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‘The financial system performs the essential economic function of,
channeling funds from those who are investor (sav ts
to those who need funds (users of funds). Rother words, the
Financial System tani ye alls sae onda lend ds sao
(4)
5 =e
pg Private es oarar cd
Binns Placement Ciameg
Flow of funds Flow of seciiities/notes/bonds/debt ins, Financial
Hi ! Meet Rose
Rose is an entrepreneur and investor. She
managed her investments and cash very well.
She has an idle cash and she want to put her
excess cash in some financing activities that will
make her excess cash grow. What she should do
with that cash. 2%) Financial System
Jack is an entrepreneur, and he owned a small
clothing shop. He is planning to expand his
business but does not have enough cash to pay
for the expansion. Where can Jack get the
additional funding?
arta
Deu ay PVT
Sees
If Rose knows that Jack is in needs of
funds, or if Jack knows that Rose is
willing to invest funds,
Rose and Jack may agree to make a
Private Placement
- the sale of a new security
directly to an investor or
group of investors. Financial System
And sinée Rose observed that
Jack’s business has been
profitable, Rose is willing éo lend
Jack the money since she is
confident that Jack can repay his
loan.
Rose is now expecting to be 20%
richer from her lending to Jack,
and Jack can now expand his
operations'to gain more profit
from his business. Financial System
(ee)
teats
BTC Private
Caaed Placement
Flow of funds
| However, if these facts are unknown to them,
Rose and Jack can go to a FINANCIAL MARKET
which is an organized forum that lets Rose,
along with other suppliers of funds, and Jack,
along with other users of funds, meet and
make transactions.
‘Once Rose and Jack have met in the Financial
Market, they can now agree to make a private
placement.
Is an organized forums
in which the suppliers
and users of various
types of funds can r
ransactio\ tly
ered
POT Umaga Financial System
(3)
. \
Eee Private Te ears
Bis Placement aes
Flow of funds Flow of securities /notes/bonds/debt ins, If Rose and Jack do not want to make an effort
to find a counterparty in the Financial
Markets, Rose and Jack may go to a FINANCIAL
INSTITUTION.
A Financial Institution will receive Rose's
supply of funds and match it with Jack's
demand of funds.
Unlike the Financial Markets were Rose and
Jack knows to whom the fund went and from
whom the funds came, Financial Institutions
served as an intermediary to the supplier and
users of funds, °
Financial Institutions
La - intermediaries that
channel the savings of
individuals, businesses,
gees == 2nd governments into
SE loans oF investments,
ered
PTT CU mea ay Financial System
—
Placement a
Flow of funds Flow of seciiities/notes/bonds/debt ins, Financial System
How transactions between suppliers and users of funds take
place?
2. How would they prove that there was a transaction so that the
demander or users of funds will be able to repay theSupplier on
@ time and at the right amount?
+ Verbal agreement
@ © Witten agreement
e
due to the increased need for security for the performance of obligations
arising from these transactions and due to the growing size of the
@ financict system, the tronsfers of funds from one party to another are
‘made through Financial Instruments. Financial Instruments ~ is a a virtual docume
representing a legal_agreement involving some sort-of
monetary value (Source: Investopedia - Sharper Insight.
Smarter Investing. | Investopedia. (2016).
Financial instruments are contracts for monetary as:
that can be purchased, traded, created, modified, 0
|__settled
When a financial instrument is issued, it gives rise to a
sset on one hand and a financial liability or
ent _on the other. (Corporate Finance
Institute) ” Financial Instrument will °
e
Financia assets FESUIttO a/AN: ——ginancial bitty
any asset that is any liability that is a contractual obligation:
e Cash ‘To deliver cash or other financial instrument
Bonds Payable
* An equity instrument of another entity to another entity.
© A contractual right to receive cash or
another financial asset from another entity. ‘* Examples: Notes Payable, Loans Payable,
Examples: Notes Receivable, Loans
Receivable, Investment in Stocks, puanciat mstRUMENT
Investments in Bonds
e
Equity Instrument
is any contract that evidences a residual
Interest in the assets of an entity after
deducting all liabilities. (IAS 32)
* Examples: Ordinary Share Capital, «
Preference e Let’s
EX wn. are the HOLDERS © | Who are the MAKERS
of Financial Assets? of Financial Liabilities?
e
when companies are in need of funding (users of funds), they either sell debt
securities (or bonds) or issue equity instruments. The proceeds from the sale of
the debt securities and issuance of bonds will be used to finance the company’s
plans.
On the other hand, investors buy deft securities of equity instruments (supplier of
funds) in hopes of receiving returns through interest, dividend income or
appreciation in the financial asset's price. INANGIAL IN: IT could be any document that rep
{ TYPES OF FINANCIAL )
INSTRUMENTS
Why “so many” Fin inancial Instrument
eFinanceManagement.com
hittps://efinancemanagement.com/sources-of
finance/financial-instruments Derivatives
Instrument
Cash
Instrument
Tat
aes de att
AEE sot Classes
‘Are financial instruments that have values determined
from underlying assets, uch as interest rates, currency,
bonds, stocks, and stock indexes.
Derivatives are financial instruments that derive the
value in response to changes in interest rates, financial
instrument prices, commodity prices, foreign exchange
rates, credit risk and indices,
Cash instruments include things like deposits and
loans, as well as easily transferable securities. This
type of instrument is directly influenced by the
market, so any market fluctuations will be directly
reflected in the cash asset's value,
We can also categorize financial instruments by asset
class, depending on whether they are debt or equity
poe
reflect a loan the investor made to the issuing enti’
on the other hand,
reflect ownership ofthe issuing entity.
ace financial instruments
that are represented on th
primarily consist of currency a
reign market and Equity-Based Financial Instruments
Generally have varied returns based on the p:
formance of the issuing company.
= Returns from equity instruments come from either dividends or stock price appreciation
Preferred Stock has priority over a common
stock in terms of claims over the assets of a
‘company.
+ if a company were to be liquidated and its
assets have to be distributed, no azzet will be
distributed to common stockholders unless
all the claims of the preferred stockholders
have been given.
Moreover, preferred stockholders have also
priority over common stockholders in_cash
vidend declaration. No cash dividends will
bee given to common stockholders unless all
the dividends due to preferred stockholders
are paid first. (Cayanan, 2015)
Ceti on te oer har te ra
umes ofthe compan
