Business Finance: Basic Concept
people.
Finance
 The science and art of managing money
 Why science?
 Rooted from statistics and
mathematics
 Scientific method
 How to predict financial
consequences-calculation
 Why an art?
 Influenced by human behavior
 Relationships and politics
 Knowing when to act
Branches of Finance
 Public Finance
 Deals with the government’s action
in relation to the general welfare of
the general public or citizenry
 Concerned with public revenue and
expenses, debt, fiscal policy
 Private Finance
 Personal Finance
 Corporate Finance
 Social Finance
 Personal Finance
 Optimization of finance
in an individual or
household level
 Subject to individual
budgetary constraints
 Corporate/Business Finance
 Maximization of wealth
in accordance with
corporate goals standards
 Subject to budgetary
constraints, regulation,
industry standards
 Social Finance
 Emerging concept-
management of finance
by charitable institutions
 Need to a strike a balance
between keeping the
charity running and
serving the class of
Budgeting
 Act of estimating revenue and expenses over
a period of time
Investment
 An asset or item that is purchased with the
hope or expectation of generation of wealth
or income in the future
 Management of excess funds (savings) in
order to receive something in return.
 Modern concept:
 Anything bought with one’s personal
funds can be an investment as long
as it serves its intended purpose for
the expected or perceived period of
use or service.
Sources of Funds
 Either short-terms or long term
 Generally important when facing financial
difficulties, but also relevant for start-ups
Personal vs Business Finance
 Personal Finance – concerned with:
 How to spend earnings
 How much to save
 How to invest the savings
 Business Finance – concerned with:
 How to raise money from investors
 How to invest money in order to earn
profits
 Financial decisions on whether to
reinvest or distribute to investors,
and how to accomplish these
Career Opportunities
 Financial Services
 Concerned with the design and
delivery of advice and financial
products to individuals, businesses
and governments
 Direct contact with customers/
investors
  Includes: bankers, finance coaches,
investments, real estate,
insurance,traders.
 Managerial Finance – Financial Manager
 Administer the financial affairs of
businesses
 Tasks include: developing financial
plans, approving and extending
credit, evaluating proposals, projects
to raise money to fund the business
Career Opportunities – Professionals
 Chartered Financial Analyst
 Graduate-level course offered by the
CFA institute focused primarily on
the investment side of finance
 Certified Treasury Professional
 Single exam focused on knowledge
and skills needed to work in a
corporate treasury
 Certified Financial Planner
 Ten-hour exam covering a wide
range of topics related to personal
financial planning
 American Academy of Financial
Management
 Accountancy Tracks:
 Certified Public Accountant
 Certified Management Accountant
 Certified Internal Auditor
Forms of Business Organization
 Sole Proprietorship
 Owned by one person to generate
profit for his own
 Wide discretion from the proprietor,
but has to be a jack-of-all trades
 Flexible, ease of secrecy, low
organizational costs, but unlimited
liability concentrated on the sole
owner
 Monitored by the Department of
Trade and Industry (DTI)
 Common Examples:
 Sari-sari stores
 Carenderia
 Online Shops
 Partnership
 A contract where two or more
persons bind themselves to
contribute money, property or
industry to a common fund with the
intention of dividing the profits to
themselves, in pursuit of the business
or exercise of a profession
 No man is an island – can raise more
funds
 Unlimited liability and may be a
source of quarrel amongst family and
friends
 Common examples:
 Law firms
 Accounting firms
 Corporation
 An artificial being created by
operation of law, having the right of
succession and the powers,
attributes and properties expressly
authorized by law or incident to its
existence
 Long corporate life and large
organizational structure
 Subject to higher taxes, stricter
government regulation, public
scrutiny
 Current state: slightly volatile due to
difference in work approach due to
generation gap, but negated by
stability
 Common examples:
 Jollibee foods, Incorporated
 San Miguel
Wealth Maximization
 Making sound financial decisions in order to
increase the current value of a business or
share, with the objective of bringing in the
highest possible return
 Kung asa ta magkaginansiya ug mayo
 Decision rule: to make decisions only when
it is most profitable, increase the shareholder
price or where the most returns are expected
 Key factors: Timing Cash Flow, Risk
  “Those who are willing to let go at
everything are those capable of bringing
change.”
Factors affecting financial decisions
 Controllable Factors:
 Profitability
 Liquidity and Leverage
 Dividends
 Competent management – efficiency
 Corporate Planning
 Uncontrollable Factors
 Economics conditions
 Political stability
 Industry standards
 General market sentiments/public
opinion
 World market
Controllable – Profitability
 a measure of the financial performance of a
company for a period of time
Controllable – Liquidity and Leverage
 ability to meet current and short-terms
obligations
 Management of the type and amount of the
assets that it will acquire and hold in the
course of its operations, and the liabilities it
is willing to incur in order to maintain these
assets and the company as a whole
Controllable – Dividends
 Return on investments to shareholders in the
form of cash or other properties
 Not a peso-for-peso return – depends in the
performance of the company and essentially
a management prerogative
 Many companies do not shell out dividends,
and if any, only minimal
Controllable – Competent Management and
Corporate Planning
 Controlling corporate finances begin
internally and begins with management
 Examples:
 Siomai sa Tisa
 Bisag unsa na sila kaparehas
pero kung ang usa ka
siomaian is really good not
only in planning for its future
but also in handling its
current situation, especially
against its competition,
morise to the occasion to the
exception of others jud ang
usa.
Financial Management
 How to ensure that company objectives will
be met vis-à-vis wealth maximization
considering these internal and external
factors?
 Deals with decisions that are supposed to
maximize the value of shareholders’ wealth
 Decisions which ultimately affect the
market’s perception of the company and
influence the share price.
Business Finance: Business Finance and
Organizational Structure
Business Finance
 An area of finance that focuses on the
handling and management of financial
resources of a business organization
 Three major divisions”
 Financial Management
 Capital Market
 Financial Investment
Financial Management
 Focuses on capital budgeting decisions or
investment decision on the acquisition of
assets and its corresponding financing
schemes
 Answers:
 What kind of asset shall be acquired?
 What type of financing scheme shall
be used in the acquisition of the
asset?
Financial Management and Economics
  Financial managers must understand the  Financial Perspective: P300,000 net loss
economic framework and be alert to the  Finance deals with actual finances, both
consequences of varying levels of economic existing and future cash flows.
activity and changes in economic policy
Accounting Finance
 They must also be able to use economic
Accrual Method Cash Flows
theories as guidelines for efficient business
Focuses on collection Focuses on evaluating
operations
and presentation of data and making
 Marginal cost-benefit analysis: financial data. decisions based on
 Financial decisions should only be their assessment of the
made and actions taken only when risks and returns
the added (marginal) benefits exceed
the added (marginal) costs
Financial Management, in sum
 Using the same set of facts, but this time,
Mr. Mbappe is contemplating replacing all  Deals with acquisition of assets and how to
his taxis with new ones. acquire these assets, bearing in mind wealth
 Benefits with new taxis – P1,000,000 maximization
Less: Benefits with old taxis (P300, 000)  Financial Management has a symbiotic
Marginal benefits: P700, 000 relationship with Economics and
 Cost of new taxis – P800,000 Accounting:
Less: Sale of old taxis (P200,000)  One cannot exist without the other,
Marginal cost: P600,000 interdependent
 Finance need economics and
Net Benefit(Cost): P700,000 – P600,000 = accounting concept in order to be
P100,000 useful
Financial Management and Accounting Capital Market
 Closely-related generally overlap  Studies the different financial institutions
 In general, most accounting functions and their functions that provide assistance to
involve financial functions, sans making both private and public borrowers of funds
financial decisions  Includes cost of borrowing funds such as
 Small firms: Accountants carry out the interest and other financing charges
financial functions
Financial Investment
 Large firms: Financial analysts help compile
and organize accounting information  Business decisions about the value and
 Difference? prices of stock bonds, portfolio analysis,
 Finance focuses on cash flows market analysis, security analysis, and
 Accounting focuses on accrual behavior of investors.
method
 Examples:
 In Mr. Mbappe’s real estate business, sales
and cost reports show:
 Sales P1,000,000 (2 condominium
lots sold, 100% uncollected) Business Finance, divisions
 Cost P300,000 (Labor, Marketing,
Office Supplies, all paid) Financial Capital Financial
Management Market Investment
 Accounting Perspective P700,000 net
Focuses on Focuses on Focuses on
income
spending borrowing investing
 Focus on both Focuses on Focus on
asset and liabilities assets
liabilities
(greater on
liabilities)
Business Finance: Finance in a Business
Organization
Basic Organizational Structure
 Each organization has their own structure
depending on the nature and type of
business organization they have, and
management philosophies
 No specific or rigid rule governs the
structuring of finance in the organization,
but every organization has at least these four
functional divisions:
 Marketing
 Finance
 Production/Operations
 Administration/Human Resources
Organizational Roles, in general
 Each line is working for the interest of the
person on the line above them
 Hence, the managers are making decisions
for the interest of the Board of Directors and
the latter does the same for the interest of
shareholders
 Each person in a corporate organization (at
least theoretically) should have an objective
of shareholder’s maximization of wealth.
Stakeholders
 Groups such as employees, customers,
suppliers, owners and others who have a
direct economic link to the firm
 A firm with a stakeholder focus consciously
avoid actions that would prove detrimental
to stakeholders. The goal is not to
 See: Corporate Social Responsibility (CSR)
Shareholders
 Shareholders elect the Board of Directors
(BOD)
 Generally, one share = one voting right
 Objective of shareholders:
 Wealth maximization
 How to attain his objective? Elect competent
members of the BOD
Board of Directors
 Highest policy making body in a corporation
 Primary responsibility:
 to ensure that the corporation is
operating to serve the best interest of
the stockholders, and ultimately the
best interest of the stakeholders
 Other responsibilities:
 Setting policies on investment,
capital structure and dividends
 Approving company strategies, goals
and budget
 Appointing and removing top
management
 Determining compensation of top
management
 Approving financial statements
President (Chief Executive Officer)
 Role varies from one company to another
 Responsibilities:
 Overseeing the operations of a
company
 Ensure the implementation of
approved strategies
 Performing all areas of management
 Represent the company in all matters
and activities
VP for Marketing
 Formulate marketing strategies and plans
 Direct and coordinate sales
 Perform market and competitor’s analysis
  Analyzing and evaluating the effectiveness
and cost of marketing methods
 Identifying new marketing opportunities
 Promoting good relationship with customers
and distributors
VP of Operating
 Ensuring production meets customer
demands
 Identifying technology that minimizes
production costs
 Making production plans
 Identifying cheap but adequate raw material
suppliers
VP for Administration (Human Resources)
 Coordinating the functions of all
departments
 Four-fold powers, to assist,in the:
 Selection and engagement of
employees (hiring)
 Payment of wages and salaries
 Dismissing/firing employees
 Monitoring and controlling the
means and methods by which the
work is to be accomplished
 May have general purpose functions –
assisting the department in their clerical
functions
VP for Finance/ Chief Finance Officer
 Primarily responsible for managing the
finances in the organization and making
operation, investing and financial decisions
 Usually oversees the Accounting
Department and Treasury Department
 Decision-making functions:
 Operating Decisions
 Investment Decision
 Financing Decision
 Dividend Policies
Operating Decisions
 Decisions affecting the routine operating
activities of a business
 The CFO determines the proper working
capital accounts and amounts (accounts
receivable; inventories)
 The CFO has to consider financing working
capital need to either from short-term
sources or long-term sources
 Short-term: payable at most 12
months; possibility of liquidity risk
 Long-term: payable for more than 12
months; gives the organization more
time to pay its obligations
 Examples:
 Ordinary business activities:
 Purchases
 Selling costs
 Operating expenses
such as selling,
marketing and general
administrative
expenses
 Banks:
 Cost of making
budgets
 Monitoring credits
and past due accounts
 Avoidance of
penalties and
surchrages
Investment Decisions
 Choosing small and large projects with
several investment opportunities
 Where to put excess cash to make it more
profitable
 Usually involves large amounts of money =
Risk of adverse effects, or even its downfall,
on the entire business operations in case of
an erroneous investment decision
 Kinds:
 Short-term – needs simpler
budgeting and forecasting
 Long-terms – requires capital
budgeting analysis
Financial Decision
 From a business standpoint, it is the making
of decisions on how to fund investments and
capital
  Deals with raising or acquiring funds from the changes means to be aware of the
outside sources and not from the ordinary business environment.”
results of the business operation
 Usually made when the organization needs Why study the business environement?
to borrow money  To identify change and use it as a tool for
 His role is to determine the appropriate improvement
capital structure of the company
 To manage resources properly and tap future
 Capital structure – balancing how much of
resources
the total assets is financed by debt and
equity (debt financing; equity financing)  To cope with change and open new
opportunities
 To plan for the future and improve
Dividend Policies performance
 Determine when the company should  To manage risk
declare cash dividends Business Environment
 Ultimate goal is to balance the capacity of
the business to maintain its operations and  Divided into:
the expectation of shareholders to receive  International
returns from their investments  National
 Two requirements  Regional
 Retained earnings  Local
 Cash  Composed of different layer:
 Considerations:  Political System
 Availability of financially viable  Financial System
long-term investments  Economic System
 Access to long-term sources of funds  Socio-Cultural System
 Management’s target capital
 Technological System
structure
 Legal System
 Common policies:
 Small companies: Residual dividend Financial System
policy – invest first before declaring
dividends  A system is composed of several parts with
 Large companies: Varied; Balance interrelated functions
between expansion and declaring  Basic meaning:
dividends  Principally responsible for the flow
of money or funds from the lender to
the borrower
Business Finance: Financial Institution,
Instruments and Markets  Expounded meaning:
 Controls, regulates, and facilitates
Business Environment the saving, borrowing, lending and
investing activities happening among
 The sum total of all internal and external
the different players in the system
forces which affects the overall performance
 Regulated by the
and sustainability of the business
BangkoSentralngPilipinas(BSP)
 To take into consideration the changing
needs of the world in order to survive in the
market
 “To survive in the market means to adapt to
the changes as much as possible. To adapt to
Implication
 On one side, people and organizations are
saving in order to accumulate funds for
some future use
 Those with surplus funds expect to earn a
return on their investment
 On the other, people, organizations and the
government are looking for sources of funds
 Those in need of funds understand that they
.
must pay interest to the providers of capital
 Financial institution are categorized whether
Basic Elements of Financial System
they accept deposits:
 Financial Institutions  Depository Institutions
 Financial Markets  Non-Depository Institutions
 Financial Instruments 1. Financial Intermediaries
 Lenders and Borrowers 2. Investment Institution

Business Finance: Financial Institutions Business Finance: Depositary Financial

Institutions
Financial Institutions
Depository Institution
 Intermediaries that channel the savings of
individuals, businesses and governments  FIs that accept deposits from individuals and
into loans or investments (Gitman) corporate entities, extend loans to
 Institutions through which suppliers channel borrowers, transfer funds and manage funds
money to users of funds (Mcgraw-Hill) for investment purposes
 Implication of two meanings?  Includes:
 Financial institutions are  Banks
intermediaries  Saving and loans associations
 These are suppliers and demanders  Trust companies
of money  Credit Unions
 The key suppliers and demanders of Banks
money are the individuals,
businesses and governments  Depository FIs that are authorized to operate
and regulated by the BSP (formerly Central
Bank) under the General Banking Law of
2000
 Three major functions:
  Financial intermediation – brings regular banking service of accepting
together the sources and suppliers of deposits
funds  Ranked next to universal banks; more
 Monetary supply - affects the limited banking services compared to
circulation of money universal banks
 Payment system  24 commercial banks as of January 29,
 Nature? Fiduciary/impressed with public 2019, as per BSP website directory
interest  Examples:
 J.P. Morgan
Banks, classification
 Bank of Commerce
 Under BSP Circular No. 271, the major  Philippine Veterans Bank
classification of banks in the Philippines are:
Universal and Commercial Bank
1. Universal Bank
2. Commercial Bank  Universal and commercial banks represent
3. Thrift Bank the largest single group, resource-wise, of
4. Rural Bank financial institutions in the country. They
5. Cooperative Bank offer the widest variety of banking services
6. Islamic Bank among financial institutions
Universal Bank  In addition to the function of an ordinary
commercial bank, universal banks are also
 Biggest type of bank in terms of assets, authorized to engage in underwriting and
activities, branches and services offered other functions of investment houses, and to
 As of Jan. 28, 2019, there are 21 Universal invest in equities of non-allied undertaking
Banks in the Philippines, per BSP website
Thrift Bank
directory
 Examples:  Introduced by RA 7906 or the Thrift Banks
 Land Bank Act
 BPI  ”include savings and mortgage banks,
 BDO private development banks, and stock
 Standard Chartered savings, loan associations, and microfinance
 Deutsche Bank thrift banks that are organized under existing
 Performs more functions than the ordinary laws”
bank, both nationwide and abroad  54 thrift banks as of Jan. 29, 2019
 What makes a universal bank distinct from  Purposes:
other banks? 1. Accumulating and investing the savings
 It can perform the functions of an of depositors
investment house 2. Providing capital for businesses engaged
 Investment house – works primarily in agriculture, service and housing
for corporations and the government 3. Financial services to individuals and
to help them raise money through SMEs
debt and stocks; advise on mergers  What makes a thrift bank unique
and acquisition 1. It is more community-focused - focused
Commercial Bank on providing service to their customers
 Abroad: thrift banks are legally
 Provides commercial loans and offers required to commit 60-65% of their
investment products in addition to the loans to consumers rather than
businesses
  PH: focused on the agriculture
industry and SMEs
2. Ability to draw less expensive capital –
higher interest return rates on savings
accounts; can be attractive
Rural and Cooperative Banks
 Rural and cooperative banks are the more
popular type of banks in the rural
communities. Their role is to promote and
expand the rural economy in an orderly and
effective manner by providing the people
in the rural communities with basic
financial services.
 Rural and cooperative banks help farmers
through the stages of production, from
buying seedlings to marketing of their
produce.
 Implication:
1. Focused on expanding rural
communities
2. Primary targets are farmers
 Rural banks and cooperative banks are
differentiated from each other by ownership.
While rural banks are privately owned and
managed, cooperative banks are
organized/owned by cooperatives or
federation of cooperatives.
 >300 rural and cooperative banks as of Jan.
29, 2019
Islamic Bank
 Aims to promote and accelerate the socio-
economic development of the ARMM by
performing banking, financing and
investment operations and to establish and
participate in agricultural, commercial, and
industrial ventures based on the Islamic
concept of banking
Savings and Loan Association
 Sometimes referred to as a financing and
mortgage loan company
 Engaged in the business of accumulating the
savings of its members and stockholders,
and using such accumulations for loans or
investments in securities of productive
enterprises
 Unique feature?
 Its depositors are only its member-
borrowers
 Examples:
 Shell
 Supreme Court
 AFP
Trust Companies
 Acts as a fiduciary agent or trustee on behalf
of an individual person or corporate entity
for the purpose of management,
administration, and final transfer of property
to the beneficiary
 IOW: acts as custodian of the property for
and on behalf of the beneficiary for a fee
 Trustor-trustee relationship: fiduciary =
based on trust and confidence
 May also act as administrator of the
properties of a deceased person for the
distribution of the net estate
Credit Unions
 Mainly created and operated by its
members for its members
 Purposes:
1. Extend credit to members
2. Offer competitive interest rates
3. Promote the concept of thrift among its
members
4. Provide other financial services to its
members
 Implication:
1. Funds are pooled from its members
2. Funds are only made available to its
members in need
Non-Depositary Financial Institutions
Financial Intermediaries
 In a general sense, includes all other
financial institutions, even banks
 In a strict technical sense, refers to those
similar to banks but which do not have
depository and investment functions
1. Mutual Funds
 2. Pensions Funds
3. Insurance Companies
Mutual Funds
 Accumulate money by selling shares of
stocks or bonds of corporations (sometimes
called units) to individuals or investors
 The funds accumulated from several people
are pooled into a single fund, which is
managed by a fund manager or asset
management company, and reinvested into
debt and equity instruments.
 The investors can sell back its unit/s anytime
and receive a value based on the net asset
value of the fund
 Reduced risk through diversification
Pension Funds
 Set up for the purpose of paying the pension
requirements of all private-sector employees
who retire from the business organization
upon reaching their retirement age
 Same concept with mutual funds
 Most common:
1. Social Security System (SSS)
2. Government Service Insurance System
(GSIS)
Insurance Companies
 Pools together proceeds of insurance
policies (insurance premiums) sold to the
public and investing the accumulated funds
in high-yield maturing securities from
investment houses
 Entered into to serve as protection against
the risks inherent to the business or on the
life of the individual
 Common examples:
1. Life
2. Health
3. Car
4. Fire
Investment Institutions
 Engaged in buying securities of other
companies which are listed in the stock
exchange for investment purposes
 Take note: Only buying, no selling – simply
holds on to the securities acquired from
other companies
 Earns income through interest and/or
dividends
Business Finance: Financial Markets
 Market – a place where sellers and buyers
of goods or services meet and agree on an
exchange price
 Structures through which funds flow
 Forums in which suppliers of funds and
demanders of funds can transact business
directly
 Selling-buying transactions happening in the
financial market is called trading activity
 Some organizations prefer to raise money
through a public offering , which is the sale
of either bonds or stocks to the general
public, or a private placement, which is the
sale of bonds or stocks directly to an
investor or group of investors
Types of Financial Markets
 Primary Market
 Secondary Market
 Capital Market
 Money Market
 Primarily distinguished in two dimensions:
1. Primary vs Secondary
2. Money vs Capital
Primary Market
 A financial market where securities are
initially issued by a corporation
 Initially issued = new shares of stock, which
can only be sourced from unissued
authorized shares
 The only market in which the issuer
(corporation) is directly involved in the
transaction with the investors
 Proceeds go to the issuing corporation
 Example:
 Initial public offering, public
offering, private placement
Secondary Market
  Involves preowned securities – those that are
not new issues
 A financial market where financial securities
are traded between or among investors
 The issuing corporation is no longer
involved and the proceeds go to the seller of
the securities
 Example:
 International: NYSE, NASDAQ
 Japan: NIKKEI
 PH: Philippine Stock Exchange
(PSE)
Primary vs Secondary Markets
 My Special Nanay Corporation, which has
cheese tofu for its principal product, has just
been incorporated on January 1, 2019 and
would like to raise capital by issuing new
stocks.
 Transactions:
 MSN Corp. sold Mel Domini 1,000
new ordinary shares
 Mel Domini, later on, learns how to
use the internet and sells 500 shares
of MSN Corp. to Steffi Kay through
the Philippine Stock Exchange.
 MSN Corp. sold Mel Domini 1,000 new
ordinary shares – This is a primary market
transaction and the proceeds go to the MSN
Corp.
 Mel Domini, later on, learns how to use the
internet and sells 500 shares of A & B Corp.
to Steffi Kay through the Philippine Stock
Exchange – this is a secondary market
transaction and the proceeds go to Mel
Domini
Money Market
 A financial market in which funds are
borrowed or loaned for shortperiods
 Transactions are made in trading securities –
can be realized within a period of one year
or less, such as:
 Treasury bills
 Commercial papers
 Short-term stocks and bonds
 Negotiable instruments
 Trading securities are highly liquid or
readily marketable – more available sellers
and buyers
Capital Market
 A financial market where stocks and bonds
for medium and long –term periods are
issued/traded
 Stocks = equity securities; bonds = trading
securities
 No hard and fast rule for the concept of
medium and long-term periods
 Riskier than the money market
Business Finance: Financial Instruments
 The medium with which the financial
institutions and markets exist
 Refer to contracts that give rise to the
formation of financial asset on one hand and
a financial liability or equity instrument on
the other
 Financial Asset – a contractual right to
receive cash or another financial asset from
another entity, under conditions that are
potentially favorable
 Financial Liability – exchanging financial
instruments under conditions that are
potentially unfavorable
  Equity Instrument – any contract that Bonds – Debt Instruments
evidences a residual interest in the assets of
 A long-term debt instrument which
any entity after deducting all liabilities
represents a contractual debt evidenced by a
 Who are the holders of financial assets?
certificate called bond indenture
 Suppliers of funds
 Returns come from interest payments
 Who are the makers of financial liabilities
 General Concept:
and equity instruments?
 An IOU – a promise to pay both
 Users of funds
interest and principal
 When companies are in need of funding,
 Interest is usually semiannual
they sell debt securities or issue equity
 Principal is paid at maturity
instruments
 May be new or preowned
 Investors then buy these, using their excess
 Common types of Bond:
funds or savings, in the hopes of receiving
1. Term
returns through interest, dividend or
2. Serial
appreciation
3. Secured
 Common Examples:
4. Debenture
 Cash
5. Convertible
 Check
6. Callable
 Loan
 Bond
 Stock
1. Term Bond – has a single maturity date;
may cancel or surrender prior to maturity
date
Bond and Stock
2. Serial Bond – has several maturity dates; a
 Corporations typically have two sources of portion of the principal is paid every
funds: bonds and stocks. maturity date and the obligation gradually
 Economic Recession – invest in bonds reduces
 Economic Boom – invest in stocks 3. Secured Bond – supported by a
 Why? Business follows a cycle. collateral/security in the event of default on
the part of the bond issuer; two liabilities
 During recession, companies perform
4. Debenture Bond – not supported by any
poorly. So people save. Companies lose
collateral or security
money and stocks become highly
5. Convertible Bond - can be converted into a
unattractive.
share of stock in a later date through the
 Government then steps in – lower the
exercise of an option; bondholder becomes a
interest rate. People will take the money out
shareholder
of the bank and spend the money.
6. Callable Bond – may be redeemed or call
 Spending = Improved economy =
the bond prior to its maturity date
Corporations grow = People buy stocks. So
 Other Examples:
when govt. lowers interest rate, buy stocks.
1. Treasury Bonds – issued by the
 Eventually, supply will be more than
government; low risk, low interest rate
demand; Inflation rises
2. Corporate Bonds – issued by companies;
 To fight inflation, govt. raises the interest
higher interest rates than treasury bonds
rate and people would save their money.
3. Municipal Bonds – issued by local
Economy is again in recession.
governments
 So when govt. raises interest rates, buy 4. Foreign Bonds – issued by foreign corps.
bonds. or governments
Stocks
 A financial security which signifies
ownership of a corporation evidenced by a
stock certificate
 Must be authorized by the Securities and
Exchange Commission (SEC) before a
corporation can engage in selling stocks
 Has varied returns based on the performance
of the issuing company
 Returns come from either dividends or stock
price appreciation
 Common types of stock:
1. Common Stock/Share
2. Preferred Stock/Share

1. Common Stock – a stock which has the

same rights and privileges in terms of
dividend or asset distribution, but has least
preference in the distribution (preferred
stockholders will be paid first; includes the
right to vote during the election of BODs
and the right to subscribe additional shares
2. Preferred Stock – a stock which is
preferred over common stock and will have
preference during distribution of dividends
or net assets (in case of liquidation); do not
have voting rights