Financial
Management
Review
By : Lolita Apatan
Money can be thought of as any good
that is widely used or accepted in the
transfer of goods and services.
Commodity money is a good whose inherent value a. It is first and
serves as the value of money – gold or silver being one foremost a medium
good example. of exchange.
Fiat money is currency that a government has declared to b. Money also is
be legal tender, but it is not backed by a physical commodity. The supposed to hold
value of fiat money is derived from the relationship between value over time.
supply and demand rather than the value of the material from c. Finally, money
which the money is made also provides a
Bank money consists of accounting credits that can be drawn on by convenient unit of
the depositor – checking accounts, for instance. account.
Banking is an industry that handles cash,
credit, and other financial transactions. Banks
provide a safe place to store extra cash and credit.
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.
Banks and the Banking Systems
THRIFT BANKING SYSTEM
is 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.
Banks and the Banking Systems
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
Banks and the Banking Systems
NON-BANKS WITH QUASI-BANKING SYSTEMS
Institutions that borrow funds from 20 or more
lenders for the purposes of relending or purchasing
receivables and other obligations
Financial Institutions
INVESTMENT BANKS – underwrites and distributes new securities
FINANCIAL SERVICES CORP – Large conglomerates that combine various fin.
Institutions within a sngle corporation
LIFE INSURANCE COMPANIES – Takes annual premiums and pays the
beneficiaries of the insured party.
MUTUAL FUNDS – companies that pools funds to purchase fin. Instruments
and thus reduce risks through diversification
HEDGE FUNDS – are like mutual funds but are not regulated by the SEC
and involves large investments by high net worth corps. or individuals
Time Value of Money
Simple Interest
Interest is NOT earned on interest, ONLY PRINCIPAL earns interest.
PRINCIPAL x Interest % per payment * No. of Payments per Year
Compound Interest
Interest is earned on interest. BOTH PRINCIPAL and INTEREST
earns interest. Therefore, utilizes the idea of TIME VALUE
Time Value of Money:Cash Flows
Lumpsum
There is one time cash payment or receipt
Annuities
There are series of cash flow.
Ordinary Annuity – cash flows are made at the end of every
period or payment term
Annuity Due – cash flows are made at the beginning of every
period or payment term
Time Value of Lumpsums
0 1 2 3 4 5 6 7 8 9 10
Compounding
FVL = PV(1+i) n
0 1 2 3 4 5 6 7 8 9 10
Discounting
n
PVL = FV(1+i) or FV
-n
(1+i)
COMPOUND INTEREST: Timing of Cash Flows
0 1 2 3 4 5 6 7 8 9 10
Future Value
of Annuities
Compounding
FVA = CF (1+i)n - 1
i
