Financial Economics Reviewer
Financial Economics Reviewer
Financial Economics Reviewer
Financial Institution - an organisation that acts as a middle Liquidity - The degree to which an asset or security can be
man between two parties and provide myriad of of financial quickly bought or sold in the market without affecting the
services asset's price. Or easily converted into cash.
Financial Instruments - Financial system functions serve as an Financial Systems Components - The main financial system
intermediary in allowing funds to be transferred from savers components include financial institutions, financial services,
to borrowers. It is financial system functions that enable the financial markets, and financial instruments. It would include
surplus and deficit of funds to be allocated efficiently in aspects such as finances, accounting, revenue, expenses,
the economy. wages, and more. From a regional standpoint, the financial
system, as mentioned above, facilitates the exchange of funds
Middle Man - The one who facilitates a financial transaction. between borrowers and lenders.
• To know the causes of inflation and how it affects our daily
1. Financial Institution lives.
2. Financial Markets • To further know the advantages and disadvantages caused by
3. Financial Services inflation.
4. Financial Instruments • Examine different degrees and types of inflation.
• Explain how inflation is measured using Consumer Price Index
Importance of Financial System - Financial system importance (CPI).
comes from its role in stimulating higher savings and • Analyse the intricate relationship between money and
investment expenditure, leading to higher economic growth. inflation.
They serve as the foundation upon which economic transactions
may occur and upon which monetary policy can be based. Due to What is Money?
financial regulations, economic and financial institutions A medium of exchange that is centralised, generally accepted,
between parties involved in the financial system are safe and recognized, and facilitates transactions of goods and
secure. services.
MONEY - Medium of exchange. Barter System - Is an old method of exchange. This system has
DECOMPOSE - To break up into constituent parts. TRANSACTION - been used for centuries and long before money was invented.
An instance of buying or selling something. INTRINSIC VALUE – People exchanged services and goods for other services and
Something that is made of gold and silver. LEGAL TENDER – goods in return.
Recognized by law as a medium of exchange. Commodity Money - This is when money takes into a form of
DEFERRED – Delayed or until a stated time. commodity that has intrinsic value.
VALUE – Worth of money.
INEVITABLY – Impossible to avoid. Fiat Money - Currency established as money, often by
DISTORT- When prices and production are higher or lower than government regulation, that does not have intrinsic value.
levels that would usually exist in a comparative market.
Characteristics of Money
Objectives
• To be able to know the history, characteristics, types, and 1. Durability - Item retains the same shape, form, and
functions of money. substance over an extended period of time. It does not easily
• To be able to know the difference between commodity money decompose, degrade, or otherwise change form.
and fiat money.
2. Divisibility - Means money can be divided into small checks drawn on deposits held at banks involve the use of bank
increments that can be used in exchange for goods of varying money.
values.
Functions of Money
3. Transportability - Means that money can be easily moved
from one location to another when such movement is needed to As a Unit of Value - measures the value of various goods and
complete exchanges. services which are produced in an economy.
4. Non Counterfeit Ability - Means that money cannot be easily Medium of Exchange - money facilitates transaction of goods
duplicated. A given item cannot function as a medium of and services.
exchange if everyone is able to "print up," or "make up" a
batch of money any time that they want. Standard of Deferred Payment - goods can be acquired now and
paid for at a later date.
5. Limited supply - Means that restriction on the amount of Store of Value - money has the ability to keep wealth in a
money in circulation. Each country's Government has the form so that it can be readily available to spend in the
responsibility to control/maintain an adequate money supply. future.
6. Acceptability - Acceptability means that everyone must be The Demand and Supply of Money
able to use the money for transactions. Money is universally
accepted anywhere in the world as a universal means for Demand of Money - is the desired holding of financial assets
transaction. in the form of money: that is, cash or bank deposits rather
than investments.
Types of Money Supply for Money - is the total amount of money—cash, coins,
and balances in bank accounts —in circulation.
1. Commodity Money - Commodity money is a good whose value
serves as the value of money. Commodity money has been Inflation
replaced with fiat money.
What is Inflation?
2. Fiat Money - Money that a government has declared to be a is a rise in prices, which can be translated as the decline of
legal tender. Its value relies on trust in the government and purchasing power over time. The rate at which purchasing power
its ability to maintain stability. drops can be reflected in the average price increase of a
basket of selected goods and services over some time.
3. Bank Money - Bank money consists of the book credit that
banks extend to their depositors. Transactions made using Causes of Inflation
1. DEMAND PULL INFLATION - When demand for goods increases and
exceeds production capacity.
Types of Interest Rate Consumer Spending - Interest rates have an impact on how much
consumers must borrow. Higher rates may discourage consumer
Simple Interest - is a set rate on the principal originally borrowing and spending, lower rates might promote spending by
lent to the borrower that the borrower has to pay for the making credit more available.
ability to use the money.
Savings - Savings accounts, certificates of deposit, and other
Formula interest-bearing investments have returns that are affected by
interest rates. For savers, higher rates typically mean more
Simple Interest - P x r x t alluring returns.
P - Principal Central Bank Policy - Interest rates are a tool that central
R - Investment Rate banks employ to implement monetary policy. The purpose of rate
T - Time in Years adjustments is to accomplish economic goals like limiting
inflation, fostering job growth, and maintaining the stability
Compound Interest - it essentially means “interest on of the financial system.
interest.” The principal and the compounding interest paid on
that loan. A contractionary policy - is applied when central banks raise
interest rates and reduce the money supply to avoid inflation.
Accrued Interest - is the interest that has been earned but It's a macroeconomic weapon against growing inflation. An
not yet paid. important tool in contractionary monetary policy is an
increase in interest rates. The cost of borrowing goes up when
Effects of Interest rate in Finance the central bank raises its standard interest rate. When
borrowing becomes more expensive, this results in a decrease
Cost of Borrowing - Interest rates have an impact on how much in business and consumer spending. Increasing interest rates
borrowing money costs. Higher rates have an impact on both reduces inflation by limiting the amount of active money
circulating in the economy.
Personal Finance - is the process of planning and managing
Expansionary Monetary Policy - A central bank may use an personal financial activities such as income generation,
expansionary monetary policy to boost economic growth by spending, saving, investing, and protection. The process of
decreasing interest rates, increasing the money supply, and managing one’s personal finances can be summarised in a budget
promoting borrowing and spending. In difficult economic times, or financial plan.
a central bank may implement an expansionist monetary policy
to lower unemployment and boost growth. Components of Personal Finance
Roles of Finance Rate in Finance Corporate Finance - is a field of study that concerns all
financial decisions that companies make on a daily basis. It
Interest is a concept in finance where a borrower pays a cost relates to all decisions that aim at converting capital (e.g.,
for using the lender's money, or an investor receives a return tangible and intangible assets) owned by the company into
for depositing funds. It keeps the economy moving by profit.
encouraging people to borrow, to lend, and to spend.
Types of Corporate Finance
Types of Finance
1. Equity Financing
Public Finance - Deals with the revenue and expenditure of the 2. Debt Financing
government.
Philippine Financial System
Types of Public Finance
Banking- is the business of protecting money for others.
1. Public Revenue Private Banking - caters to wealthier customers who want
2. Public Expenditure personalised service and tailored guidance on how best to
3. Public Debt manage their money.
4. Financial Administration
Government Banking - is a shared government function which source of credit and its funds were invested in mortgage
provides critical banking services across central government financing loans, trade with Acapulco and maritime insurance.
and for wider public sector customers. Obras Pias profits were channelled to the construction of
churches, government buildings and other charitable and
Monetary - means relating to money, especially the total religious projects. Among the first banks that emerged in the
amount of money in a country. 19th was the Rodriguez Bank which was considered more of a
loan association than a regular bank. The need for more
Finance - is a term for matters regarding the management, extensive banking services and facilities led the board of
creation, and study of money and investments. authorities (Junta de Autoridades) in Manila to establish on
August 1, 1851 the first state bank in the Philippines. The
Financial System - a set of institutions, such as banks, Banco Espanol-Filipino de Isabel II was the first state bank
insurance companies, and stock exchanges, that permit the and Obras Pias provided 50% of its bank capital.
exchange of funds.
In 1873, British-Orient banks opened in the country as a
Money - a commodity accepted by general consent as a medium of result of the expanded Philippine -European trade that
economic exchange. followed the opening of the Suez-Canal in 1869. The Chartered
bank of India, Australia and China opened in Manila in 1872.
Paper Money - is a country's official, paper currency that is Hongkong and Shanghai Banking Corporation established its
circulated for the transactions involved in acquiring goods Manila branch in 1875. The first mutual savings in the country
and services. is Monte de Piedad Y Caja de Ahorros - a unique combination of
savings banks and pawnshops opened in 1882. Initial
Coins - a piece of metal put out by a government authority as capitalization was also provided by Obras Pias. The bank was
money. later renamed to Monte De Piedad and Savings Bank. The Banco
Espanol-Filipino de Isabel II changed its name to Bank of the
Deposits - is a sum of money that is held in an account. Philippine Islands on January 1, 1912. BPI established
Loans - is a monetary loan that is usually repaid in regular correspondent arrangements with a Paris bank for servicing of
payments over a set period of time. client transactions with counterparts in Europe and other
parts of the world. BPI is considered as the oldest bank in
History of Banking the country.
Banking in the Philippines began in the 16th Century This was During the American Occupation, seven domestic private banks
the establishment of Obras Pias (Pious Works) by laymen came to existence. Branches of Japanese a well as Chinese
associated with the religious orders. Funded from legacies and banks were also opened during the early part of the period.
donations of wealthy individuals, The Obras Pias was the The Postal Savings Bank was put up in 1906. The first
agricultural bank was established in 1908 but its assets and consumer goods. Consumers or households purchase non-durables
liabilities were transferred to the Philippine National Bank from current income and borrow for the durables like cars,
which was organised in 1916. Three years after the American washing machines, air-conditioners and houses.
regime ended, the Central Bank of the Philippines was created,
establishing a managed monetary system in the Philippines. It Financial Institutions/ Intermediaries - Financial
was given the sole authority to issue the country's paper institutions channel the funds from lenders to borrowers. They
money, regulate and supervise the country's banking system. can also be the lenders and borrowers themselves. If they buy
securities, they are lenders but if they are the ones issuing
Financial System - a set of institutions, such as banks, the securities, they are borrowers.
insurance companies, and stock exchanges, that permit the
exchange of funds provides channels to transfer funds from Non-Financial Institution - Non-Financial Institution are
individual and groups who have saved money to individuals and businesses such as manufacturing, extractive industries,
group who want to borrow money Bangko Sentral ng Pilipinas construction and genetic industries. Non-financial
(BSP) is the financial supervisory authority. BSP supervises institutions can also be the lender and borrowers just like
banks, finance companies and non-bank financial institutions financial institutions.
performing quasi-banking functions.
The Government - is the national, provincial, city and towns
comprising the Philippines as a whole. The Central Bank is an
Classification of Philippine Financial System institution that manages a state currency, money supply and
interest rate.
1. Universal/Commercial Banks
2. Thrift Banks Central banks – also usually oversee the commercial banking
3. Rural Banks system of their respective countries.
4. Non-Bank Financial Intermediaries
Foreign Participants - Foreign participants refers to the
Financial System Participants participants from the rest of the world such as households,
government, financial and non-financial firms, and central
Households - or consumers are generally described as that banks. They exchange goods and services across national
group receiving income, majority of which typically come from boundaries. International trade and international finance are
wages and salaries. Gross savings are equal to current income parts of globalisation.
fewer current expenditures. Such income is spent on goods and
services and a part is saved. Goods that are consumed within a Bangko Sentral ng Pilipinas - The BSP was created under
current period are termed non-durable consumer goods. Goods section 2 of RA 7653 better known as "The New Central Bank
that will last for more than a year are termed durable Act" It traces the roots and fundamental structure from its
predecessor, The Central Bank Philippines. The bank began Financial Banking Institution - can be categorised as private
formal operations on July 3,1993. banking and government banking. Are entities that manage
financial transactions, offering services such as deposits,
Bangko Sentral ng Pilipinas (FUNCTIONS) - The Money Manager- loans, and financial advice to individuals and businesses.
The BSP manages the amount of money available to public to
keep the prices increasing more than usual. The Supplier of Private Banking Institutions -these companies perform the
Money- Only BSP can legally issue money in paper notes and services of safekeeping funds through the acceptance of money
coins and in amounts consistent with the country's economic deposits and the provision of credit through lending of money.
program. The Bankers Bank - The BSP grants loans and accepts
only from banks. The Supervisor of all Banks-The BSP regularly 1. Commercial Banks cover the widest range of functions among
monitors and examines the operations of banks as well as their all financial intermediaries.
compliance and banking rules and regulations. The Main Bank of
the Government- The BSP is the official depository of the The services include:
government. • receiving
• collecting
Bangko Sentral ng Pilipinas (MONETARY BOARD) - Is the policy- • transferring
making body of the bank. It is headed by the governor who is •lending
concurrently the chairman of the Board with five full-time • investing
members from the private sector and one from the member of the • dealing
cabinet. • exchanging and handling money
• safe deposit custodianship
A deputy's Governor heads each of the bank's three major • trusteeship
operating sectors. • and money claims domestically and internationally
1. Banking Services Sector 2. Thrift Banks are savings and mortgage banks, stock savings,
2. Supervision and Examination Sector and loan association, and private development banks.
3. Resource Management Sector Functions:
• grant loans
Bangko Sentral ng Pilipinas (OBJECTIVES) - is to maintain • invest in readily marketable bonds
price stability conducive to a balanced and sustainable growth • and other debt securities
of the economy and employment. It shall also promote and 3. Rural Banks operate primarily to serve the needs of people
maintain monetary stability and the convertibility of the in the provinces and sub-urban areas.
peso.
Functions:
• granting of short-term loans to farmers, merchants, and 4. Credit Unions
cooperatives. 5. Private Insurance
• They also accept savings and time deposits to accumulate 6. The Pawnshop
funds for local development. 7. Trust Companies
8. . Non-Stock Savings and Loans Association
Government Bank 9. Financing Companies
1. Development Bank of the Philippines was organised in 1963 10. Other Non-Bank Financial Institutions
to provide timely and adequate financial support to the
Agrarian Reform program. its lending activities are geared Government Non-Financial Institutions
primarily towards helping farmers acquire land under the
agrarian reform program. 1.Government Service Insurance System (GSIS) started its
2. The Land Bank of the Philippines was established in 1946 as operation on May 13, 1937 it was entrusted with the
the Rehabilitation Finance Corporation to attend to the administration of a life insurance fund and benefits to
requirements of rehabilitation and development after World War government employees of the country. Presently, GSIS
II. Today, its tasked and lending activities are concentrated administers the following:
on developing projects, such as agriculture, industry, and Life Insurance Fund Retirement Fund Health Insurance
low-cost housing. Fund/Employee's Compensation General Insurance Fund/Property
3. Philippines Amanah Bank -was established in 1974 to promote Insurance Barangay Official's Life Insurance
and accelerate the socio-economic development in Mindanao
especially in the predominantly Muslim province. it is also 2. The Social Security System (SSS) started its operation on
based on the Islamic concept of banking following the "no September 1, 1957. grants to its members those from private
interest and partnership" principles. sector benefits such as sickness, disability, death, and old-
age pension.
NON-BANK FINANCIAL INSTITUTIONS are organisations that provide
services but do not hold a banking licence. They can include
entities like insurance companies, investment firms, and
credit unions, offering various financial products and
services.