FINANCIAL MARKETS

OUR LADY OF THE PILLAR COLLEGE-

CAUAYAN CAMPUS
AY 2021-2022
BSAIS 3
CHAPTER 1- WHY WE NEED
TO STUDY FINANCIAL MARKETS

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WHY STUDY FINANCIAL MARKETS

Financial markets, such as bond and stock

markets, are crucial in our economy.
1. These markets channel funds from savers to investors, thereby
promoting economic efficiency.
2. Market activity affects personal wealth, the behavior of
business firms, and economy as a whole
3. Well functioning financial markets, such as the bond market,
stock market, and foreign exchange market, are key factors in
producing high economic growth. 5
WHY STUDY FINANCIAL MARKETS
DEBT MARKETS AND INTEREST RATES

• Debt markets, or bond markets, allow governments,

corporations, and individuals to borrow to finance activities.

• In this market, borrowers issue a security, called a bond, that

promises the timely payment of interest and principal over
some specific time horizon.

• The interest rate is the cost of borrowing. 6

 WHY STUDY FINANCIAL MARKETS
The Stock Market

• The stock market is the market where common stock (or just
stock), representing ownership in a company, are traded.
• Companies initially sell stock (in the primary market) to
raise money. But after that, the stock is traded among
investors (secondary market).
• Of all the active markets, the stock market receives the most
attention from the media. Why?
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 WHY STUDY FINANCIAL MARKETS
The Foreign Exchange Market

• The foreign exchange market is where international

currencies trade and exchange rates are set.

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APPROACH IN STUDYING FINANCIAL MARKETS AND INSTITUTION

• 1. UNDERSTANDING- Students learn to understand

economic analysis, that is, students develop the economic
intuition they need to organize concepts and facts
• 2. EVALUATING– Students learn to evaluate current
developments and the financial news. Students learn to use
financial data and economic analysis to think critically about
how they interpret current events.

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APPROACH IN STUDYING FINANCIAL MARKETS AND INSTITUTION

• 3. PREDICTING- Students learn to use economic analysis to

predict likely changes in the economy and the financial
system.

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CHAPTER 2- ROLE
OF MONEY IN THE ECONOMY

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Money is any item or commodity that is generally
accepted as means of payment for goods and
services or for repayment of debt, and that serves
as an asset to its holder. On the simplest level,
money is composed of the bills and coins which
have been printed or minted by the National
Government (these are called currency)
Money is not directly backed by intrinsic
value (e.g. , the coin’s weight in gold or
silver), the financial system works on an
entirely fudiciary basis, relying on the
public’s confidence in the established
forms of monetary exchange.
CHARACTERISTICS AND KEY FUNCTION OF MONEY

1. STORE OF VALUE
2. ITEM OF WORTH
3. MEANS OF EXCHANGE
4. UNIT OF ACCOUNT
5. STANDARD OF DEFERRED PAYMENT
BARTER SYSTEM

Barter is the direct exchange of commodity or

service for another without the use of money.
INCONVENIENCES OF BARTER

• MARKET NEEDED
• NO MEASURE OF VALUE
• NO STORE OF VALUE
• NO SUBDIVISION
• DIFFICULTIES IN TRANSFER OF WEALTH
THE SUPPLY AND DEMAND FOR
MONEY
The Demand for Money
In economics, the demand for money is the desired
holding of financial assets in the form of money (cash
or bank deposits).

Money Supply: The total amount of money (bills,

coins, loans, credit, and other liquid instruments) in a
particular economy.
THE SUPPLY AND DEMAND FOR
MONEY
Key Points
• Money provides liquidity which creates a trade-off
between the liquidity advantage of holding money
and the interest advantage of holding other assets.
• The quantity of money demanded varies inversely
with the interest rate.
The interest rate is the rate at which
interest is paid by a borrower (debtor)
for the use of money that they borrow
from a lender (creditor). It is viewed as
a “cost” of borrowing money. 
Impact of the Interest Rate
Interest-rate targets are a tool of monetary policy. The quantity of
money demanded varies inversely with the interest rate. Central
banks in countries tend to reduce the interest rate when they want
to increase investment and consumption in the economy. However,
low interest rates can create an economic bubble where large
amounts of investments are made, but result in large unpaid debts
and economic crisis. The interest rate is adjusted to keep inflation,
the demand for money, and the health of the economy in a certain
range. Capping or adjusting the interest rate parallel with economic
growth protects the momentum of the economy.
Factors that Influence the Interest Rate
• Political gain: both monetary and fiscal policies can affect the
money supply and demand for money.
• Consumption: the level of consumption (and changes in that
level) affect the demand for money.
• Inflation expectations: inflation expectations affect a the
willingness of lenders and borrowers to transact at a given interest
rate. Changes in expectations will therefore affect the equilibrium
interest rate.
• Taxes: changes in the tax code affect the willingness of actors to
invest or consume, which can therefore change the demand for
money.
Market Equilibrium
In economics, equilibrium is a state where economic forces such as
supply and demand are balanced and without external influences, the
equilibrium will stay the same. Market equilibrium refers to a
condition where a market price is established through competition
where the amount of goods and services sought by buyers is equal to
the amount of goods and services produced by the sellers. In the case
of money supply, the market equilibrium exists where the interest
rate and the money supply are balanced. The money supply is the
total amount of monetary assets available in an economy at a specific
time. Without external influences, the interest rate and the money
supply will stay in balance.
CHAPTER 3- THE
PAYMENT SYSTEM: AN OVERVIEW

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Payment system is established infrastructure for transfer of funds between
participants, which is composed of institutions, instruments, rules,
procedures and technical means for secure transmission.
Hence, the payment system includes:
• payment instruments that initiate the transfer of funds by the principal,
• processing (clearing) of payment instructions of the participants in the
payment system,
• settlement of payments between participants in the payment system -
commonly using funds on accounts with the central bank, and
• agreed common operating procedures, rules and technical standards
(participants, accounts, charging, etc.).
Nowadays, payments are usually committed through the use of
bank deposits. To make payment, the principal must issue
instructions, usually to the bank where they keep money that
should be transferred. The instruction can be in a paper form or
an electronic instruction using modern technological solutions
(credit card, PC or mobile device). Furthermore, the payment
instruction is processed and is usually settled without the
participation of the principal of instruction. Hence, although the
payment system is essential for providing payment services to
the end users, however, they are not direct participants in the
payment system and its payment is executed indirectly through a
limited number of direct participants in the payment system.
A well-functioning payment system enhances
the stability of the financial system, lowering
transaction costs in the economy, promotes the
efficient use of financial resources, and
improves financial market liquidity. Most
importantly, payment systems are considered
the main infrastructure to facilitate the conduct
of monetary policies by the central bank.
TRANSITION FROM COMMODITY MONEY
AND FIAT MONEY

Commodity Money- refers to a good used as

money that has value independent or its use of
money

Fiat Money – refers to a money such as paper

currency that has no value apart from its use as
money
NEW TECHNOLOGY AND THE PAYMENTS
SYSTEM

The BSP has listed what it believes to be the five most desirable
outcomes for a payment system:
1. Security
2. Efficiency
3. Speed
4. Smooth International Transactions
5. Effective Colloboration among participants in the system.
CHAPTER 4-
FINANCIAL INSTRUMENTS

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Financial Instrument is any contract that
gives rise to a financial asset of one
entity and a financial liability or equity
instrument of another entity.
Financial Asset is any asset that is:
• Cash
• Equity instrument of another entity(e.g.,
Investment in ordinary share of corporation)
• Receivable (Accounts, Notes and Loans
receivables)
Some of the most commonly encountered
Financial Instruments representing Financial
Assets are the following:
A. Cash on Hand and in Banks
• Petty Cash
• Demand, Savings, and Time Deposits
• Undeposited Checks
• Foreign Currencies
• Money Orders
• Bank Drafts
Some of the most commonly encountered
Financial Instruments representing Financial
Assets are the following:
B. Accounts, Notes and Loans Receivable and
Investment in bonds and other debt instrument
issued by other entities:
• Trade Receivables
• Promissory Notes
• Bond Certificates
Some of the most commonly encountered
Financial Instruments representing Financial
Assets are the following:
C. Interest in shares or other equity instruments
issued by other entities
• Stock Certificates
• Publicly listed securities
Some of the most commonly encountered
Financial Instruments representing Financial
Assets are the following:
D. Derivative Financial Assets
• Future Contracts
• Forward Contracts
• Call Options
• Foreign Currency Futures
• Interest Rate Swaps
Financial Liability is any liability that is:
A. A contractual Obligation
• To deliver cash or another financial asset to
another entity; or
• To exchange financial assets or financial
liabilities with another entity under
conditions that are potentially unfavorable to
the entity; or
Financial Liability is any liability that is:
B. A contract that will or may be settled in the entity’s
own equity instruments and is:
• A non-derivative for which the entity is or may be
obligated to deliver a variable number of the
entity’s own equity instruments; or
• A derivative that will or may be settled other than
by the exchange of a fixed amount of cash or
another financial asset for a fixed number of the
entity’s own equity instruments.
Examples of Financial Liabilities are the ff:

A. Accounts and notes payable, loans from

other entities and bonds and other debt
instruments issued by the entity.
B. Derivative financial liabilities
C. Obligations to deliver own shares worth a
fixed amount of cash
D. Some derivatives on own equity instruments
Equity Instruments is any contract that evidence a
residual interest in the assets of an entity after
deducting all of its liabilities.
Examples:
• Ordinary Shares
• Preference Shares
• Warrants or written call option that allow the
holder to subscribe or purchase ordinary shares in
exchange for a fixed amount of each or another
financial asset.
Derivatives are financial instruments that “derive”
their value on contractually required cash flows from
some other security or index.
Examples:
• Future Contracts
• Forward Contracts
• Call Options
• Foreign Currency Futures
• Interest Rate Swaps
CHAPTER 5-
OVERVIEW OF THE
FINANCIAL SYSTEM

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A financial system is a set of institutions, such as banks,
insurance companies, and stock exchanges, that permit the
exchange of funds. Financial systems exist on firm,
regional, and global levels. Borrowers, lenders, and
investors exchange current funds to finance projects, either
for consumption or productive investments, and to pursue a
return on their financial assets. The financial system also
includes sets of rules and practices that borrowers and
lenders use to decide which projects get financed, who
finances projects, and terms of financial deals.
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THREE KEY SERVICES THAT THE FINANCIAL
SYSTEM PROVIDES TO SAVERS AND BORROWERS:

• RISK SHARING
• LIQUIDITY
• INFORMATION
TWO PROBLEMS ARISING FROM ASYMMETRIC
INFORMATION ARE:

• ADVERSE SELECTION
• MORAL HAZARD
HOW FINANCIAL INTERMEDIARIES REDUCE “
ADVERSE SELECTION”

• Requiring borrowers to disclose material information on

their financial performance and financial position.
• Collecting Information on firms and selling that
information to investors
• Convincing lenders to require borrowers to pledge some
of their assets as collateral which the lender can claim
the borrower defaults.
HOW FINANCIAL INTERMEDIARIES REDUCE
MORAL HAZARD PROBLEMS

• Specializing in monitoring borrowers and

developing effective techniques to ensure that the
funds they loan are actually used for their intended
purpose.

• Imposing restrictive covenants

HOW FINANCIAL INTERMEDIARIES REDUCE
TRANSACTION COSTS

• Financial intermediaries take advantage of economies of

scale, which refers to the reduction in average cost that
results from an increase in the volume of good or
service produced.
• Financial Intermediaries can also take advantage of
economies of scale in other ways.
HOW FINANCIAL INTERMEDIARIES REDUCE
TRANSACTION COSTS

• Financial intermediaries also take advantage of

technology to provide financial services, such as those
that ATMs networks provide.
• Financial intermediaries also increasingly rely on
sophisticated software to evaluate the credit worthiness
of loan applicants.
CHAPTER 6-
THE PHILIPPINE
FINANCIAL SYSTEM

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STRUCTURE OF THE PHILIPPINE FINANCIAL
SYSTEM

• I. BANGKO SENTRAL NG PILIPINAS

• II. BANKING INSTITUTIONS
• A. PRIVATE BANKING INSTITUTION
1. UNIVERSAL BANKS
2. COMMERCIAL BANKS
3. THRIFT BANKS
• SSMB
• PDB
• SLA
STRUCTURE OF THE PHILIPPINE FINANCIAL
SYSTEM

4. RURAL BANK
5. COOPERATIVE BANKS

B. GOVERNMENT BANKS OR SPECIALIZED GOVERNMENT

BANKING INSTITUTIONS
1.DBP
2.LBP
3.AL-AMANAH ISLAMIC INVESTMENT BANK
STRUCTURE OF THE PHILIPPINE FINANCIAL
SYSTEM

III. NON BANK FINANCIAL INSTITUTIONS

A. PRIVATE NON BANK FINANCIAL INSTITUTIONS
1. INVESTMENT HOUSE
2.INVESTMENT BANKS
3.FINANCING COMPANY
4.SECURITIES DEALER
5.SAVINGS AND LOAN ASSOCIATIONS
STRUCTURE OF THE PHILIPPINE FINANCIAL
SYSTEM

6. MUTUAL FUNDS
7.PAWNSHOPS
8. LENDING INVESTOR
9. PENSION FUNDS.
10. INSURANCE COMPANIES
11. CREDIT UNIONS
STRUCTURE OF THE PHILIPPINE FINANCIAL
SYSTEM

B. GOVERNMENT NON-BANK FINANCIAL INSTITUTIONS

1. GSIS
2. SSS
3. PAG-IBIG
THANK
YOU!
RON RON C. PEREZ,
CPA, MBA, CTT
Phone
0917-314-2561
Email
ronronperez0@gmail.com