER HAND, SECURITIES WITH LONGER-TERM MATURITIES ARE
SOLD IN CAPITAL MARKETS. THE KEY CAPITAL MARKET SECURITIES ARE
BONDS (LONG-TERM DEBT) AND BOTH COMMON STOCK AND PREFERRED
STOCK (EQUITY, OR OWNERSHIP).
 FINANCIAL MARKETS
- MONEY MARKET - A FINANCIAL
RELATIONSHIP CREATED BETWEEN
SUPPLIERS AND USERS OF SHORT-TERM
FUNDS.
- CAPITAL MARKET - A MARKET THAT
ENABLES SUPPLIERS AND USERS OF LONG-
 FINANCIAL INSTITUTIONS
EXAMPLES OF FINANCIAL INSTITUTIONS:
- COMMERCIAL BANKS - INDIVIDUALS DEPOSIT FUNDS AT COMMERCIAL BANKS, WHICH
USE THE DEPOSITED FUNDS TO PROVIDE COMMERCIAL LOANS TO FIRMS AND PERSONAL
LOANS TO INDIVIDUALS, AND PURCHASE DEBT SECURITIES ISSUED BY FIRMS OR
GOVERNMENT AGENCIES.
- INSURANCE COMPANIES - INDIVIDUALS PURCHASE INSURANCE (LIFE, PROPERTY AND
CASUALTY, AND HEALTH) PROTECTION WITH INSURANCE PREMIUMS. THE INSURANCE
COMPANIES POOL THESE PAYMENTS AND INVEST THE PROCEEDS IN VARIOUS SECURITIES
UNTIL THE FUNDS ARE NEEDED TO PAY OFF CLAIMS BY POLICYHOLDERS. BECAUSE THEY
OFTEN OWN LARGE BLOCKS OF A FIRM’S STOCKS OR BONDS, THEY FREQUENTLY ATTEMPT
TO INFLUENCE THE MANAGEMENT OF THE FIRM TO IMPROVE THE FIRM’S PERFORMANCE,
AND ULTIMATELY, THE PERFORMANCE OF THE SECURITIES THEY OWN.
 FINANCIAL INSTITUTIONS
EXAMPLES OF FINANCIAL INSTITUTIONS:
- MUTUAL FUNDS - MUTUAL FUNDS ARE OWNED BY INVESTMENT COMPANIES WHICH ENABLE
SMALL INVESTORS TO ENJOY THE BENEFITS OF INVESTING IN A DIVERSIFIED PORTFOLIO OF
SECURITIES PURCHASED ON THEIR BEHALF BY PROFESSIONAL INVESTMENT MANAGERS.
WHEN MUTUAL FUNDS USE MONEY FROM INVESTORS TO INVEST IN NEWLY ISSUED DEBT OR
EQUITY SECURITIES, THEY FINANCE NEW INVESTMENT BY FIRMS. CONVERSELY, WHEN THEY
INVEST IN DEBT OR EQUITY SECURITIES ALREADY HELD BY INVESTORS, THEY ARE
TRANSFERRING OWNERSHIP OF THE SECURITIES AMONG INVESTORS.
- PENSION FUNDS - FINANCIAL INSTITUTIONS THAT RECEIVE PAYMENTS FROM EMPLOYEES AND
INVEST THE PROCEEDS ON THEIR BEHALF.
- OTHER FINANCIAL INSTITUTIONS 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 OTHER
FINANCIAL INSTITUTIONS
FINANCIAL INSTITUTIONS
THANK YOU FOR LISTENING!
 QUIZ

PART 1: TRUE/FALSE
1. TO ACHIEVE THE GOAL OF PROFIT MAXIMIZATION FOR EACH ALTERNATIVE
BEING CONSIDERED, THE FINANCIAL MANAGER WOULD SELECT THE ONE THAT IS
EXPECTED TO RESULT IN THE HIGHEST MONETARY RETURN.
2. DIVIDEND PAYMENTS CHANGE DIRECTLY WITH CHANGES IN EARNINGS PER
SHARE.
3. THE WEALTH OF CORPORATE OWNERS IS MEASURED BY THE SHARE PRICE OF THE
STOCK.
4. FINANCIAL MARKETS ARE INTERMEDIARIES THAT CHANNEL THE SAVINGS OF
INDIVIDUALS, BUSINESSES, AND GOVERNMENT INTO LOANS OR INVESTMENTS.
5. THE MONEY MARKET INVOLVES TRADING OF SECURITIES WITH MATURITIES OF
ONE YEAR OR LESS WHILE THE CAPITAL MARKET INVOLVES THE BUYING AND
SELLING OF SECURITIES WITH MATURITIES OF MORE THAN ONE YEAR.
 QUIZ
PART 2: MULTIPLE CHOICE
1. THE ______ IS CREATED BY A FINANCIAL RELATIONSHIP BETWEEN SUPPLIERS AND USERS OF SHORT-TERM
FUNDS.
A. FINANCIAL MARKET B. MONEY MARKET C. STOCK MARKET D. CAPITAL MARKET
2. FIRMS THAT REQUIRE FUNDS FROM EXTERNAL SOURCES CAN OBTAIN THEM FROM _____.
A. FINANCIAL MARKETS. B. PRIVATE PLACEMENT. C. FINANCIAL INSTITUTIONS.
D. ALL OF THE ABOVE.
3. THE MAJOR SECURITIES TRADED IN THE CAPITAL MARKETS ARE ____.
A. STOCKS AND BONDS.
B. BONDS AND COMMERCIAL PAPER.
C. COMMERCIAL PAPER AND TREASURY BILLS.
D. TREASURY BILLS AND CERTIFICATES OF DEPOSIT.
4. THE PRIMARY GOAL OF THE FINANCIAL MANAGER IS _____.
A. MINIMIZING RISK.
B. MAXIMIZING PROFIT.
C. MAXIMIZING WEALTH.
D. MINIMIZING RETURN.
 QUIZ

PART 2: MULTIPLE CHOICE

5. A FINANCIAL MANAGER MUST CHOOSE BETWEEN FOUR ALTERNATIVE ASSETS: 1, 2, 3, AND 4.
EACH ASSET COSTS $35,000 AND IS EXPECTED TO PROVIDE EARNINGS OVER A THREE-YEAR
PERIOD AS DESCRIBED BELOW.

BASED ON THE PROFIT MAXIMIZATION GOAL, THE FINANCIAL MANAGER WOULD CHOOSE _____.
A. ASSET 1. B. ASSET 2. C. ASSET 3. D. ASSET 4.
 QUIZ
PART 2: MULTIPLE CHOICE
1. THE ______ IS CREATED BY A FINANCIAL RELATIONSHIP BETWEEN SUPPLIERS AND USERS OF SHORT-TERM
FUNDS.
A. FINANCIAL MARKET B. MONEY MARKET C. STOCK MARKET D. CAPITAL MARKET
2. FIRMS THAT REQUIRE FUNDS FROM EXTERNAL SOURCES CAN OBTAIN THEM FROM _____.
A. FINANCIAL MARKETS. B. PRIVATE PLACEMENT. C. FINANCIAL INSTITUTIONS.
D. ALL OF THE ABOVE.
3. THE MAJOR SECURITIES TRADED IN THE CAPITAL MARKETS ARE ____.
A. STOCKS AND BONDS.
B. BONDS AND COMMERCIAL PAPER.
C. COMMERCIAL PAPER AND TREASURY BILLS.
D. TREASURY BILLS AND CERTIFICATES OF DEPOSIT.
4. THE PRIMARY GOAL OF THE FINANCIAL MANAGER IS _____.
A. MINIMIZING RISK.
B. MAXIMIZING PROFIT.
C. MAXIMIZING WEALTH.
D. MINIMIZING RETURN.