Reviewer in Special topics
Basic Functions of financial system
1. Promote Savings – the savings of different surplus spending turns into
investment
2. Enable payment – has the best and most expedient mechanism in
facilitating payments
3. Protect against risk – property and accidents insurance policies by
insurance companies, financial market has become necessary to
entrepreneurs, consumers and governments.
4. Present a means to wealth- are excellent payments for savings the
various economic units accumulate.
5. Provide liquidity – used to store wealth possessed by different
economic units can readily be converted into cash with little or no risk
of loss
6. Provide credit facilities – markets also make credit facilities available
to consumers and investors whether for spending or other purpose.
FINANCIAL SYSTEM – defined as the diversified financial activities performed
by different economic units
FINANCIAL INTERMEDIARY- brings together the users and the providers of
funds without having meet face to face.
1. Hire qualified people
2. Know how to diversify
3. Hiring financial intermediaries cost advantage or economic of scale
4. Provide savers with liquidity
FINANCIAL MARKET – is mechanism which buyer and sellers trade financial
assets such as stocks, bonds, currencies and derivatives.
MONEY MARKET – is a market intended for short term placements.
MONEY MARKET INSTRUMENTS
1. Certificate of deposit – is a time deposit in which the depositor has to
wait for a certain number of days.
2. Commercial paper – is an unsecured promissory note with a fixed
maturity of 1 up to 270 days.
3. Repurchase agreement (repo) – which one party sells a financial
instrument to another at a specified price.
4. Treasury bills (T-bills) – an obligation incurred by the national
government.
5. Banker’s acceptance – a bank draft which a bank is required to pay the
holder a specified amount on a specific date.
Bank Drafts – are normally used in export and import transactions.
CAPITAL MARKET – intended for long term financial instruments. Included in
capital market are issuance of securities and long term obligations by
businesses or government agencies.
TWO IMPORTANT ELEMENTS OF A CAPITAL MARKET
1. Organized security exchanges – operates under the rules and
regulations formulated by exchange.
2. Over the counter (OTC) market – are involved in buying and selling of
financial instruments but not organized securities exchanges.
TWO TYPES OF CAPITAL MARKET
1. Primary market – is a venue where firms and government agencies
raise money by issuing financial instruments like stocks or bonds for
the first time.
PLAYERS IN PRIMARY MARKET
a. Issuers – are either public or private corporations.
b. Financial instruments – are instruments purchased by the
investors
c. Financial intermediaries – are financial institutions which
facilitate the issuance of the securities.
d. Investors – are individuals or firms with extra funds who are
willing to invest.
2. Secondary Market – also called aftermarket. It is where financial
instruments that are issued are traded.
OTHER EXAMPLES OF FINANCIAL MARKETS
1. Bond Market – long term debt are issued by firms and government
agencies to raise money
2. Commodity market – where raw or primary commodities are traded.
3. Stock market – where publicly listed stocks are bought and sold.
4. Derivatives market – provides instruments to help manage financial
risks.
5. Foreign-exchange market – venue for exchange of currencies.
