BUSINESS

FINANCE

1
2
 BUSINESS FINANCE
MODULE

Module 2: Week 2: First Quarter

Financial Institution, Financial Instrument and Financial Market

Learning Competencies
1. Distinguish a financial institution from financial instrument and financial market
Code: ___ ABM_BF12-IIIa-2

2. Explain the flow of funds within an organization – through and from the
enterprise—and the role of the financial manager.
Code: ___ ABM_BF12-IIIa-5

Objectives
After going through this module, you are expected to:

1. Classify a financial institution from financial instrument and financial

market.
2. Be familiar with financial institution, financial instrument and financial
market.
3. Explain the significance of the flow of funds in an organization.
4. Know and understand the role of a financial manager.

Let’s Recall (Review)

KEY WORDS

Banks – A financial institution licensed to receive deposits and make loans. It also provides
financial services such as wealth management, currency exchange, and safe deposit boxes.
Insurance Companies – A practice or arrangement by which a company or government
agency provides a guarantee of compensation for specified loss, damage, illness, or death in
return for payment of a premium.
Stocks - (also known as equity securities) A security that represents the ownership of a
fraction of a corporation.
Financial Instruments - Assets that can be traded, or they can also be seen as packages of
capital that may be traded.
Stock Brokerage firms - Financial institutions that help one buy and sell securities. They act
as the middleman between the buyer and the seller.

3
Financial intermediary - An entity that acts as the middleman between two parties in
a financial transaction, such as a commercial bank, investment bank, mutual fund, or pension
fund.

Wealth maximization - The concept of increasing the value of a business in order to increase
the value of the shares held by its stockholders.

Dividends - A payment made by a corporation to its shareholders.

Financial Market - Broadly refers to any marketplace where the trading of securities occurs.
Bonds - A form of debt that the issuing entity promises to repay at some point in the future.
Philippine Stock Exchange - (PSE or Exchange) is a private non-profit and non-
stock organization created to provide and maintain a fair, efficient, transparent and orderly
market for the purchase and sale of securities such as stocks, warrants, bonds, and others.

Let’s Understand (Study the Concept)

Financial Markets

Financial markets are venues where the different stakeholders of security do

their act, either lending money or borrowing money or invest. In a developed economy
different financial market exits. It consists of different kinds of security to cater the different
kind of individuals and businesses. Of the many different financial markets these two are the
most that a financial manager will be involved in:
Primary Market – This is a venue that deals with the new issuance and sale of securities by
the government and the corporation. The government and the corporations are the vendors in
this market, this transaction is called Initial Public Offering (IPO).
Secondary Market – This is a venue where the different individuals and corporation will sell
their securities to the public which was bought during the IPO. Secondary market includes:
a. Stock Market or Exchange – which exist a physical venue (like Philippine stock
exchange) where shareholders can buy shares as well as sell their shares to the
available buyers.
b. Over-the- Counter Market (OTC) – this is a venue where shares can be bought
through the use of mail, telephone, online and other system type of
communications.

4
Financial Institutions:

1. Commercial banks – Represent the largest group of financial institutions. 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
2. Insurance Companies – A practice or arrangement by which a company or
government agency provides a guarantee of compensation for specified loss, damage,
illness, or death in return for payment of a premium.
3. Mutual Funds – These 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 manager.
4. Pension Funds – are financial institutions that receive payments from employees and
invest the proceeds on their behalf.
5. Other financial institution – include pension funds like Government Service
Insurance System (GSIS) and Social Security System (SSS), Unit Investment trust
fund (UITF) and credit unions and others. (Cayanan & Borja, 2017)

Two major categories of Financial Instruments are:

1. Equity Securities - You own one percent in everything that the company has or may
have in the future. Common stocks and preferred stocks are common examples of
equity securities.
2. Common Stocks - Is a security that represents ownership in a corporation. Holders of
common stock elect the board of directors and vote on corporate policies. This form of
equity ownership typically yields higher rates of return on long term. However, in the
event of liquidation, common shareholders have rights to a company's assets only after
bondholders, preferred shareholders, and other debtholders are paid in full.
3. Preferred Stocks – Has priority over a common stock in terms of claims over the
assets of a company. If a company is 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.

4. Debt Securities – Generally have fixed returns due to fixed interest rates. These
financial instruments are sold if a company is in need of funding and the proceeds of
this will be used to finance the company’s plans.
a. 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.
b. Corporate Bonds – are issued by publicly listed companies. These bonds
usually have higher interest rates than Treasury bonds. 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. (Cayanan & Borja, 2017)

Once you are done with your schooling, have your own income in the future and have
saved enough, do you plan on investing your savings? Do you plan of establishing a business
on your own (sole proprietorship), or going into a partnership, or being an owner of a
corporation? If you plan on being an owner of a corporation, you can actually become one

5
by buying stocks from one of the list of leading companies that publicly list their stocks to the
market namely BDO Leasing and Finance, Inc., Bank of the Philippine Islands, PLDT,
Globe, San Miguel Corporation and others.

Let’s say that you bought 20 shares of PLDT at PHP 1,231.00 each on June 21, 2020
which is a total of PHP 24,620. What would happen to the value of your investment if the
price goes up to PHP 1,273.00 per share or it goes down to PHP 1,134.00 per share?

An increase of the share price to PHP 1,273.00 per share means that people are willing
to buy the shares for that moment. If you will sell your share at this point, you will have a
profit of PHP 42.00 per share and PHP 840.00 on your whole investment.

However, a decrease per share means that investors are willing to pay only PHP
1,134.00 per share. If you will sell your shares at this point you will have a loss of PHP 97.00
per share and your total loss would amount to PHP 1,940.00.

Common factors that influence Stock Market Price

a. Economics - Macro-economic factors such as interest rates, inflation, unemployment

and economic growth often move stock markets.
b. Politics - A belief by investors that control of the government by one party or the
other will hurt or benefit them can move the market as whole. This is especially true
in times of intense domestic turmoil.
c. Natural and Man-Made disaster - Natural or man-mad disasters with economic
consequences also affect stock markets.
d. Market Psychology - At the end of the day, swings in the stock market are caused by
human beings. There are boom periods in a rising market when everyone wants to
buy. Alternatively, there are also periods of panic when almost every investor is
scrambling to sell.

Flow of funds within an organization

Remember the individuals involved in the financial system -- the savers, financial
intermediaries, and the users of funds? The financial system permits the transfer of money
efficiently and effectively between savers to financial intermediaries and to borrowers or
investors. Thus, the flow of funds within an organization gives us a picture of how funds
originated and how the funds will be used.

6
Significance of Cash Flows

Statement of cash flows is one of the four main financial statements. Cash flow
statement is an overview of all cash flows made by the business through operations,
investment, and financing transactions over a period of time. This statement is preferred
mostly by investors to look at when analyzing a company’s performance. Looking at a cash
flow of a company gives the idea of how the company generated cash inflows to pay loans,
pay dividends to shareholders, and making sure that the new investment’s resources are not
coming from loans. In statement of cash flows this is where we would know where the
increase and decrease of cash is coming from, hence this is why cash flows are grouped into
three basic types of business activities namely:

1. Cash from Operating Activities – this is where we can measure the

amount of cash that the company has made through its regular business operations.
The information provided in this statement shows the quality of earnings the company
has made. It is basically a measure of a company’s operating profit.

2. Cash from Investing Activities – this statement provides the information

regarding the buying and selling of long-term assets such as property, plant and
equipment. This section shows how the cash is spent in an investment over a given
period.

3. Cash from Financing Activities – In this section one can see the amount of
cash the company has raised to fund the company through all forms of debt like
stocks bonds etc. If the company have an approved loan, the money they will receive
will be reflected in this statement. This statement would also show the company’s
financial strength and how well the company’s capital structure is managed.

Four major types of decisions for a Financial Manager

1. is one of the crucial duties of a financial

manager. These decisions are made in order for the company to have the
appropriate capital structure. This involves how much borrowing or how much
capital is to be allocated in financing for acquiring an asset, long term
investments or working capital for the day to day operations of the company.

7
 2. is concerned about the selection of assets in
which funds will be invested by a company. Basically, this is the how and
where to invest the funds. In order for a VP for Finance to decide, he must
have the support of capital budgeting analysis. This analysis would allow a
financial manager to have a forecast of the cost investment and the possibility
of greater return to be generated from the investment.

3. involves in dealing with the daily operations of

a company that ensures that the company has sufficient cash to carry on with
the day to day operations and keep away from unnecessary expenses. The VP
of finance determines how to finance working capital accounts such as
accounts receivables and inventories, would it go for short-term sources of
financing or through long-term sources of financing.

4. These decisions involve the

payouts to the shareholders and its proportion of earning per share, how often
would these payments be made or convince the shareholders to retain the
earnings within the company.

Let’s Apply
Directions: Below are lists of companies who are publicly listed. Kindly
search their share price (opening) movement for the last 15 trading days.

a. Globe Telecom (GLO)

b. PLDT (TEL)
c. San Miguel Corporation (SMC)
d. Jollibee Foods Corporation (JFC)

(GLO) (TEL) (SMC) (JFC)

DATE PRICE PRICE PRICE PRICE

8
Based on the data that you have gathered, from your observation, which of the four
company stocks have an erratic price (opening) movement for the 15 trading days? Write
your answer on the space provided.

Let’s Analyze
Directions: Read and explain each question carefully.

1. What is the role of financial instrument in the financial system?

2. Among the financial instrument, which would you prefer to invest. Explain and why?
3. What is the purpose of the Philippine Stock Exchange?
4. What is the function of banks in the financial system?
5. In achieving the primary goal of the firm, describe the financial manager’s role.
6. Enumerate and explain the four (4) major types of decisions that a financial manager
makes.

9
 Let’s Try (Evaluation)
I. Word Search: Locate the given words below in the grid, running in one of
eight possible directions horizontally, vertically, or diagonally.

BANK SECURITIES PREFERRED STOCKS MONEY MARKET

CAPITAL MARKET COMMON STOCKS INSURANCE BONDS
FINANCIAL INSTITUTION STOCK BROKERAGE DEBT SECURITIES

S T O C K B R O K E R A G E E E B A N K
F I N A N C I A L I N S T I T U T I O N
T I N S T I T U T I O N S T M O N E Y K
E S E C U R I T I E S E I N S U S T O C
K D E B T S E C U R I T I E S E U F B O
R F I N A N C I A L U I N S I T O I A T
A C O M M O N S T O C K S T A N T N K S
M O N E Y M A R E T A U I N S U E A N C
Y M S B O N D S D O S R N A E P R N O O
E M T M O N Y S E C U R I T G R A C N M
N O O U P T T C B C O M M S A E M I B M
O S C E I K N D E B T S E K R F L A R O
M T K U B O N S T O C K S C E R A L O N
M O Q A A T Y U E Q U I T Y K R T D B S
Y E T U S T O C M A R K E O O E I E A T
E C O V I N S U R A N C E T R D P B N O
N K Y U F I N A N C I A L S B D A T K K
O S Q U P R E F E R R E D S T O C K S E
M E F I C A P I T A L M A R K E T S S S

II. Choose and encircle the letter of your answer.

1. Which of the following would best describe Preferred stocks?

a. Has priority over a common stock in terms of claims over the assets of a company.
b. Represents value of ownership that can be converted into cash.
c. Defined as a payment made by a corporation to its shareholders.
d. A form of debt that the issuing entity promises to repay at some point in
the future.

10
2. What is the role of financial intermediaries in the financial system?
a. Play an active role in developing the rural economy by providing basic financial
services.
b. An entity that acts as the middleman between two parties in
a financial transaction.
c. Represent the largest group of financial institutions.
d. A financial institution licensed to receive deposits and make loans.

3. It is a form of debt that the issuing entity promises to repay at some point in
the future.
a. Preferred Stocks
b. Common Stocks
c. Bonds
d. Assets

4. Which of the following comprises Debt Securities?

a. Economics and Market Psychology
b. Universal and Commercial Banks
c. Dividends and Liquidity
d. Common and Preferred Stocks

5. You bought 155 shares of BPI at PHP 72.60. each on Sept 21, 2019. How much would
be your total investment?

a. PHP 11,255.00
b. PHP 11,253.00
c. PHP 11,233.00
d. PHP 11,525.00

6. Using the details in no. 5, how much would you gain in your investment if the price
goes up to PHP 110.78 per share or how much would you lose if price would go down
to PHP 61.83 per share?

a. PHP 38.10/ PHP 10.77 per share

b. PHP 38.00/ PHP 10.77 per share
c. PHP 38.18/ PHP 10.77 per share
d. PHP 38.81/ PHP 10.78 per share

7. It is a financial market that deals with the new issuance and sale of securities by the
government and the corporation.

a. Over-the-counter market
b. Secondary Market
c. Primary Market
d. Stock Market

8. Financial Market where there is a physical location for the buying and selling of
stocks.
a. Primary Market
b. Secondary Market
11
 c. Stock Market
d. Over-the-counter Market

9. Business activities are classified into three main categories: operating, investing and
financing.
a. Cash flows
b. Sources of funds
c. Uses of Cash
d. Working Capital

10. Decisions of financial manager that involves in dealing with the daily operations of a
company that ensures that the company has sufficient cash to carry on with the day to
day operations and keep away from unnecessary expenses.
a. Financing decisions
b. Investing decisions
c. Operating decisions
d. Return of capital or dividend distribution Decisions

The content of this module is adapted and taken from the different websites and
books.The module writer is in a heartfelt gratitude to the following references and
its authors:

https://doingbusinessinthephilippines.com/list-of-banks-in-the-philippines/
https://www.investopedia.com/terms/f/financial-market.asp
https://www.linkedin.com/pulse/types-financial-institutions-philippines-rahul-kumar/
The Commission on Higher Education in collaboration with the Philippine Normal
University: Business Finance – Teaching Guide for Senior High School
Business Finance by:Arthur S. Cayanan and Daniel Vincent H. Borja, 2017
Business finance Principles and Applications 2017 Edition for Senior High School-ABM
Track by: Ma. Elenita Balatbat Cabrera and Gilbert Anthony B. Cabrera

12
BUSINESS FINANCE (Grade XII)
Self-Learning Module
Quarter 1 - Module 2: Financial Institution, Financial Instrument and Financial Market
First Edition, 2020

Republic Act 8293, section 176 states that: No copyright shall subsist in any work
of the Government of the Philippines. However, prior approval of the government agency or
office wherein the work is created shall be necessary for exploitation of such work for profit.
Such agency or office may, among other things, impose as a condition the payment of
royalties.

Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand names,
trademarks, etc.) included in this module are owned by their respective copyright holders.
Every effort has been exerted to locate and seek permission to use these materials from
their respective copyright owners. The publisher and authors do not represent nor claim
ownership over them.

Published by the Department of Education

Secretary: Leonor Magtolis Briones
Undersecretary: Diosdado M. San Antonio

Development Team of the Module

Writer: Charissa D. Mendoza
Editors: Dr. Pastor Valcorza
Eden M. Papa
Reviewer: Dr. Emma R. Cunanan – EPS in Mathematics
Illustrator: Charissa D. Mendoza
Layout Artist: Christian Jake T. Laspiñas
Management Team: Wilfredo E. Cabral, Director IV
Genia V. Santos, CLMD Chief
Dennis M. Mendoza, Regional EPS In Charge of LRMS
Evangeline P. Ladines, CESO V, Schools Division Superintendent
Bernardo N. Mascariña, Curriculum Implementation Division Chief
Rodel C. Apostol, Division EPS In Charge of LRMS

Printed in the Philippines by ________________________

Department of Education – National Capital Region

Office Address: Misamis St., Bago Bantay, Quezon City

Telefax: 02-929-0153
E-mail Address: [email protected]

13