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?

<p>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)</p> Signup and view all the answers

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

<p>Shares, debentures, bonds (C)</p> Signup and view all the answers

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

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

What is the main purpose of the financial system?

<p>All of the above (D)</p> Signup and view all the answers

How does the financial system help in economic development?

<p>All of the above (D)</p> Signup and view all the answers

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

<p>Capital Formation (C)</p> Signup and view all the answers

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

<p>By linking savers and investors (C)</p> Signup and view all the answers

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

<p>To decide monetary policy (A)</p> Signup and view all the answers

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

<p>Banking and Non-Banking (A)</p> Signup and view all the answers

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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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