Business Finance Module 2: Financial Institutions, Instruments and Markets | Overview | Grade 12

Module 2: Financial Institutions, Instruments, and Markets

Overview of Module 2

• This module focuses on financial institutions, instruments, and markets. It consists of three lessons: financial institutions, financial instruments, and financial markets.

Lesson 1: Financial Institutions

Definition and Purpose

• Financial institutions are organizations that provide various financial services such as loans, credit, fund administration, etc. They play a crucial role in the economy by facilitating transactions and managing funds.

Types of Financial Institutions

• Depository Institutions: Accept deposits from individuals and corporations while extending loans to borrowers.

• Includes banks (e.g., BDO), trust companies, credit unions, savings associations.

Banks

• Banks accept deposits and facilitate payments while providing loans for personal or business needs. Major classifications in the Philippines include universal banks, commercial banks, thrift banks, rural banks, and cooperative banks.

Savings Associations

• These institutions focus on financing mortgage loans and accommodating savings from their members. They serve as a source of capital for housing finance.

Trust Companies

• Act as fiduciary agents or trustees for individuals or businesses to manage property distribution to beneficiaries effectively. They handle asset management tasks like stock transfers and ownership registration.

Credit Unions

• Designed to assist members by pooling funds to offer competitive interest rates on loans while promoting savings among members through thrift programs. Similar in function to savings associations but member-focused.

Financial Intermediaries

• These act as middlemen between investors who have surplus funds and borrowers needing those funds.

• Include mutual funds, pension funds, insurance companies; they do not typically have depository functions but facilitate investment flows instead.

Mutual Funds

• Collect money from investors by selling shares in publicly listed corporations; an example is the Home Development Mutual Fund (HDMF). This allows individual investors access to diversified portfolios without direct stock purchases.

Pension Funds

• Established by businesses to meet retirement obligations for employees; these funds accumulate contributions over time until employees retire at a specified age (usually around 60 or 65).

Insurance Companies

• Provide risk protection against life events or business risks in exchange for premium payments; policyholders receive benefits when covered events occur based on their agreements with the insurer.

Investment Institutions

• Engage in purchasing securities solely for investment purposes; they hold these securities until maturity which generates income through interest or dividends over time.

• Investors can expect returns after a set period (e.g., five or ten years) upon maturity of their investments with these institutions.

Conclusion of Lesson 1

• The lesson concludes with an overview of different types of financial institutions including depository institutions like banks and credit unions along with intermediaries such as mutual funds and insurance companies before transitioning into Lesson 2 about financial instruments.

Financial Instruments and Markets Overview

Understanding Financial Instruments

• Financial instruments are contracts that create financial assets for one entity while simultaneously creating financial liabilities for another.

• In a transaction involving financial instruments, one party has the right to receive a financial asset, while the other party has an obligation to pay it.

Common Types of Financial Instruments

Cash

• Cash is recognized as a financial asset for the holder and a liability for the government or issuer.

Loans

• Loans represent a financial asset for lenders and a liability for borrowers.

Bonds

• Bonds are considered financial assets for investors and liabilities for issuing companies, used primarily to generate capital.

Stocks

• Stocks provide equity ownership in a company; they can be classified into preferred stock and common stock. Preferred stockholders have priority over common stockholders regarding claims on assets and dividends.

Differences Between Preferred Stock and Common Stock

• Preferred stockholders receive fixed-rate dividends, which do not fluctuate with company performance, unlike common stockholders who benefit from growth through variable dividends.

Introduction to Financial Markets

Types of Financial Markets

• Financial markets facilitate transactions between suppliers and users of funds. They include primary markets (for initial public offerings) and secondary markets (for trading previously owned securities).

Money Markets vs. Capital Markets