cooperatives and specializes in short-
Financial System- plays the key role in the
economy by stimulating economic growth,
influencing economic performance of the
actors, affecting economic welfare. It is a set
of institutions that permit the exchange of
funds.
FINANCIAL MARKET – facilitate
the flow of funds in order to finance
investments by corporations,
governments and individuals.
FINANCIAL INTERMEDIARIES
OR INSTITUTIONS – are the key
players in the financial markets as
they perform the function of
intermediation and thus determine
the flow of funds.
FINANCIAL REGULATORS –
perform the role of monitoring and
regulating the participants in the
financial system.
-regulates the financial services
industry including markets,
exchanges and firms.
FINANCIAL INSTITUTIONS- is a
company engaged in the business of dealing
with financial and monetary transactions.
DEPOSITORY INSTITUTIONS
BANKS - are institutions that collect
savings of individuals as well as
businesses and then lend those
pooled savings to other individuals
and businesses. They earn money by
charging a rate of interest to
borrowers that exceeds the rate they
pay to savers.
CREDIT UNIONS - are the opposite
of banks, they are not-for-profit
term loans.
SAVINGS AND LOANS
ASSOCIATIONS – are like banks,
but specializes more on residential
mortgages.
NON-DEPOSITORY INSTITUTIONS
INSURANCE COMPANIES –
contractual savings institutions
which collect periodic premium from
insurers and in return agree to
compensate against the risk of loss of
life and or properties.
PENSION / PROVIDENT FUNDS -
are institutions which accepts
savings to provide pension and other
kinds of retirement benefits to the
employees of government units or
corporations .
FINANCE COMPANIES – are
financial institutions that engage in
satisfying individual credit needs,
and perform merchant banking
functions.
MUTUAL FUNDS – are open-end
investment companies. They are
associations or trusts of public
members and invest in financial
instruments or assets of the business
sector or corporate sector for the
mutual benefit of its members.
BROKERAGE FIRMS – assists
individuals or institutions in buying
and selling securities among
available investments
BANKS- are assets that can be traded, or
they can also be seen as packages of capital
that may be traded. Most types of financial
instruments provide efficient flow and
transfer of capital all throughout the world's
investors. These assets can be cash, a
contractual right to deliver or receive cash or
another type of financial instrument, or
evidence of one's ownership of an entity.
CENTRAL BANK - It regulates the
monetary and credit system of the
country. Central Bank acts as
controller, supervisor, and regulator
of the activities of commercial banks
and other financial institutions in the
country. The Central bank is
considered as the apex institution of
the country’s money market.
UNIVERSAL AND
COMMERCIAL BANKS –
represent the largest single group,
resource-wise, of financial
institutions in the country. They offer
the widest variety of banking
services among financial institutions.
In addition to the function of an
ordinary commercial bank, universal
banks are also authorized to engage
in underwriting and other functions
of investment houses, and to invest
in equities of non-allied
undertakings.
THIFT BANK – composed of
savings and mortgage banks, private
development banks, stock savings
and loan associations and
microfinance thrift banks. Thrift
banks are engaged in accumulating
savings of depositors and investing
them. They also provide short-term
working capital and medium- and
long-term financing to businesses
engaged in agriculture, services,
industry and housing, and diversified
financial and allied services, and to
their chosen markets and
constituencies, especially small- and
medium- enterprises and individuals.
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. 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.
FINANCIAL INSTRUMENTS- are assets
that can be traded, or they can also be seen
as packages of capital that may be traded.
Most types of financial instruments provide
efficient flow and transfer of capital all
throughout the world's investors. These
assets can be cash, a contractual right to
deliver or receive cash or another type of
financial instrument, or evidence of one's
ownership of an entity.
CASH INSTRUMENTS – are those
whose value is determined directly
by the markets. They can be
securities, which are readily
transferable and loans and deposits,
where both borrower and lender have
to agree on a transfer.
 DERIVATIVE  CAR LOAN
INSTRUMENTS - are those  CREDIT CARD
which derive their value from  STUDENT LOAN
the value and characteristics  FINANCING OF
of one or more underlying RECEIVABLES, LOANS AND
entities such as an asset, SAVINGS ACCOUNT
index, or interest rate. They
can be exchange-traded MORTGAGE-BACKED SECURITY
derivatives and over-the- (MBS)- is an investment similar to a bond
counter (OTC) derivatives. that is made up of a bundle of home loans
bought from the banks that issued them.
FINANCIAL ASSETS- is a liquid asset that Investors in MBS receive periodic payments
gets its value from a contractual right or similar to bond coupon payments.
ownership claim.
 CAR LOAN
 CASH  CREDIT CARD
 RECEIVABLES  STUDENT LOAN
 SECURITIES  FINANCING OF
 DERIVATIVES RECEIVABLES, LOANS AND
SAVINGS ACCOUNT

SECURITY-Is a negotiable instrument that

represents a financial claim. It can take the
form of ownership or debt agreement.
DEBT SECURITY – a negotiable or
tradable liability or loan.
EQUITY SECURITY – is an
investment in stock issued by
another company. The accounting for
an investment in equity securities is
determined by the amount of control
and influence over operating
decisions of the company purchasing
the stock has over the company
issuing the stock.
DEBT SECURITIES- interest
 GOVERNMENT BOND
 Treasury Bill – matures within a
year or less
 Treasury Note – matures within 2
to 10 years
 Treasury Bond – matures within
10 to 30 years
 CORPORATE BOND
 PREFERENCE SHARES with
mandatory redemption rate
EQUITY SECURITY- dividends

HYBRID SECURITY  SHARES OF STOCK OF

PRIVATE CORPORATIONS
 ORDINARY SHARES
ASSETS-BACKED SECURITIES (ABS)-  PREFERENCE SHARE
is a financial security collateralized by a
pool of assets such as loans, leases, credit
card debt, royalties or receivables.
DETACHABLE COMPONENTS OF
SECURITIES
 STOCK RIGHTS – are
instruments issued by companies to
provide current shareholders with the
opportunity to preserve their fraction
of corporate ownership. A single
right is issued for each share of
stock, and each right can typically
purchase a fraction of a share, so that
multiple rights are required to
purchase a single share.
 SHARE WARRANTS – is a
security that entitles the holder to
buy the underlying stock of the
issuing company at a fixed price
called exercise price until the expiry
date.
DERIVATIVES- is a financial security with
a value that is reliant upon or derived from,
an underlying asset or group of assets—a
benchmark. The derivative itself is a
contract between two or more parties, and
the derivative derives its price from
fluctuations in the underlying asset.
 FORWARD CONTRACTS – is an
agreement between two parties to
exchange specified amount of a
commodity, security, or foreign
currency at a specified date in the
future at a pre-agreed price.
 FUTURES CONTRACTS – is a
contract traded on an exchange that
allows an entity to buy or sell a
specified quantity of commodity or a
financial security at a specified price
on a specified future date.
 OPTION CONTRACTS – is a
contract giving the holder the right,
but not the obligation, to buy or sell
an asset at a specified price any time
during specified period in the future.
When the holder exercises his right,
the writer of the option is obligated
to perform his obligation on the
option contract.
 SWAP CONTRACTS – is a
contract in which two parties agree
to exchange payments in the future
based on the movement of some
agreed-upon price or rate.
 INTEREST RATE SWAP
– is a contract between two
parties who agree to
exchange future interest
payments on a given loan
amount. Usually, one set of
interest payments in based on
a fixed interest rate and the
other is based on a variable
interest.
 FOREIGN CURRENCY
SWAP – is contract between
two parties who agree to
exchange sum of money in
one currency for another
currency
OPTION CONTRACTS
CALL OPTION- option to buy
PUT OPTION- option to sell
FINANCIAL MARKET-LEVEL
 PRIMARY MARKET – is
contract between two parties who
agree to exchange sum of money in
one currency for another currency.
  SECONDARY MARKET – is a
financial market in which securities
that have been previously issued can
be resold.
FINANCIAL MARKET- CHANNEL
 EXCHANGES – where buyers
and sellers of securities (or their
agents or brokers) meet in one
central location to conduct trades.
 OVER-THE-COUNTER (OTC)
MARKET – dealers at different
locations who have an inventory of
securities stand ready to buy and sell
securities “over the counter” to
anyone who comes to them and is
willing to accept their prices.
FINANCIAL MARKET- TERM
 MONEY MARKET – is a
financial market in which only short-
term debt instruments (generally
those with original maturity of less
than one year) are traded.
 CAPITAL MARKET – is the
market in which longer-term debt
(generally with original maturity of
one year or greater) and equity
instruments are traded.
FINANCIAL MARKET- PLAYERS
 BORROWERS or SPENDERS
(INDIVIDUALS OR BUSINESS)
 LENDERS or SAVERS
 FINANCIAL INTERMEDIARIES
ECONOMIC FUNCTION OF FINANCIAL
MARKET
1. PRICE DISCOVERY – Financial
markets provide vehicles by which
prices are set both for newly issued
financial assets and for the existing
stock of financial assets.
2. LIQUIDITY - Financial markets
provide the holders of financial
assets with a chance to resell or
liquidate these assets.
3. REDUCTION OF
TRANSACTION COST
4. MOBILIZATION OF FUNDS –
Financial markets permit the transfer
of funds (purchasing power) from
one agent to another for either
investment or consumption purposes.
5. RISK SHARING – Financial
markets allow a transfer of risk from
those who undertake investments to
those who provide funds for those
investments.
INTEREST - is payment from a borrower or
deposit-taking financial institution to a
lender or depositor of an amount above
repayment of the principal sum (that is, the
amount borrowed), at a particular rate. It is
distinct from a fee which the borrower may
pay the lender or some third party.
SIMPLE INTEREST- i=PRT
COMPOUND INTEREST- Is the
addition of interest to the principal
sum of a loan or deposit, or in other
words, interest on interest. is
determined by multiplying the daily
interest rate by the principal by the
number of days that elapse between
payments.
• the result of reinvesting interest,
rather than paying it out, so that
interest in the next period is then
earned on the principal sum plus
previously accumulated interest.
A= P(1+i)^n
NOMINAL INTEREST- refers to
the interest rate before taking
inflation into account.
• refer to the advertised or stated
interest rate on a loan, without taking
into account any fees or
compounding of interest.
EFFECTIVE INTEREST- is the
interest rate that is actually earned or
paid on an investment, loan or other
financial product due to the result of
compounding over a given time
period.
FISHER EFFECT- s an economic
theory created by economist Irving
Fisher that describes the relationship
between inflation and both real and
nominal interest rates. The Fisher
Effect states that the real interest rate
equals the nominal interest rate
minus the expected inflation rate.
Therefore, real interest rates fall as
inflation increases, unless nominal
rates increase at the same rate as
inflation.
• REAL INTEREST – is the
rate of interest an investor,
saver or lender receives (or
expects to receive) after
allowing for inflation.
• INFLATION RATE – is a
sustained increase in the
general price level of goods
and services in an economy
over a period of time
TERMS OF PAYMENT
• LUMP SUM
• INSTALLMENT
• Monthly
• Quarterly
• Semi-Annually
• Annually
TIME VALUE OF MONEY- is the concept
that money available at the present time is
worth more than the identical sum in the
future due to its potential earning capacity.
This core principle of finance holds that,
provided money can earn interest, any
amount of money is worth more the sooner
it is received.
• PRESENT VALUE – is the current
value of a future sum of money or
stream of cash flows given a
specified rate of return
• FUTURE VALUE – is the value of
an asset at a specific date. It
measures the nominal future sum of
money that a given sum of money is
"worth" at a specified time in the
future assuming a certain interest
rate, or more generally, rate of
return; it is the present value
multiplied by the accumulation
function.
ANNUITY
• ORDINARY ANNUITY – is a
series of equal payments made at the
end of consecutive periods over a
fixed length of time.
 • ANNUITY DUE – is a
repeating payment that is
made at the beginning of each
period, such as a rent
payment.
INTERNAL RATE RETURN-is a metric
used in capital budgeting to estimate the
profitability of potential investments. The
internal rate of return is a discount rate that
makes the net present value (NPV) of all
cash flows from a particular project equal to
zero.
BALLOON PAYMENT- is a large payment
due at the end of a balloon loan, such as a
mortgage, a commercial loan, or another
type of amortized loan. A balloon loan is
typically for a relatively short term, and only
a portion of the loan's principal balance is
amortized over that period. The remaining
balance is due as a final payment at the end
of the term.
MEASUREMENT OF RISKS
INVESTMENT RISK- the probability or
likelihood of occurrence of losses relative to
the expected return on any particular
investment.
Market Risk- the risk of
investments declining in value
because of economic developments
or other events that affect the entire
market.
Equity Risk – is the risk of
loss because of a drop in the
market price of shares.
Interest Rate Risk – is the
risk of losing money because
of a change in the interest
rate.
Currency Risk – is the risk
of losing money because of a
movement in the exchange
rate.
Liquidity Risk- The risk of being
unable to sell your investment at a
fair price and get your money out
when you want to. To sell the
investment, you may need to accept a
lower price. In some cases, such as
exempt market investments, it may
not be possible to sell the investment
at all.
Credit Risk- The risk that the
government entity or company that
issued the bond will run into
financial difficulties and won’t be
able to pay the interest or repay the
principal at maturity. Credit risk
applies to debt investments such as
bonds.
Inflation Risk-The risk of a loss in
your purchasing power because the
value of your investments does not
keep up with inflation.
 VOLATILITY/STANDARD
DEVIATION-is statistic that
measures the dispersion of a dataset
relative to its mean. In finance, it is a
statistical measurement that when
applied to the annual rate of return of
an investment, it sheds light on the
volatility of the investment.
 THE GREATER THE
STANDARD DEVIATION,
THE GREATERTHE
VARIANCE BETWEEN
EACH PRICE AND THE
MEAN, WHICH SHOWS A
LARGER PRICE RANGE.
 DOWNSIDE VOLATILITY
 MAX DRAWDOWN
 DRAWDOWN SUM
  SHARPE RATIO
EXPECTED RETURN- is the profit or loss
an investor anticipates on an investment that
has known or expected rates of return.
Expected Return E(R) = Sum of (Probability
x Rate of Return if the state occurs)
RISK PREMIUM
• Risk premium is the return in
excess of the risk-free rate of a return
an investment is expected to yield.
• Risk-free rate is the rate of return of
a hypothetical investment with no
risk of financial loss, over a given
period of time.
Risk premium = Expected return –
Risk free rate
STANDARD DEVIATION  is a risk
statistic measuring volatility. It is a variation
of standard deviation that focuses only upon
the “bad” volatility.
SHARPE RATIO-was developed by Nobel
laureate William F. Sharpe and is used to
help investors understand the return of an
investment compared to its risk. The ratio is
the average return earned in excess of the
risk-free rate per unit of volatility or total
risk.
SORTINO RATIO  is a variation of the
Sharpe ratio that differentiates harmful
volatility from total overall volatility by
using the asset's standard deviation of
negative portfolio returns, called downside
deviation, instead of the total standard
deviation of portfolio returns.
FINANCIAL ASSETS is a liquid asset that
gets its value from a contractual right or
ownership claim.
 Cash and Cash Equivalents
 Receivables
 Derivatives
 Investment in Securities
EQUITY SECURITIES is an investment in
stock issued by another company.
Investment is made:
 As temporary replacements of
excess case and held primarily for
sale in the near term to generate
income on short-term price
fluctuations.
 To obtain long-term customer or
supplier or creditor relationship to
secure certain operating or financing
arrangements with these companies.
 To exercise significant influence
or even control over the operating
policies over another entity.
TYPES OF SHARES
Ordinary Shares – represent the basic
voting shares of a corporation.
Holders of ordinary shares are
typically entitled to one vote per
share and only receive dividends at
the discretion of the company’s
management.
Preference Shares - are shares of a
company’s stock with dividends that
are paid out to shareholders before
common stock dividends are issued.
If the company enters bankruptcy,
preferred stock holders are entitled to
be paid from company assets before
common stockholders. Most
preference shares have a fixed
dividend, while common stocks
generally do not. Preferred stock
 shareholders also typically do not
hold any voting rights, but common
shareholders usually do.
ACCOUNTING FOR EQUITY
SECURITIES
 Equity investments at Fair Value
through Profit or Loss (FVPL)
 Equity investments at Fair Value
through Other Comprehensive
Income (OCI)
 Investment in Associate
 Investment in Subsidiary
CLASSIFICATION OF INVESTMENT IN
EQUITY SECURITUES
 More than 50% - 100%
 Control
 Investment in Subsidiary
20% to 50%
 Significant Influence
 Investment in Associate
 Less than 20%
 Trading Securities or Available for
Sale
 Investment at Fair Value
 Through Profit or Loss
(P/L)
 Through Other
Comprehensive Income
(OCI)
FINANCIAL ASSETS AT FVPL
 At initial recognition
 At Fair Value
 Transaction Costs are
Expensed outright
 At subsequent measurement
 At Fair Value
 Changes in Fair Value are
recognized at Profit or Loss
DIVIDENDS- is the distribution of reward
from a portion of the company's earnings
and is paid to a class of its shareholders.
Dividends are decided and managed by the
company's board of directors, though they
must be approved by the shareholders
through their voting rights.
 Cash
 Property Dividends
 Script Dividends
 Liquidating Dividends
DATE PERTINENT FOR DIVIDENDS
 Date of declaration – the date
when the Board of Directors of
corporation declares the distribution
of dividends
 Date of record – the date when the
corporation will draw a list naming
the shareholders who are entitled to
dividends
 Date of payment – the date when
the corporation distributes the
dividends
SHARE SPLIT- Is a reduction in the par or
stated value of share capital accompanied by
a proportionate increase in the number of
shares outstanding. A share split does not
affect the shareholders’ equity of the issuing
corporation.
SHARE RIGHTS- Is a reduction in the par
or stated value of share capital accompanied
by a proportionate increase in the number of
shares outstanding. A share split does not
affect the shareholders’ equity of the issuing
corporation.
INVESTMENT IN ASSOCIATES-
Associate – an entity in which an investor
has significant influence but not control or
joint control.
SIGNIFICANT INFLUENCE
According to accounting standards a
holding of 20% or more of the voting
 power (directly or through
subsidiaries) will indicate significant
influence unless it can be clearly
demonstrated otherwise. If the
holding is less than 20%, the investor
will be presumed not to have
significant influence unless such
influence can be clearly
demonstrated.
 representation on the board
of directors or equivalent
governing body of the
investee
 participation in the policy-
making process
 material transactions
between the investor and the
investee
 interchange of managerial
personnel
 provision of essential
technical information
ACCOUNTING FOR INVESTMENT IN
ASSOCIATE
 EQUITY METHOD
At Initial Recognition
 Investment is recognized at
purchase price plus
transaction costs
 At Subsequent Measurement
 Carrying amount of the
investment is increased or
decreased to the recognize
the investor’s share of the
profit or loss of the investee.
 Distributions received or
receivable from an investee
reduce the carrying amount
of the investment.
INVESTMENT IN DEBT SECURITIES
BONDS a formal unconditional promise,
made under seal, to pay a specified sum of
money at a determinable future date, and to
make periodic interest payment at a stated
rate until the principal sum is paid.
BOND INDENTURE a document that
contains the certificate and contractual
agreement between the issuer and investor
of bond.
• Characteristics of the bonds
• Maturity date and provision for
repayment
• Establishment of a sinking fund and
the periodic deposit therein
• Deposit to cover interest payments
• Provisions affecting mortgaged
property, such as taxes, insurance
coverage, collection of interest or
dividends as collaterals
• Access to corporate books and
records of trustee
• Certification of bonds by trustee
• Required debt to equity ratio
• Minimum working capital to be
maintained, if any
TYPES OF BONDS
• According to Maturity
a. Term Bonds –
bonds with a single
date of maturity.
b. Serial Bonds –
bonds with a series of
maturity dates instead
of a single one.
• According to Security a.
Secured Bonds – bonds are
secured by collaterals.
• Mortgage Bonds –
secured by a mortgage
on real properties
 • Collateral Bonds –
secured by stocks and
bonds of other
corporation b.
Unsecured Bonds
• According to Registration
a. Registered Bonds –
requires registration
of the name of the
bondholders on the
book of corporation.
b. Unregistered Bonds
– are unregistered
bonds in the sense
that the name of the
bondholder is not
registered in the entity
books .