FM-107-SG3.docx

**Part II. Capital Markets and Theory** **The Financial System** It is through the financial system of a country that entities that have funds send those monies to those who have maybe more productive ways to utilize those funds, which may contribute to a higher growth rate for the economy of a co...

**Part II. Capital Markets and Theory** **The Financial System** It is through the financial system of a country that entities that have funds send those monies to those who have maybe more productive ways to utilize those funds, which may contribute to a higher growth rate for the economy of a country. In other words, the financial system of a country acts as a conduit for the distribution of funds. With the help of a financial system, which makes it possible for a more efficient transfer of funds, the information asymmetry problem that exists between those who have funds to invest and those who need funds can be overcome. This is because the financial system makes it feasible for those who have funds to invest and those who need funds. The term \"information asymmetry\" refers to the circumstance in which one party to a transaction possesses more or better information than the other side, which results in a power imbalance within the context of the transaction because of the information disparity. Knowledge asymmetry, when applied to the setting of a financial system, can result in an allocation of financial resources that is less than optimal. At the end of this module, you should be able to: - Define what a financial system is and demonstrate its importance in the economy. - Identify the various participants in the financial systems and describe their duties. - Discuss the distinctions between the market participants. **FINANCIAL SYSTEM: DEFINITION** *The collection of phrases that are used to talk about the financial markets, the people who are active in the financial system, and the financial instruments and securities that are traded on those markets is referred to as the \"financial system.\" The term \"financial system\" refers to this collection of terms.* *The functions of the financial system are as follows:* - *to serve as a medium of exchange; to serve as a mechanism for risk sharing;* - *to serve as a channel through which the central bank can affect the economy in general and the financial system in particular.* - *to transfer of funds from units with savings or surplus (lenders and investors) to units with deficit (borrowers, creditors/debtors).* *The term \"multi-national financial system\" refers to the collective financial transfer mechanisms that make it possible for participants in financial systems all over the world to move money and profits more easily amongst and among themselves.* [Four Essential Purposes of a Financial System:] - Fund acquisition refers to the process of accumulating deposits and other essential funds for the purpose of financing projects and investments. - Fund allocation is the process of choosing which uses, projects, or investments will receive the money that has been acquired. - Fund distribution is the procedure by which monies that are necessary are distributed to the uses, projects, or investments that are in need of funds. - Utilization of funds refers to applying the money to the activity that was originally intended for it. **FINANCIAL SYSTEM (MARKET) PARTICIPANTS** - Households, also known as consumers, are the group that is considered to be in possession of income, the vast majority of which is normally acquired through earnings and salaries. A portion of revenue like this is put toward purchasing goods and services, while the rest is put into savings. o The formula for calculating gross savings is as follows: current income minus current expenses. o The consumption refers to the things that money is spent on. o Goods that are consumed in the time period are referred to as non-durable goods or non-durables. o Long-lasting consumer goods, often known as durables, are products that have a lifespan of longer than one year. - Businesses that are not classified as financial institutions or intermediaries make up the category of non-financial institutions. Trading, manufacturing, the extractive industries, construction, the genetic industries, and all businesses that are not financial firms are included in this category. They are considered lenders, investors, or savers when they purchase securities, but when they issue securities, they take on the role of the borrower. - When we talk about \"government,\" we\'re referring to the governments of the national, provincial, municipal, or city levels, as well as any barangays or towns that make up the Philippines as a whole. The Bureau of the Treasury (BTR) is a department of the United States government that is actively involved in the functioning of the nation\'s monetary and financial systems. When the BTR issues their own security, they perform the function of borrowers or deficit units; however, when the BTR buys securities, they perform the function of investors or savers or surplus units. - The Central Bank - The mandate of the Bangko Sentral ng Pilipinas and all the other central banks of the various countries is to ensure that the financial systems of their individual countries are stable and healthy. They exercise authority over the workings of their entire financial system and legislate laws, regulations, and monetary policies that will contribute to the upkeep of an economy that is both healthy and stable. The term \"banker\" refers to the function of the central bank. - Foreign participants and investors -- These are the participants from the rest of the globe, including households, governments, financial and non-financial enterprises, and central banks. **FINANCIAL MARKET** The mechanisms that allow for the circulation of funds are known as financial markets. It refers to the organizations and processes that make it easier to conduct transactions involving any and all forms of financial claim. It is a location where those who have extra money to lend (the lender) can meet people who are in need of money (the borrower). A financial claim calls: \- creditors have the right to receive payment from a debtor in accordance with the terms outlined in the contract, which can be communicated verbally or in writing. \- depositors have the right to have financial claims on institutions in which they keep their savings. Classifications of Financial Markets: 1\. Primary Markets: These are the markets wherein corporations, which are users of cash, raise capital by issuing new financial instruments like stocks and bonds. 2\. Secondary Markets: These are the markets in which investors trade existing financial assets. They are responsible for the issuance of primary securities, often known as original or new shares. Equity security, also known as stock Debt security, also known as a bond A picture containing text, whiteboard, handwriting, parallel Description automatically generated Investment banks and merchant banks are places where primary market transactions take place. These transactions assist companies that are issuing stocks or bonds in selling those securities to investors who are interested in purchasing them. The term \"underwriter\" refers to a party that has agreed to the sale of the issues but does not plan to keep the shares or bonds for his own account. Initial Public Offerings, also known as IPOs, are first-time offerings made available to the general public. 1\. The Secondary Market is comprised of exchanges where securities that are currently up for sale can be found. These securities were purchased and kept for a period of time in the past, and they are currently being resold, either by the investors who initially purchased them or by others who have since purchased shares in this market. Outstanding shares or securities are stocks that are owned by members of the general public; outstanding shares or securities are stocks that are owned by members of the general public.  Purposes of Secondary Markets: Marketability: the ability to sell and transfer ownership with ease. Liquidity: the capacity of securities to easily be converted into cash. Securities dealer -- is a type of financial entity that is often structured as either a corporation or a partnership and whose primary function is to trade in securities (buy and sell). Under the provisions of the Revised Securities Act, they are required to seek a license from the SEC. They buy securities to use as an asset and then resale those securities. **MONEY MARKET** The term \"money market -- cover market\" is used to describe the market for short-term loan instruments, which are often offered by enterprises that have an excellent credit standing. They are comprised of a network of institutions and facilities that make it possible to trade debt securities with maturities of no more than one year. Traits of money market instruments: extremely liquid low default risk very marketable delivers better yields wholesale markets (involving enormous transactions and massive quantities) open market transactions (with a nature that is impersonal and competitive) Open market transaction - an order that has been issued by an insider in an exchange after all of the relevant documentation has been filed in order to buy and sell restricted securities in an open market. An open market transaction is also known as an open market trade. Examples of debt securities: - ST T-bills issued by the government - banker's acceptances - negotiable certificates of deposit - money market deposit accounts (MMDAs) - money market mutual funds (MMMFs) - commercial papers (CPs). **CAPITAL MARKET** Capital markets -- are financial markets that specialize in long-term investments. It has been left to mature for longer than a year. Examples: - debt securities: notes, bonds, mortgages, leases; - equity securities: stocks Attributes of capital market instruments: - greater default and market risks - higher return yield - wider price fluctuations Capital goods -- are put into the production of goods and services in order to bring in revenue. The capital market consists of the following: 1. Securities market 2. Negotiated (or non-securities) market [1. Securities Market] In this type of market, corporations may often issue marketable and negotiable securities like common stocks or bonds in order to raise long-term capital. The capacity to negotiate a security allows for it to be traded anonymously. In addition to this, it enhances liquidity because any holder of the security has the ability to promptly sell the security in the event that the holder needs cash. Even before the security\'s maturity date, the holder has the option to sell it. The securities market is comprised of the following: a\. the stock market, where equity or stock securities are traded b\. the bond market, where debt securities are traded c\. the derivative securities market, where securities that derive their value from another security are traded A. STOCK MARKET *The stock market acts as a conduit or agency for the exchange of transactions that deal with equity securities. Institutions and analysts examine the performance of publicly traded corporations as part of this process. The fundamental economic law of supply and demand is reflected in every market. When there are a lot of shares of a particular company available on the market, the price of those shares will go down. The rising cost of shares can be attributed to the limited availability of shares. If a large number of people acquire the stocks, then there will be more demand, which will drive prices higher.* *The Philippine Stock Exchange (PSE) was able to calculate stock indexes (indices) for each of the groups that were created by classifying the stocks into boards.* *Stock index* * It is a measurement of the current price level of the shares that are listed on the exchange according to the category that has been indicated.* * It is helpful to have a record of the fluctuations in stock values over the course of time.* * It provides reports on the fluctuating prices of both individual groups and the entire market.* * It provides information regarding the number of shares that were exchanged, the price range that was experienced throughout the year, dividends per share and EPS.* PSE tracks four indicators: 1. Commercial and Industrial 2. Property 3. Mining 4. Oil Saldana (1997) listed the following prices in a trading day: 1\. Open: the price at which the first transaction is made in the stock market at the beginning of each trading day 2\. Low refers to the stock price that has been traded the fewest times throughout the day. 3\. High: the share price that was achieved throughout the trading day was the highest. 4\. The \"Close\" refers to the stock price at the time of the day\'s final trade. Note: Closing price \> opening price = upward trend in the price of stock The wide difference in the low and high price = volatility and, therefore, risk in the stock. B. BOND MARKET The market for the issuance and trading of bonds is referred to as the bond market. In most cases, it can be divided up into: 1\. Treasury notes and bonds market have longer maturities, which results in wider price fluctuations and exposure to interest rate risk are issued by the government\'s treasury; are backed by the full faith and credit of the government; as a result, they are risk-free and offer investors low rates of interest (yield to maturity); their maturities range from one to ten years. 2\. Municipal bonds market It stimulates and rewards transparent good governance among local government executives, and it decreases the dependency of local governments on the national government in the implementation of their development programs. It makes local governments less dependent on the national government in the implementation of their development initiatives. It brings in private institutional funding and gives the investing public access to alternative long-term investment vehicles. So yet, it has only been acknowledged as a possible instrument for economic growth. 3\. Corporate bonds market C. DERIVATIVES MARKET The term \"derivatives securities market\" refers to the market that is used for the trading of derivative securities. Derivative securities are a type of financial instrument in which the payoffs are tied to the payoffs of another security that was previously issued. This represents an agreement between two parties to trade a particular asset or cash flow of a standard quality at a defined price at a future date that has been determined in advance. \* More of this will be discussed in Module 5. [2. Negotiated market (non-securities market)] - This does not concern securities and is consulted since it is the outcome of negotiations between a borrower and a lender. - This is the transaction in which the buyer and the seller engage in conversation with one another, either directly or indirectly through the medium of a broker or a dealer, on both the price and the volume of the transaction. An agreement between a borrower and a lender regarding the terms and conditions of a loan for a specified amount of time is known as a loan agreement. The amount of time between the date on which a loan is initiated and the date on which it is expected to be repaid is referred to as the loan\'s term. A syndicate, often known as a consortium of banks, is an organization through which a significant quantity of money or funds may be secured. The negotiated or non-securities market includes the following: 1. The Loan Market - Refers to a situation in which a borrower and a lender conduct a transaction directly with one another. 2. The Mortgage Market - To guarantee or secure large loans, real estate assets such as land (whether it be residential, agricultural, or industrial), buildings (whether it be residential, commercial, etc.), and large machinery are sometimes used as collateral. - This is a type of loan, but it is a secured loan, which means that it is backed by collateral in the case that the company or person mortgages the property. - If the company or person mortgages the property, the loan will be paid off. Foreclosed homes are homes that have been repossessed by their original lenders because the original borrowers were unable to pay back the money they borrowed, and since the property was used as collateral for the loan, the original lender now owns it. The market for mortgages also includes the market for foreclosed homes, which are homes that have been repossessed by their original lenders. - Examples: National Home Mortgage Finance Corporation, GSIS, SSS and Pag-IBIG Fund. 3. The Lease market **OTHER MARKETS** 1. Consumer Credit Market \- Involves the parties and transactions associated with the provision of loans to households for the purpose of meeting similar demands, such as the purchase of real estate, travel, the attainment of an education for themselves or their loved ones, etc. Borrowers are considered to be customers. \- The following are the most common types of consumer credit: - Character loan or longer-term like car loans (5 years) - Appliance loan (3 years) - Pawnshops, SSS pension lending companies, and other small consumer loan companies are some examples. 2. Organized Markets \- These are the marketplaces that originally existed in the form of actual locations offering trading opportunities. \- Exchanges are based in certain locations and adhere to a predetermined set of standards when conducting business. 3. Over-the-Counter Market (OTC) \- There has never been a \"place,\" but rather, it is more commonly a well-organized network of trading ties that is centered on one or more dealers. \- By stating rates at which they will sell or buy to other dealers as well as to their clients or customers, dealers function as market makers in the financial market. 4\. The Auction Market is the area where transactions involving the buying and selling of specific securities are carried out by a neutral third party who matches prices on orders received to do so. These transactions can only take place when the Auction Market is open. Shares of stock are typically sold on trading floors to the individual investor who has given the highest price, who is also referred to as the \"highest bidder.\" 5\. Foreign Exchange Markets: These markets provide both the physical and institutional structure through which the currency of one country is exchanged for the currency of another country, the rate of exchange between currencies is computed, and foreign exchange transactions are physically opted for. In other words, these markets are what allow for the exchange of one country\'s currency for the currency of another country. \- A transaction involving foreign exchange is an agreement between a buyer and a seller that a certain amount of one currency is to be delivered at a certain rate in exchange for another currency. This agreement specifies the amount of the one currency that is to be supplied. The name given to this arrangement is a \"foreign exchange rate.\" 6\. Spot Market \- Are given this name due to the fact that purchasing and selling takes place \"on the spot,\" meaning that rapid delivery and payment takes place. The buyer makes a quick payment, and the vendor promptly fulfills the order. 7\. The Futures Market \- Is the place where the contracts that grant the holder the right to acquire something in the future at a price set in the contract are conceived of and exchanged for the first time. 8\. Forward Market \- Are contractual agreements between a buyer and a seller at a time zero (0) to exchange a pre-specified, non-standardized asset for cash at some later point in the future. 9\. The Options Market is the marketplace in which stock options can be bought and sold. 10\. Swap Markets are agreements between two parties (counterparties) in which they would exchange defined periodic cash flows at some point in the future based on an underlying instrument or price. The swap market is also known as the cash flow swap market. 11\. Third and Fourth Markets -- The practice of selling securities in the over-the-counter market that are listed in organized exchanges such as the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the London Stock Exchange Group, amongst others. These markets are referred to as the \"Third\" and \"Fourth\" markets, respectively. **TYPES OF INVESTORS** 1. Risk-averse investors (like bull and/or chicken) - They would rather invest in assets that do not involve any risk than in assets that do involve risk, provided that the returns that can be anticipated from each asset are equivalent. They will require a bigger return on their investment in the risky asset before they will consider doing so. 2\. Risk-taker investors (like bears and pigs) \- These are the type who are willing to purchase an investment at a greater price regardless of the dangers that are associated with the transaction. 3\. Risk-neutral investors \- These are the types of investors that do not take into account the dangers that are associated with the investment and who are solely focused on the profits that are anticipated. In the stock market: - When stock prices and market indexes are both trending in an upward manner, we are observing bull market conditions. In order for this to even be considered, there needs to be a gain in market value of at least 20%. - When the economy is in terrible form when a recession is looming in the near future, and when falling stock values are noticed, this is known as a bear market. Because of this, it is more difficult for investors to choose companies that will result in a profit. - Chicken market is an indication that you are easily frightened. Because of their anxiety, rather than focusing on making profits, they will only invest in money market assets or look for easy ways to exit the market. - The pig market attracts high-risk investors who are trying to make a significant profit in a relatively short amount of time. They base their purchases on hearsay and make investments in businesses without first conducting adequate research. **FINANCIAL INSTRUMENTS** *A bullish institution that stokes and develops the investing character of Filipinos in the Philippine financial and capital market is the Capital Market Institute of the Philippines (CMIP). CMIP is an abbreviation for the Capital Market Institute of the Philippines. Capital Market Institute of the Philippines is shortened to CMIP, which is an abbreviation for the full name of the institution. It is committed to promoting, developing, and advancing awareness and knowledge of the capital market and its role in the development of the national economy by developing, organizing, and conducting programs, projects, research, and other activities to upgrade the competencies of members, practitioners, entrepreneurs, professionals, teachers, and students in dealing with the Philippine capital market. This will be accomplished by developing, organizing, and conducting programs, projects, research, and other activities. This goal will be achieved by planning, coordinating, and executing of various programs, projects, and research endeavors.* A. Money market instruments B. Capital market instruments A. MONEY MARKET INSTRUMENTS These are securities with a very short term. They might be physical pieces of paper or digital representations of debt, and they are traded on the money markets. 1. The Cash Management Bills \- Are financial liabilities that have been issued by the government and have maturities of fewer than 91 days, more specifically 35 or 42 days. Government Securities are unconditional liabilities of the government that issues Government Securities (GS). These obligations are supported by the full taxing power of the government that issues the Government Securities (GS), which is also known as the government that issues Government Securities. 2. The Treasury Bills, often known as T-Bills These notes with maturities of 91 days, 182 days, and 364 days respectively, are issued by the Bureau of the Treasury. T-bills can only be purchased through government securities-eligible dealers (GSEDs), which are banks and other financial organizations that have been given authorization by the United States government to sell T-bills. Buying them directly from the government is not possible. The successful conclusion of transactions is achieved through the use of competitive bidding conducted online. 3. Banker's Acceptances \- a time draft that has been issued by a bank and is payable to a vendor of goods is referred to as a. This is the name given to the time draft. It has already been drawn on, and the bank has indicated that they will take it. a\. A time draft is an instruction for the bank to pay a certain amount of money to the holder of the time draft on a given date. This date is specified in the time draft. The time draft includes both the amount and the date written on it. b\. A sight draft is an order to pay immediately and must be paid upon sight. 4. Letters of Credit - International letter of credit -- is opened for import - Domestic letter of credit -- is opened for local purchase - Commercial letter of credit -- This refers to a contractual agreement that has been made between one bank, which is known as the issuing bank, on behalf of the buyer, which is known as the drawer, and another bank, which is known as the correspondent bank, which is known as the advising or confirming bank, to make payment to the beneficiary, who is also known as the seller. The buyer is known as the drawer. \- A letter of credit, sometimes known as a \"credit letter,\" is a letter written by a bank that guarantees a payment from a buyer to a seller will be received on time and for the exact amount. In the case that the purchaser is unable to make a payment toward the purchase, the bank will be forced to reimburse either the total cost of the purchase or the amount that is still outstanding. 5. Negotiable Certificates of Deposit \- It is a receipt that was issued by a commercial bank in exchange for the money that was deposited. It is a type of time deposit that has a definite maturity date (of up to one year) and a definite rate of interest. -It states that the holder of the certificate has the right to receive annual interest payments at the rate that is stated on the certificate, in addition to the principle, when the certificate reaches its maturity date. 6. The Repurchase Agreements - -Are binding legal contracts that entail the real sale of securities by a borrower to a lender with the commitment on the part of the borrower to repurchase the securities at a contract price plus a stated interest charge at a later date. These transactions take place when a borrower sells securities to a lender in exchange for a loan. A borrower engages in this transaction in order to acquire a loan by selling securities to a lender. The buyer of the securities is the lender. - A reverse repurchase agreement, often known as a reverse repo, is an arrangement in which one party promises to another that they will sell back the securities that they have purchased from the first party at a specified time in the future. 7. Money Market Deposit Accounts (Money Market Accounts) \- Are deposit accounts that are protected by the PDIC and are typically maintained by banks or brokerages. They can be a useful place to hold money that will be utilized for future investments or that has been obtained through the sale of more recent assets. \- They are assets that are extremely risk-free, highly liquid, and pay interest rates that are higher than those offered by savings accounts but lower than those offered by money market mutual funds. 8. Money Market Mutual Funds \- Are types of investment vehicles that aggregate capital from a large number of investors for the purpose of purchasing money market securities from investment firms. A mutual fund is a type of investment business that creates a significant asset base by pooling the financial resources of a large number of individual and institutional participants. a\) Growth funds are those that invest in assets that are anticipated to generate significant capital gain (usually equities securities). b\) Income funds are those that invest in stocks that routinely pay dividends and in notes and bonds that routinely pay interest. c\) Balanced funds combine aspects of growth funds and income funds to create a unique investment vehicle. d\) Sector funds are funds that invest in certain areas, such as health care, financial services, utilities, and extractive industries. e\) Index funds are funds that invest in a basket of assets that make up some market index, such as the S&P 500 index of equities. f\) Global funds: These invest in securities that have been issued in a variety of nations, thereby offering diversity. 9. Certificate of Assignment - a contract that stipulates the transfer of a seller\'s right to possession of a security to the buyer of such security. The underlying security, which is similar to a promissory note in that it contains a promise to pay a particular sum of money on a specified date, bears this promise. The agreement makes it possible for the purchaser to keep the security as a source of repayment that is guaranteed. 10. Certificate of Participation \- Is a type of financial instrument that confers onto its owner the right to a proportionate equitable interest in the securities held by the issuing company or the right to a pro-rata share in a pledged revenue stream, which is often comprised of lease payments. 11. Eurodollar CD and Eurocommercial Papers (ECP) *- The term \"Eurodollar\" refers to deposits denominated in U.S. dollars that are held at overseas branches of American banks or at banks located in other countries.* *- Eurocommercial paper, often known as ECP, is a type of unsecured short-term loan that can be issued on the international money market by a financial institution or a firm. Noteworthy is the fact that exchange-traded products are denominated in a currency that is distinct from the local currency of the market in which the paper (debt security or bond) is issued.* B. CAPITAL MARKET INSTRUMENTS These investments can be classified as either equity or debt instruments. Corporate stocks, mortgages, corporate bonds, treasury securities, and bonds issued by state and municipal governments are examples of these types of investments. The following are some classifications of instruments found on the capital market: 1\. Non-negotiable/non-marketable instruments 2\. Negotiable/marketable instruments **FINANCIAL INTERMEDIATION** Financial Intermediaries - these are the financial institutions that play the role of a bridge between those who invest or save money and those who borrow money or issue securities. - A commercial bank, investment bank, mutual fund, or pension fund are all examples of the types of organizations that fall under the category of \"financial intermediaries.\" These institutions operate as the go-between for two parties involved in a financial transaction. DIRECT AND INDIRECT FINANCE - **Direct Finance**- obtaining funds directly.  - **Indirect Finance is a result of financial intermediation.** CLASSIFICATION OF FINANCIAL INTERMEDIARIES A. Depository institutions - often known as depositories, these are the types of financial organizations that accept deposits made by surplus units. B. entities that are not depository banks; these entities execute financial intermediation and issue contracts that are not deposits. Note: FM103: Banking and Financial Institutions subject comprehensively discusses the depository institutions. A. DEPOSITORY INSTITUTIONS 1. Commercial banks \- the largest among the financial institutions serving as depositories. -They were the first people to successfully mediate between two parties in a financial transaction a\. regular commercial banks \- These banks engage in the straightforward activities of receiving deposits and making loans. b\. Expanded commercial or universal banks \- This type of bank is a blend of commercial banks and investment houses \- They carry out enlarged commercial banking responsibilities in addition to the underwriting functions of an investment business. 2. Thrift banks \- They attend to the requirements of households, agriculture, and industry. \- They promote the practice of frugality and saving money, and they offer loans at interest rates that are affordable. a\. savings and mortgage banks \- These are banks that, in addition to their primary duty of receiving deposits, have developed a specialty in the provision of mortgage loans. Mortgage banks do not take deposits, but they do accept loan applications. b\. savings and loan associations: These organizations collect the savings of their depositors and stockholders and utilize those savings, in addition to their own capital, to make loans to customers and investments in government and private assets. c\. private development banks \- These banks cater to the requirements of many industries, including agriculture and industry, by offering loans at competitive interest rates for medium-and long-term use. d\. microfinance thrift banks \- These are smaller thrift banks that cater to tiny, micro, and cottage industries; therefore, the term \"micro\" is used to describe these banks. e\. Credit unions are cooperatives that are created by individuals who belong to the same organization, such as farmers, fishermen, teachers, sailors, employees, and so on. 3\. Rural banks and cooperative banks B. NON-DEPOSITORY INSTITUTIONS 1\. Insurance firms 2\. Fund managers a\. corporations that manage pension funds: these businesses sell contracts that guarantee a certain level of income to policyholders once they reach retirement age. b\. Mutual fund firms: these companies give investors the opportunity to purchase mutual funds, which then go out and purchase various securities on the securities market. These securities can include stocks, long-term bonds, or short-term debt instruments that are issued by corporations or government entities. c\. Hedge fund organizations provide contracts that guarantee a certain amount of revenue to policyholders while they are actively working. d\. Hedge fund organizations provide contracts that guarantee a certain amount of revenue to policyholders while they are actively working. 3\. Financial intermediaries such as investment banks, houses, and businesses combine relatively modest amounts of money from investors to fund huge portfolios of assets that justify the cost of professional management. 4. These substantial assemblages of financial holdings are what make it possible to justify the fees associated with professional management. By combining their financial resources, these firms can reduce the risks that are normally associated with diversification and gain a competitive advantage. 4\. Lending and borrowing money to individuals and corporations is the primary function of finance companies, which are profit-driven organizations in the financial sector. 5\. Security dealers and brokers Security brokers perform the same function as financial intermediaries in the sense that they search for investors or savings units for the advantage of borrowers or deficit units. - Security dealers sell securities to investors in exchange for a commission. Dealers in securities make their money by purchasing existing securities, reselling those assets, and pocketing the profit that results from the price differential between the two transactions. 6\. Pawnshops are enterprises that allow individuals and some types of small businesses to \"pawn\" their personal property in exchange for a sum of money that is significantly less valuable than the worth of the thing being pawned. 7\. Trust companies and departments are corporations that are founded with the goal of accepting and executing trusts, as well as acting as trustees under wills, as executors, or as guardians. Trust companies and departments can also be departments inside larger corporations. 8\. Lending investors are persons or corporations that lend money to borrowers, who are typically consumers or households. Lending investors can be either private individuals or businesses. To learn more about this lesson, please refer to the reference cited on the last page of this module. **Reflection on Learning:** - You are to talk about the meaning of the financial system. To what extent does this matter for the nation? - You are to have a conversation on the roles that each of the players in the financial system play. - Why are financial markets so essential to the functioning of a nation\'s economy? Talk about the answer you provided. - Make a distinction between the money market and the capital market, as well as between the money market instruments and the capital market instruments. What exactly is meant by the term \"financial intermediation\"? Who are these financial middlemen, and what do they do? - You are to talk about the function that financial intermediaries play in the transformation of assets and give concrete examples. **Learning Activity:** - **Prepare for a recitation or oral/written participation.** - Prepare for a quiz after discussion. - The term \"financial system\" refers to the collection of financial markets, as well as the participants and instruments that are traded on those markets. - The global financial system is comprised of six different actors or sectors. - The financial markets are the structures that the flow of money occurs via. It refers to the institutions and processes that make it easier to conduct transactions involving various kinds of financial claims. - Financial instruments are contracts for monetary assets that can be bought, sold, created, altered, or settled for. These contracts can be purchased, exchanged, created, or amended. - CMIP is a non-stock, non-profit organization whose members are active practitioners in the Philippine capital market, professionals, and leaders in the academic community. - CMIP\'s members are also members of the Philippine Securities and Exchange Commission. The social and economic growth of the nation as a whole, and of urban and rural areas in particular, is significantly impacted by the activities of financial intermediaries.  - Fabozzi, Frank J. and Pamela Peterson Drake (2009). *Capital Markets, Financial Management and Investment Management.* John Wiley & Sons, Inc. - Lopez-Mariano, Norma D (2017). *Capital Markets*. Rex Bookstore Inc. - Kagan, Julia (2021). *Letter of Credit.* Investopedia. - Chen, James (2021). *What is Eurodollar?* Investopedia. - Gatdula, Donnabelle (2005). *BSP Hails Capital Market Institute.* Philippine Star. - Beechmont Toyota (n.d). *What are Direct and Indirect Finance?* - Corporate Finance Institute (n.d). *Financial Instrument.*