Business Finance Grade 12 Qtr 2 Module 1 Week 1-1 PDF

Business Finance Second Quarter Introduction to Investment Learning Competency Compare and contrast the different types of Investment. Code: ABM_BF12-Ivm-n-23 Objectives:...

Business Finance Second Quarter Introduction to Investment Learning Competency Compare and contrast the different types of Investment. Code: ABM_BF12-Ivm-n-23 Objectives: After reading this module, the learners will be able to: 1. Explain what is Investment. 2. Identify the basic features of Investment. 3. Identify the types of Investments. 4. Differentiate the types of Investment. Let’s Recall: Making Meaning Tangible assets are physical and measurable assets that are used in a company’s operations like property, plant and equipment. Interest Rate is the amount charged, expressed as a percentage of the principal, by a lender to a borrower for the use of assets. Amortization refers to the reduction of debt over time by paying the same amount each period. Amortized Loan a loan to be repaid by a series of regular installments of principal and interest that are equal or nearly equal. Intangible asset is an asset that is not physical in nature. Principal amount is the initial size of a loan and can also refer to a loan balance that is still outstanding. Fixed Interest Rate offers borrowers a fixed interest percentage to pay back over an agreed period of the loan. Negative amortization is a financial term referring to an increase in the principal balance of loan caused by a failure to cover the interest due on a certain loan. Annual Percentage Rate A percentage rate that reflects the amount of interest earned or charged. Equal Principal Repayments provides accrued interest on the unpaid balance, plus an equal amount of the principal. Let’s Understand: In this module you will be learning about Investments particularly Bank deposits, Insurance, Real Estate, Hard Assets, Mutual Funds, Stocks and Bonds. All these investments are provided by any financial institution in our country. Have you ever heard the tag lines such as, “You’re in good hands”, “We’ll take you farther”, “We find ways”? Probably most of you are very familiar with these tag lines. These tag lines are used by top banks in the Philippines, to make you, your parents, and the general public to think of having an investment especially during difficult times like this pandemic we are now experiencing. So basically, if we will describe Investment, we can say that it is an asset or item acquired with the goal of generating income or appreciation. We can also say that the term "investment" can refer to any mechanism used for generating future income. 1. What is Bank Deposit? Bank deposit consists of money placed by an individual or a company into financial institutions or banks for safekeeping. There are several different types of bank deposit accounts that is offered by a financial institution to suit the needs of every consumer. All bank deposits are PDIC covered with a maximum deposit insurance coverage of Ph 500,000 per depositor or per financial institution. We are going to discuss particularly the 3 most popular types of accounts among the consumers which are: Savings Accounts: o Savings accounts are suitable for people who have a definite income and are looking to save money. This type of accounts mostly offers.25% interest annually on the deposit and in every financial institution these accounts are required to have an opening amount and monthly maintenance amount depending on the requirements of the financial institution you have chosen. The funds on these accounts are easily accessible which means you can withdraw the money anywhere and anytime you need it as long as there is a serviceable ATM in the area. Checking or Current Accounts: o Checking accounts are offered by all financial institution in the Philippines that is suitable for small and big businessmen, companies and institutions as schools, hospitals etc. in paying for their business transactions, instead of withdrawing these big amounts in cash, they instead issue a check indicating the said amount. In this regard it is safer than carrying big amount of cash for payment. On this account, the bank does not pay any interest on the balance. This account also has an opening and maintaining balance that is required when you want to open this type of account. The required opening amount depends on the bank where you opened your account. Checking account also is very accessible. You can also withdraw funds in this account as long as you have your ATM card with you and there is a serviceable ATM in the area. You can also access your checking account online as long as you have enrolled your checking account on the online system provided by your financial institution or bank. However, the opening and maintaining balance of this account is much higher than a saving account. There are also fees such as ordering a new checkbook, falling below maintaining balance, closing fee, dormancy fee, returned checks, bank statement reprinting, stop payment order. Time Deposit Accounts: o Time Deposit account is a type of bank account where your money is locked in for a period of time. This account offers higher interest rate than Savings Account. This account also incurs certain fees if you will withdraw your money earlier than the maturity date. Once you open the account you will be given a Certificate of Deposit as proof that you have a time deposit account. The maturity or length of time of the funds depends on the consumers choice between a relatively short 30-days up to 10 years. 2.What is Insurance? Now a days Insurance policy in the Philippines is getting popular in the world of consumers, especially on the family sector. Most breadwinners now would love to protect their loved ones for any unforeseen events such as death, disability, illnesses, and accidents. Insurance is a means of protection from a financial loss. It is a reimbursement against losses of fire, typhoons, car accidents, plane crash accidents, death etc. from an insurance company. Insurance payments and maturity will depend on the policy that you have chosen. The individual should understand the type of insurance that will be availed to get the best possibility of utilizing one’s funds. In this topic we are going to discuss the most common type of Insurance. Life Insurance: There are many life insurance products in our country. Every financial institution and Insurance company offers this kind of insurance. This insurance pays money in a large amount to the surviving family on the insured person’s death or after a certain period. There are four main types of Life Insurance in the Philippines such as: 1.Term Life Insurance – This insurance provides only death benefit payment for a fixed period. If the policyholder does not die within the term period, the coverage ends, and the policyholder gets nothing. 2.Permanent or Whole Life Insurance – Provides lifelong coverage or until the insured is 100 years old, with death benefit and an investment component. This type of insurance earns dividends, the policyholder can borrow or withdraw the cash, partially or fully. 3.Variable Universal Life Insurance (VUL) – Provides death, disability, and living benefits with investment component. In this type of insurance, the policyholder can choose to invest in various assets, including bonds, stocks, and money market funds. 4.Health Insurance – This type of insurance covers or pays for medical, surgical, prescription drug and sometimes dental expenses incurred by the policyholder. Fire Insurance: This kind of insurance is a property insurance that covers damage and losses caused by fire. Fire insurance covers a policyholder against fire loss. These are fires brought by faulty wirings, lightning, gas explosions, and other natural disasters. The coverage of a policyholder for fire insurance will always depend on the policy that was chosen. For example, if the house is in a total loss, the policy might have stated that reimbursement will be the home’s current market value and contents are covered for at least 50% to 70% of the policy value. Educational Insurance: Education is very important to every child but at the same time very expensive. That’s why most parents invest in the future of their children through Educational Plan. The sooner the parents start saving for their child’s educational plan the lesser they will pay for the monthly premium. This type of Insurance is a combination of savings and at the same time an insurance. 1. In the savings portion: the policyholder builds up a fixed fund for several years. You determine the payout date in advanced and you can pay with these funds for your child’s education. 2. The insurance portion: If something happens with the policyholder during the term of the educational plan or the policyholder becomes disabled or dies, the child will receive the predetermined payout amount when the plan matures. Car Insurance: This type of Insurance is mandatory in the Philippines. It is the land transportation office that requires you to have a Compulsory Third Party Liability insurance policy before you start to drive your car. CTPL insurance covers anyone outside your car and those riding with you who aren’t your employees or a family member within the second-degree consanguinity or affinity are also considered third party persons, so they are covered by the insurance. However, you can choose to get an additional type of car insurance called Comprehensive Car insurance. This type of insurance offers wider range of coverage that can protect you from all sorts of risks, although the coverage does depend on the insurance providers. Some of the coverages, on top of the CTPL, can include property damages, personal accidents, accidental collisions, fire and explosions, theft, or malicious acts by third parties, as well as Acts of Nature. 3.What is Real Estate? Real Estate is the land and any permanent improvements attached to the land, whether natural or man-made including water, trees, minerals, buildings, homes, fences and bridges. There are four main types of real estate: residential, commercial, industrial, and land.  Residential Estate Residential properties are exclusively used for private living quarters. A building that is used or suitable for use as dwelling or is in the process of being constructed or adapted for use as a dwelling; land that forms part of a garden or grounds of a building suitable for use as a dwelling. Commercial Estate Commercial property relates to any property used for business like commerce or activities like hospitals, warehouses, shopping centers, offices or any other places for business enterprise. Industrial Estate An industrial estate refers to a place where the facilities and factory accommodation are provided by the government to the entrepreneurs to establish their industries. This estate provides all infrastructural facilities such as power, water, and lighting at a reasonable cost. Land Estate Land, in the business sense, can refer to property, minus buildings, and equipment, which is designated by fixed spatial boundaries. 4. What is Hard Asset? Hard assets are tangible asset or resource with basic value. Hard assets include a fleet of trucks for the delivery of consumer goods, land, real estate, and commodities. Businesses purchase hard assets to help improve production, increase revenues, and act as a buffer against soft asset losses. However, sometimes the value of hard assets decreases in tandem with the value of intangible assets. 5. What is Mutual Fund? Mutual Funds are owned by investment companies which enable small investors to enjoy the benefits of investing in a diversified portfolio of securities purchased on their behalf by professional investment manager. 6. What are Stocks? These are certificates that are sold by companies to raise money it needs for its operation and growth. There are two majors of classes of Corporate Stocks: common stock and preferred stock. a. Common Stock - Is a security that represents ownership in a corporation. Holders of common stock elect the board of directors and vote on corporate policies. This form of equity ownership typically yields higher rates of return on long term. However, in the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders, and other debtholders are paid in full. b. Preferred Stock – Has priority over a common stock in terms of claims over the assets of a company. If a company is to be liquidated and its assets have to be distributed, no asset will be distributed to common stockholders unless all the claims of the preferred stockholders have been given. These stocks may also be issued in different classes for different purposes. 7. What are Bonds? Bonds are long-term debt or loan of a firm or a government to finance projects and operations. Bondholders have priority over stockholders when payments are made by the company. Bondholders also have no right to vote and no influence on the management side of the firm. Bonds have specific maturity date, at which time, repayment of the principal amount is due. The interest payments due to bonds are fixed while dividends to stockholders are contingent upon earnings and must be declared by the board of directors. There are general kinds of bonds. These are the following: 1. Government Bonds Government bonds are those issued by the government to finance its activities. 2. Corporate Bonds Corporate bonds are those issued by private corporations to finance their long-term funding requirements. References: Business Finance – Teaching Guide for Senior High School By: The Commission on Higher Education in collaboration with the Philippine Normal University Business Finance by:Arthur S. Cayanan and Daniel Vincent H. Borja, 2017 Investopedia