Topic I. Foundation of Financial Markets and Institutions PDF

FINANCE AND FINANCIAL MARKETS Prof: Mark Quiel Sanchez, CPA,CTT,MBA  BSACC2103: Finance and Financial Markets In this course, we will introduce you to the fundamentals of finance, which deal with corporate financing and investment decisions. You will learn about the important financi...

FINANCE AND FINANCIAL MARKETS Prof: Mark Quiel Sanchez, CPA,CTT,MBA  BSACC2103: Finance and Financial Markets In this course, we will introduce you to the fundamentals of finance, which deal with corporate financing and investment decisions. You will learn about the important financial concepts and principles for financial management (i.e., financial market, securities, regulation, industry trends, industry characteristics, etc.). Ample analytical techniques are also included to help students understand the operation of modern financial markets and institution. BSACC2103: Finance and Financial Markets Topic I. Foundation of Financial Markets and Institutions 1 Introducing Money 2 The Payment System 3 Financial Instruments Lesson 1 Introducing Money MONEY - is any item or commodity that is generally accepted as a means of payment for goods and services, repayment of debt and that serves as an asset to its holder BILLS AND COINS printed and minted by the National government (called currency) FUNDS stored in checking and savings account CHARACTERISTICS AND KEY FUNCTIONS OF MONEY 1. Store of Value 2. Item of Worth 3. Means of Exchange 4. Unit of Account 5. Standard of Deferred Payment  THE EVOLUTION OF MONEY 10,000 to 3000 BCE  THE EVOLUTION OF MONEY Barter Systems: Trading goods and services. It involved exchanging one type of good or service for another, --> Inefficient and limited by the double coincidence of wants. Commodity Money: Had intrinsic value in addition to its value as a medium of exchange. Examples include shells, beads, salt, and grain, which were widely accepted in trade. Metal Coins: Marked as a significant advancement in the history of money. --> durable, portable, and easily divisible, making them ideal for trade. Paper Money: Paper money originated in China during the Tang Dynasty and later spread to other parts of the world. It was initially backed by precious metals but later transitioned to fiat money, which is not backed by a physical commodity but by the government's guarantee. Banking Systems: Issuance of banknotes and the facilitation of financial transactions. Banks provide services such as lending, deposit-taking, and money transfer. Digital Currencies: The rise of the internet and digital technologies has led to the emergence of digital currencies such as Bitcoin and other cryptocurrencies. --> Operate independently of central banks and are based on decentralized blockchain technology. https://digikhata.in/blog/the-evolution-of-money  ECONOMICS OF MONEY The SUPPLY for Money Money facilitated the flow of resources in the circular model of macroeconomy. Not enough money will slow down the economy Too much money can cause inflation because of higher price levels Monitoring the Supply and Demand is vital for economy’s central bank’s monetary policy to stabilize price levels and to support economic growth. THE QUANTITY THEORY OF MONEY According to QTM, the general price level of goods and services is proportional to the money supply in an economy.  THE TIME VALUE OF MONEY states that a sum of money is worth more now than the same sum of money in the future. FUTURE VALUE = PV x \[1 + (i / n)\] ^ (n x t) PRESENT VALUE = FV / \[1 + (i / n)\] ^ (n x t) For example, A relative has offered to give you $8,000 and asks if you would rather receive the money today or wait two years. To ensure that getting the $8,000 today is worth more than if you waited, you can calculate its future value. If you decide to take the $8,000 and invest in an account at an annual rate of 6% FV = $8,000 x \[1 + (6%/1)\] ^ (1 x 2)FV PV = $8,000 / [1 + (0.06 / 1)] ^ (1 x 2) = $8,000 x (1 + 0.06) ^ 2FV = $8,988.80 In two years, your $8,000 investment Receiving $8,000 after 2 years is the same will be worth $8,988.80. as if you took $7,119.97  THE TIME VALUE OF MONEY (Seatwork) Problem 1: You have just won a “Philippines Lotto Lottery”. Lotto officials offered you the choice of two alternative payouts. 1. P10 million today. 2. P30 million, seven years from now. 3. Which payment will you choose if relevant discount rate is 10%? Explain your choice. Problem 2: You receive a bonus from your company located in US, but your employer gives you two options: receive $8,000 right now or $10,000 two years from now. Which payment will you choose if relevant discount rate is 12%? Explain your choice. Lesson 2 The Payments System The payments system is the mechanism for conducting transactions in the economy THE LEGAL TENDER CASHLESS SOCIETY Lesson 3 Financial Instruments is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity  Financial Assets Petty Cash Demand, Savings and time deposits Undeposited checks Cash on hand and in banks Foreign currencies Money Orders Bank Drafts Accounts, notes and loans Trade receivables receivables, investment in Promissory notes bonds and other debt Bond Certificates instruments Interest in shares or other Stock certificates equity intsruments Publicly listed securitie Futures Contracts Forward Contracts Derivatives Call Options Foreign Currency Futures Interest Rate Swaps  Financial Liabilities and Equity Intruments FINANCIAL LIABILITIES EQUITY INSTRUMENTS Accounts and notes payable, loans and bonds Ordinary Shares and other debt instruments Obligations to deliver own shares for a fix Preference Shares amount of cash Derivatives Warrants or written call option