Lesson 1.

2:
Financial Institutions,
Financial Instrument, and
Financial Market
The Financial Institutions
 The flow of money begins with the depositor
who opens a bank account and earns interest from the
account. In exchange, these funds are lent by the banks
to businesses. They are borrowers who want to start up
a new business, a new product, expand a business, or
find another investment opportunity. When the
business earns profit, the borrower of the funds will
pay interest on the loan, and the depositor receives an
interest in his/her bank account.
 The financial institution’s role is to act as a
financial intermediary. A financial intermediary
serve as a link between the depositor who has the
money and the lender who needs money. Financial
institutions include commercial banks, universal
banks, investment banks, investment companies,
finance companies, life and non-life insurance
companies, mutual fund companies, and private
equity firms.
 Most funds, especially public funds, are looking for
investment opportunities that will sustain their
requirements for about five years or more, that is, long-
term, and this is to separate certain investor requirements
from fast returns.
Financial management is managing financial matters
including analysis of statements, assessment, or investment
opportunities, which happens before one starts investing
and acquiring funds from different sources.
 The Key Individual Roles
1. The Depositor
The depositor is the person who has the money and
puts in a savings account with a bank that pools this
together with the savings from other depositors. He/she
saves money in a bank because he/she wants to achieve
things in life, such as a new house, a new car or even a
small business. His/her money also earns interest in the
bank.
 The Key Individual Roles
2. The Borrower
The borrower is the one who needs funds
and borrows it from a bank. He/she knows where
to use the funds such as starting up a new
business, purchasing new equipment, expanding
his/her business, or investing in other financial
instruments.
 Financial Instruments and Financial Markets
Financial instruments are the tools that help a business’
daily operations and help the finance manager handles his/her
cash, his/her short-term operating requirements, and long-
term business requirements.
Money market instruments are funds available for a
short time (1 year or less than a year). They are available most
of the time and do not provide very high returns. Table 1 is a
list of the different market instruments and their
characteristics.
 The borrower can also use long-term debts for
his/her business needs. However, the interest rates are
higher than money market instruments. Bond is an
example of long-term debt. It is a security reflecting the
debts of a government’s or business’ debt promising to pay
a fixed interest to the bondholder for a definite time.
A note is another example of long-term debt that has
a longer term than a money market instrument. Notes are
similar to bonds that have regular interest payments and
have a specified maturity term.
 Stocks are types of security that represent ownership
in a corporation and a claim on part of the corporation’s
assets and earnings. The two main types of stocks are
common and preferred.
 Financial Market
Financial Markets are the meeting places of suppliers and users of
various types of funds that can make transactions directly.
1. Primary Market – refers to financial market in which buyers and
sellers negotiate and transact business directly without an intermediary.
• Public offering is the sale of new securities to the general public and
the first offering of stock is called IPO or Initial Public Offering.
• Private placement is the sale of a new security to a private or specific
buyer.
 Financial Market
2. Secondary Market – refers to financial market
where previously issued securities (such as bond,
notes and shares) are bought and sold.
3. Money markets – are venues wherein securities
with short-term maturities (1 year or less) are
borrowed or loaned. Capital markets are financial
markets for stocks for a long-term period (one year or
longer).
 Different Types of Financial Institutions
A financial institution can be a bank or nonbank.
• Different kinds of banks
1. Thrift Banks
Thrift banks are deposit-taking financial institutions that extend
credit to the consumer market that is in the countryside or rural areas.
2. Commercial Banks
Commercial banks are mainly deposit-taking financial institutions
that extend credit to the retail and consumer market, and their
transactions are usually many but small, using the local currency.
 Different Types of Financial Institutions
3. Universal Banks
Universal banks lend money to multinational companies.
The transactions are larger than commercial banks and
denominated in multicurrencies not just to the local currency.
4. Investment Companies
Investment banks provide loans to big corporations and
governments and can raise funds through bond issuances and
initial public offerings. Investment banks also provide funds to
businesses.
 Different Types of Financial Institutions
• The nonbank institutions that raise and lend
funds:
1. Leasing Companies
Leasing companies extend financing to
companies that need funds for their business. They
are not banks and are not regulated by central
bank.
 Different Types of Financial Institutions
2. Investment Companies
Investment companies perform similar functions as banks
in the manner that they can provide financing to companies or
raise funds through bonds or Initial Public Offerings. They are
regulated by the Securities and Exchange Commission (SEC)
3. Mutual Funds
Mutual funds are types of investments or funds of small
investors pooled together and managed to be able to generate
maximum returns.
 Different Types of Financial Institutions
4. Insurance Companies
Insurance companies sell life and non-life insurance products that
offer security during times of death, illness, accident, and damage to
property. Individuals buy insurance protection with insurance premiums.
The insurance companies use these payments to invest in stocks, bonds,
real estate, and mortgages. The proceeds will be the payment to the
insured individual.
5. Private Equity Funds
Private equity funds are managed by private fund managers or
investors, allowing owners to invest more aggressively in the financial
markets.
 The Flow of Money and Role of the Financial Manager

The flow of funds to businesses begins with the source of

funds, the saver or lender, who has the money, saves, or deposits
with the bank of any financial institution. The financial institutions or
banks look for outlets to increase the money. The businessman need
money for his/her projects, so he/she borrow money from the
depositor. The borrower pays interest. The goal of finance is to
maximize profit, so it is expected that the finance manager will invest
the money into new projects or use this wisely. He/She can use the
money to pay the company’s loan, use for the operation of the
business or put it in investments.
 What is a worthwhile business?
A worthwhile business is a business that achieves the
objective of financial soundness, sustainability,
competitiveness, and nation-building. The financial
manager's role is to ensure that the entire cash flow
happens and is completed up to interest payments on the
borrowed loan after money is invested in a worthwhile
business,
Activity 2
Activity 2
B. Directions: Answer the following
questions in two (2) to three (3) sentences.
Write your answers in a yellow paper.
1. If you want to start a small business,
what will you do to have a capital?
2. If you are going to save money, where
will you keep it? Why?