FINANCIAL INSTITUTION
A Financial Institution is an organization that provides financial services to
individuals, businesses, and governments. These institutions act as intermediaries in
the financial system, facilitating the flow of money, investments, and credit. They help
to manage and allocate funds, provide loans, and offer a wide range of other
services such as insurance, asset management, and investment opportunities.
Types of Financial Institution
1. Commercial Banks
These are traditional banks that offer a wide range of services, including accepting
deposits, providing checking and savings accounts, offering loans (such as
mortgages and personal loans), and facilitating payment processing.
2. Investment Banks
Different from commercial banks. Do not have any dealings with the general public.
Instead perform the task as an intermediary which facilitates the transactions of
individuals and institution in investing.
3. Credit Unions
Member-owned financial cooperatives that provide similar services to commercial
banks, such as savings and checking accounts, loans, and mortgages. Credit unions
often offer better interest rates and lower fees because they are not-for-profit
organizations.
4. Savings and Loan Associations
Also known as thrift institutions, these are financial institutions that primarily focus on
accepting savings deposits and making mortgage loans. They were historically more
involved in-home financing than commercial banks.
5. Brokerage Firms
These institutions help individuals and institutions buy and sell securities such as
stocks, bonds, and mutual funds. They also offer investment advisory services.
6. Insurance Companies
Financial institutions that provide risk management services by offering various types
of insurance policies, such as life, health, auto, and property insurance. They collect
premiums and pay out claims in the event of covered losses.
7. Asset Management Firms
These firms manage investments on behalf of individuals, institutions, or
corporations. They offer services like portfolio management, wealth management,
and investment advice.
8. Pension Funds
Financial institutions that manage retirement savings for individuals. They collect
contributions from employers and employees, invest the funds, and pay out pensions
to retirees.
Roles and Importance of Financial institution
1. Savings Facilitation: Helping individuals and businesses safely store and grow
their money.
2. Credit Provision: Lending money to support personal, business, and government
needs.
3. Risk Management: Offering financial products like insurance to protect against
risks.
4. Economic Growth: Contributing to development by allocating resources
efficiently.
5. Payments System: Enabling the transfer of money domestically and
internationally.
6. Money Supply Regulation: Controlling the availability of money in the economy.
Key Concepts
1. Interest Rate: The cost of borrowing money or the return on savings, usually
expressed as a percentage.
2. Liquidity: The ease with which an asset can be converted into cash without losing
value.
3. Risk Management: Identifying and mitigating potential financial losses through
tools like diversification and insurance.
4. Regulation and Compliance: The rules and standards set by authorities to
ensure the stability and integrity of financial institutions.
Financial Products and Services
1. Deposit: Money placed in a bank or financial institution for safekeeping and
earning interest.
2. Loan: Money borrowed from a financial institution, to be repaid with interest over
time.
3. Mutual Fund: An investment vehicle pooling money from multiple investors to
invest in securities like stocks and bonds.
4. Insurance: A contract that transfers risk from an individual or entity to an insurer
in exchange for premiums.
5. Payment Services: Mechanisms for transferring money, such as mobile banking
or credit cards.
Risk and Challenges
1. Economic Cycle: The natural fluctuation of the economy between periods of
expansion and contraction.
2. Regulatory Changes: Adjustments in financial rules and laws that institutions
must follow.
3. Fraud: Deceptive practices aimed at unlawfully obtaining money or assets.
4. Globalization: The increasing interconnectedness of global financial systems,
leading to shared risks
FINANCIAL INSTRUMENTS
A Financial Instrument is a contract between two parties that represents a legal
agreement involving monetary value. It can be used for raising capital, transferring
risk, or investment purposes. Financial instruments can be categorized as equity,
debt, or derivative instruments and are typically traded on financial markets.
Examples include stocks, bonds, options, and futures. These instruments can be
used for various financial transactions, such as buying, selling, borrowing, or lending.
Common Financial Instruments
1. Savings
A savings account in a bank is the most common type of financial product offered to
customers
2. Loans
Is a bank advance for a specific period (normally one to ten years) repaid, with
interest, usually by regular periodic payments.
Different forms of Loans
a. Personal Loans Unsecured loans typically used for personal expenses like home
renovations, medical bills, or debt consolidation.
b. Mortgage Loans Secured loans used specifically to purchase real estate. The
property itself serves as collateral.
c. Auto Loans Secured loans for purchasing vehicles, where the vehicle serves as
collateral.
3. Bonds
Bonds are a type of debt security or financial instrument that represents a loan made
by an investor to a borrower, typically a government or corporation. When an entity
issues bonds, it is essentially borrowing money from investors with the promise to
repay the principal along with periodic interest payments over a specified period.
How bonds work:
a. Issuer: The entity that borrows the money by issuing bonds. This could be a
government (federal, state, or municipal) or a corporation.
b. Bondholder: The investor who lends money to the issuer by purchasing bonds.
c. Principal: The face value or amount of money the bondholder lends to the issuer.
This amount is usually repaid when the bond matures.
d. Coupon Rate: The interest rate that the issuer agrees to pay the bondholder. This
interest is typically paid periodically (e.g., annually or semi-annually).
e. Maturity Date: The date when the bond's principal amount is due to be repaid to
the bondholder.
f. Yield: The overall return that an investor can expect to earn from the bond,
considering the purchase price, coupon payments, and time to maturity.
4. Security
Security refers to a tradable financial asset that holds some type of monetary value.
When an investor has a security that he/she has a financial instrument signifying
ownership of stocks.
5. T-Bills
T-bills have short maturities, typically ranging from a few days to one year. Common
maturities are 4 weeks (1 month), 13 weeks (3 months), 26 weeks (6 months), and
52 weeks (1 year).
6. Insurance Products
Insurance is a financial product or agreement in which an individual or entity (the
policyholder) receives financial protection or reimbursement against losses from an
insurance company (the insurer) in exchange for paying a premium. Policy holder-
insured Insurance company -insurer
Types of Insurance Health Insurance:
Life Insurance
Auto Insurance
Homeowners Insurance
Renters Insurance
Disability Insurance
Travel Insurance
Business Insurance
7. Mutual Funds
Mutual funds are managed by professional fund managers who make investment
decisions on behalf of the investors. These managers analyze market trends,
economic conditions, and the performance of individual securities to optimize the
fund's returns.
Equity Instruments
1. Stock/Share: A unit of ownership in a company that represents a claim on its
assets and profits.
2. Preferred Stock: A type of equity that gives holders priority over common
stockholders for dividends and assets in case of liquidation, often without voting
rights.
Derivatives
1. Option: A financial contract that gives the holder the right, but not the obligation,
to buy or sell an underlying asset at a specified price before a certain date.
2. Future: A standardized contract obligating the buyer to purchase or the seller to
sell an asset at a predetermined price on a specific future date.
3. Swap: A derivative contract in which two parties exchange financial obligations,
such as interest rate payments or currencies.
Hybrid Instruments
1. Convertible Bond: A debt instrument that allows the holder to convert it into a
specified number of shares in the issuing company.
2. Preference Share: A type of equity that provides fixed dividends and has priority
over common stock in asset distribution, often with limited or no voting rights.
Foreign Exchange Instruments
1. Currency Swap: A financial agreement between two parties to exchange principal
and interest payments in different currencies.
2. Forex Contract: An agreement to buy or sell a specific amount of a currency at a
predetermined exchange rate on a future date.
Commodities and Asset-Backed Instruments
1. Commodity Futures: Contracts to buy or sell a physical commodity, such as oil
or gold, at a specified price on a future date.
2. Mortgage-Backed Security (MBS): A bond secured by a pool of mortgage loans,
providing investors with regular interest payments.
Money Market Instruments
1. Commercial Paper: A short-term, unsecured promissory note issued by
corporations to raise funds, typically for working capital.
2. Certificate of Deposit (CD): A savings product offered by banks, where funds are
locked for a fixed period in exchange for higher interest rates.
CAREERS OF FINANCE PROFESSIONAL
Treasury Manager
- is a finance professional responsible for overseeing an organization's financial
activities related to cash flow, liquidity, funding, and capital management. Their role is
crucial in ensuring the company has enough funds to meet its operational needs
while maximizing the efficient use of financial resources. Here are the key
responsibilities and aspects of a Treasury Manager's role.
Chief Financial Officer (CFO)
- also known as a treasurer, is an officer of a company or organization who is
assigned the primary responsibility for making decisions for the company for projects
and its finances The CFO thus has ultimate authority over the finance unit and is the
chief financial spokesperson for the organization. The CFO typically reports to the
chief executive officer (CEO) and the board of directors and may additionally have a
seat on the board. The CFO directly assists the chief operating officer (COO) on all
business matters relating to budget management, cost–benefit analysis, forecasting
needs, and securing of new funding.
Banker
- is a professional who works in a bank or financial institution, helping people and
businesses manage their finances. Whether you're opening a savings account,
applying for a loan, or getting advice on investments, bankers are there to assist you.
They have a deep understanding of financial products and services, which makes
them an important part of the economy.
Financial Consultant
- is a professional who provides expert advice to individuals, businesses, or
organizations on managing finances, covering areas such as budgeting, investing,
tax planning, retirement planning, and risk management. They analyze their clients'
financial situations, develop personalized strategies to achieve financial goals, and
recommend appropriate financial products like investments and insurance. Financial
consultants aim to improve their clients' financial health and long-term stability, and
may work independently, for consulting firms, or within financial institutions.
Investment Management
- refers to the professional management of various securities (stocks, bonds, real
estate, etc.) and assets to meet specified investment goals for clients. It involves
creating and executing investment strategies, analyzing market trends, and making
decisions regarding asset allocation, risk management, and portfolio diversification.
Financial Planner
- is a professional who helps individuals or businesses create strategies to manage
their finances, including budgeting, investing, saving for retirement, and planning for
taxes and other financial goals. They analyze their client's financial situation,
understand their objectives, and develop personalized plans to achieve those goals.
Financial planners may offer advice on various areas such as retirement planning,
insurance, estate planning, and investment strategies. They may hold certifications
like Certified Financial Planner (CFP) to indicate expertise and professionalism in the
field.
Tax Specialist
- is a professional who provides expertise and assistance in matters related to
taxation. They help individuals, businesses, and organizations navigate tax laws and
regulations to ensure compliance, minimize liabilities, and maximize tax benefits.
Their duties can include preparing tax returns, offering tax planning advice,
representing clients in audits, and staying up-to-date with changes in tax legislation.
Tax specialists may work in various areas, such as corporate taxation, estate
planning, international tax, or individual tax services.
Financial Analysis
- is the process of evaluating and interpreting a company's financial information to
assess its performance, profitability, stability, and overall financial health. This
involves analyzing financial statements, such as the income statement, balance
sheet, and cash flow statement, to make informed decisions about the company's
potential for growth, investment, and risk. Financial analysis is used by stakeholders,
including investors, managers, creditors, and analysts, to guide strategic planning,
budgeting, and investment decisions.
Loan Officer
- is a professional who works for a financial institution, such as a bank or credit
union, and is responsible for evaluating, authorizing, or recommending approval of
loan applications. They assess a borrower's financial status, creditworthiness, and
ability to repay a loan. Loan officers may specialize in various types of loans, such as
personal, mortgage, or commercial loans, and guide clients through the application
process, providing advice on the best loan options for their needs.
Auditors
- are professionals who examine and evaluate the financial records, statements, and
operations of an organization to ensure accuracy, compliance with laws, and
adherence to established accounting standards. They assess whether the financial
reports accurately reflect the financial status of the organization and whether proper
internal controls are in place. Auditors can work internally (within the organization) or
externally (as independent third parties) and provide assurance to stakeholders,
such as investors, regulators, or management, about the integrity and reliability of
financial information.
Corporate Development Officer (CDO)
- is a senior executive responsible for overseeing and driving the growth and
strategic initiatives of a company. This role typically involves identifying and pursuing
opportunities for mergers, acquisitions, partnerships, investments, and other
strategic alliances to enhance the company's market position and financial
performance. The CDO works closely with the executive team to align corporate
strategies with long-term business goals, manage risk, and ensure that growth
opportunities are executed successfully. The position may also involve market
research, financial analysis, and the negotiation of deals.
QUALITIES OF FINANCE PROFESSIONALS
Technical Skills
1. Financial Acumen – Strong knowledge of financial principles and practices.
2. Analytical Skills – Ability to interpret and analyze complex financial data.
3. Proficiency in Financial Tools – Expertise in tools like Excel, SAP, QuickBooks, or
Tableau.
4. Regulatory Knowledge – Understanding of financial laws, compliance, and
regulations.
5. Budgeting and Forecasting – Skills in planning and predicting financial trends.
Strategic Thinking
6. Business Insight – Ability to align financial goals with overall business strategy.
7. Problem-Solving Skills – Aptitude for identifying financial challenges and crafting
solutions.
8. Risk Management – Awareness of financial risks and strategies to mitigate them.
Attention to Detail
9. Accuracy – Precision in preparing financial reports and managing data.
10. Thoroughness – Reviewing and cross-checking financial details carefully.
Soft Skills
11. Communication Skills – Explaining financial information in a clear, concise
manner.
12. Collaboration – Working effectively across teams and departments.
13. Ethical Conduct – Maintaining integrity, transparency, and ethical standards in
financial operations.
Adaptability and Learning
14. Continuous Learning – Staying updated on industry trends and technological
advances.
15. Flexibility – Adapting to new financial challenges or changes in the business
environment.
Leadership and Initiative
16. Decision-Making – Making informed and impactful financial decisions.
17. Leadership Skills – Guiding teams and contributing to the organization’s strategic
direction.
18. Initiative – Proactively identifying opportunities for financial growth or
improvement.
Personal Traits
19. Dependability – Being reliable and meeting deadlines consistently.
20. Resilience – Staying composed under pressure and during financial
uncertainties.
In Partial Fulfillment
of the Requirements
in
Business Finance
Presented to: Shirley G. Elas,EdD
Presented by: Kristeen M. Francisco
12 ABM-B
