Introduction to Financial System

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Questions and Answers

What is the key role of banking institutions in economic development?

They are private nonbank financial institutions like First Metro Investment Corporation

They are government nonbank financial institutions like GSIS and SSS

They play a vital role in the field of savings and investment of money from the public and lending to business concerns (correct)

They provide certain bank-like and financial services but do not have a banking license

What is the main purpose of the capital market?

It is an institutional arrangement for borrowing medium and long-term funds and provides a facility for marketing and trading of securities (correct)

It is where financial services such as merchant banking and underwriting are provided

It is for short-term funds, which deals in financial assets whose period of maturity is up to 1 year

It is where pre-issued securities are dealt between the investors

What is the main purpose of the money market?

It is where pre-issued securities are dealt between the investors

It deals in financial assets whose period of maturity is up to 1 year and is highly liquid and easily marketable (correct)

It is where financial services such as merchant banking and underwriting are provided

It is an institutional arrangement for borrowing medium and long-term funds and provides a facility for marketing and trading of securities

What is the difference between the primary and secondary markets?

The primary market is where securities are offered for the first time for receiving the public subscription, while the secondary market is where pre-issued securities are dealt between the investors (D) Signup and view all the answers

What are the examples of financial instruments in the capital market?

Shares, debentures, bonds (C) Signup and view all the answers

What are the examples of financial instruments in the money market?

Treasury bills, commercial paper, certificates of deposit, repurchase agreements (A) Signup and view all the answers

What is the main purpose of the financial system?

All of the above (D) Signup and view all the answers

How does the financial system help in economic development?

All of the above (D) Signup and view all the answers

What is the process of transforming savings into investment instruments called?

Capital Formation (C) Signup and view all the answers

How does the financial system help in decreasing transaction costs and increasing returns?

By linking savers and investors (C) Signup and view all the answers

What is the role of the government in the financial system?

To decide monetary policy (A) Signup and view all the answers

What are the two main types of financial institutions mentioned in the text?

Banking and Non-Banking (A) Signup and view all the answers

Study Notes

Financial Institutions

Key players in economic development, facilitating savings and investments, and lending to businesses
Divided into banking and non-banking institutions

Banking Institutions

Play a vital role in economic development
Involved in savings and investments, and lending to businesses

Non-Banking Institutions

Entities that provide certain bank-like and financial services without a banking license
Government non-banking institutions:
- Government Service Insurance System (GSIS)
- Social Security System (SSS)
- National Home Mortgage Finance Corporation
- Philippine Veterans Investment Development Corporation
- National Development Corporation
Private non-banking institutions:
- First Metro Investment Corporation
- Philippine Depository and Trust Corporation
- Many more

Financial Markets

Deal with various financial instruments and services
Divided into:
- Capital Market: for medium and long-term funds
- Money Market: for short-term funds

Capital Market

Institutional arrangement for borrowing medium and long-term funds
Provides facility for marketing and trading of securities
Examples:
- Shares
- Debentures
- Bonds
Divided into:
- Primary Market: where securities are offered for the first time
- Secondary Market: where pre-issued securities are traded

Money Market

Deals in financial assets with maturity up to 1 year
Highly liquid and easily marketable
Examples:
- Treasury bills
- Commercial paper

Financial Services

Customer-focused services provided by the finance industry
Study customer needs in detail before deciding financial strategy
Consider cost, liquidity, and maturity
Examples:
- Insurance companies
- Credit rating facilities

Financial Instruments

Any contract that gives rise to a financial asset or liability
Examples:
- Shares
- Debentures
- Bonds
- Treasury bills
- Commercial paper
- Certificates of deposit
- Repurchase agreements

Financial System

Organized and regulated structure for exchange of funds between lenders and borrowers
Supplies necessary financial inputs for production and promotes well-being
Consists of various institutions, markets, and instruments
Significance:
- Induces people to save by offering attractive interest rates
- Channels savings into investments
- Monitors corporate performance
- Links savers and investors
- Decreases transaction costs and increases returns
- Helps in deciding monetary policy
- Facilitates capital formation

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Description

Explore the fundamental aspects of financial systems including institutions, markets, and instruments that facilitate the exchange of funds between lenders and borrowers. Understand how financial systems contribute to economic growth and the well-being of society.