Business Finance Lecture

Financial Market

Financial Market

• What is a Financial Market– Any marketplace where buyers and sellers

participate in the trade of assets such as equities, bonds, currencies and derivatives.

– Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade.

Financial Market

• Three Principal Players in the Financial Market– Borrowers– Savers (Investors)– Financial Institutions (Intermediaries)

Financial Market

• Financial Markets– Institutions that help bring borrowers and

savers together• Money Market• Capital Market• Securities Market

– Stock Market

Financial Market

• Money Market– A segment of the financial market in which

financial instruments with high liquidity and very short maturities are traded.

– The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.

Financial Market

• Capital Market– Capital markets typically involve issuing

instruments such as stocks and bonds for the medium-term and long-term.

– In this respect, capital markets are distinct from money markets, which refer to markets for financial instruments with maturities not exceeding one year.

Financial Market

• Security Market– A financial instrument that represents: an

ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond)

– Securities are typically divided into debt securities and equities

– Discussed in terms of Primary and Secondary Markets

Financial Market

• Security Market– Primary Market

• Firms issue new securities to raise money and are bought and sold for the first time

– Secondary Market• Trading of previously issued securities

Financial Market

• Process of Raising Money Through Securities Market1.Firm sells securities to investors

2.Firm invest funds it raises in its business

3.Firm distributes cash earned from its investors

4.Securities trading in the secondary market

Financial Market

Financial Market

• Types of Securities– Debt Securities– Equity Securities

• Common Stock• Preferred Stock

Financial Market

• Debt Security– Any debt instrument that can be bought or

sold between two parties and has basic terms defined, such as notional amount (amount borrowed), interest rate and maturity/renewal date

– Debt securities include government bonds, corporate bonds

– The interest rate on a debt security is largely determined by the perceived repayment ability of the borrower

Financial Market

• Equity Security– An instrument that signifies an ownership

position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits

– Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding\

– Can either be common stock or preferred stock

Financial Market

• Equity Security– Common Stock

• A security that represents ownership in a corporation

– Preferred Stock• A class of ownership in a corporation that has a

higher claim on the assets and earnings than common stock.

• Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

Financial Market

• Stock Market– The market in which shares of publicly held

companies are issued and traded either through exchanges or over-the-counter markets.

– Classification• Organized (instruments are traded within the

premises)• Over the counter (other than those organized)

Business Finance Lecture

The Philippine Financial System

The Philippine Financial System

• The Philippine Financial System– Banks

• universal banks (or expanded commercial banks)• commercial banks • thrift banks (savings and mortgage banks, stock

savings and loan associations, and private development banks)

• rural banks • cooperative banks • Islamic banks.

The Philippine Financial System

• The Philippine Financial System– Nonbank Financial Institutions (NBFIs)

• insurance companies, • investment houses, • financing companies,• securities dealers and brokers, • fund managers, • lending investors, • pension funds, • pawn shops, and • nonstock savings and loan associations.

The Philippine Financial System

• Nonbank Financial Institutions (NBFIs)– Is a financial institution that does not have a full

banking license or is not supervised by a national or international banking regulatory agency.

– NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering.

– they provide "multiple alternatives to transform an economy's savings into capital investment [which] act as backup facilities should the primary form of intermediation fail

The Philippine Financial System

• Central Banks– A central bank, reserve bank, or monetary

authority is an institution that manages a state's currency, money supply, and interest rates.

– In contrast to a commercial bank, a central bank possesses a monopoly on increasing the amount of money in the nation, and usually also prints the national currency.

– Examples include the Banko Sentral ng Pilipinas (BSP)

Government Policy

• Monetary Policy– Monetary policy is the process by which the monetary

authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.

– Can either be Expansionary or Contractionary

Government Policy

• Moneratry Policy– Expansionary

• an expansionary policy increases the total supply of money in the economy more rapidly than usual

• is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding.

The Philippine Financial System

• Fiscal Policy – Is the use of government revenue collection

(taxation) and expenditure (spending) to influence the economy.

– Three Main Stances• Neutral fiscal policy • Expansionary fiscal policy• Contractionary fiscal policy

The Philippine Financial System

• Fiscal Policy– Neutral fiscal policy

• Is usually undertaken when an economy is in equilibrium. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

Government Policy

• Moneratry Policy– Contractionary

• contractionary policy expands the money supply more slowly than usual or even shrinks it

• is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values.

Government Policy

• Fiscal Policy– Expansionary fiscal policy

• Involves government spending exceeding tax revenue, and is usually undertaken during recessions.

Government Policy

• Fiscal Policy– Contractionary fiscal policy

• Occurs when government spending is lower than tax revenue, and is usually undertaken to pay down government debt

Government Policy

Government Policy

• Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing