Finance: Financial System and Institutions

• Finance is the science and art of managing money.

Financial Intermediary

• Acts as the middleman between two parties in a financial transaction.
• Examples: commercial banks, investment banks, mutual funds, pension funds.

Financial Markets

• A marketplace where financial assets are created and traded.
• Examples of assets: shares, debentures, bonds, derivatives, currencies.

Financial System

• A set of institutions that permit the exchange of funds.
• Examples: banks, insurance companies, stock exchanges.

Financial Institutions

• A financial sector providing a broad range of business and services.
• This includes banking, insurance, and investment management.

Financial Instruments

• A real or virtual document representing a legal agreement involving monetary value.

Dividend Policies

• These determine the distribution of profits to equity shareholders.
• Finance managers decide whether to distribute all, retain all, or distribute a portion and retain the balance.

Mutual Funds

• Investment companies enable small investors to invest in a diversified portfolio of securities.
• Securities are purchased on their behalf by professional investment managers.

Money Markets

• Venues where securities with short-term maturities (1 year or less) are sold.

Capital Markets

• Venues where securities with long-term maturities (1 year or more) are sold.

Examples of Financial Institutions/Intermediaries

• Commercial Banks
• Insurance Companies
  • Pru Life UK
  • Manulife Philippines
• Pension Funds
• Commercial Banks
  • Land Bank
  • Bank of the Philippine Islands
  • Metropolitan Bank
• Pension Funds
  • Government Service Insurance System (GSIS)
  • Social Security System (SSS)
  • Unit Investment Trust Fund (UITF)
  • Investment banks
  • Credit unions
• Mutual Funds
  • Sun Life Prosperity Dynamic Fund
  • ATRAM Alpha Opportunity Fund

Examples of Financial Assets

• Notes Receivable
• Cash
• Investment in Stocks

Examples of Financial Liabilities

• Notes Payable
• Loans Payable
• Investment Bonds

Treasury Bonds

• Bonds and bills with low interest rates and very low risk of default.
• The government assures payment.

Manager

• Responsible for supervising and motivating employees.
• Responsible for directing the progress of an organization.

Board of Directors

• The highest policy-making body in a corporation.
• Sets policies on investments, capital structure, and dividend policies.

Common Stock

• Represents equity ownership in a corporation.
• Holders are considered the real owners of the company.

VP for Marketing

• Analyzes and evaluates the effectiveness and cost of marketing methods.
• Conducts or directs research to identify new marketing opportunities.

VP for Production

• Identifies adequate and cheap raw material suppliers.

VP for Finance

• Determines the appropriate capital structure of the company.

VP for Administration

• Assists other departments in hiring employees.
• Coordinates the functions of the administration, finance, and marketing departments.

President

• Represents the company in professional, social, and civic activities.

Financing Decisions

• Financial managers decide how to finance long-term investments and working capital.
• Deals with the day-to-day operations of the company.

Capital Structure

• Refers to how much of total assets are financed by debt and equity.

Financial Management

• Deals with decisions that maximize shareholder value.

Private Placement

• Refers to the sale of new securities to one investor or a group of investors (institutional investors).
• Funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors.

Equity Instrument

• Any contract that shows a residual interest in the assets of an entity after deducting all of its liabilities.
• Returns are based on the performance of the issuing company.

Residual Interest

• Interest that may accrue on an interest-bearing account such as a credit card, loan, line of credit, or mortgage.

Organizational Structure

• In the financial aspect of the business and the particular set of people, each play a role in the decision making of the company.

Boards Primary Responsibility

• To ensure that the corporation operates in the best interest of the stockholders.

Responsibilities of the Board of Directors

• Approving company's strategies, goals, and budgets.
• Appointing and removing members of top management, including the president.
• Determining top management's compensation.

Responsibilities of the President

• Approving the information and other disclosures reported in the financial statements.
• Overseeing the operations of a company and ensuring the strategies as approved by the board are implemented as planned.
• Performing all areas of management: planning, organizing, staffing, directing, and controlling.
• Representing the company in professional, social, and civic activities.
• Financial markets and Financial Institutions are part of the the financial system.
• Financial markets participate through creation and trading of financial assets.
• Financial institutions participate by providing a broad range of businesses and services.