Principles of Finance

Capital an investment used to start a business.

Capital flow it is the movement of money during the cycle of transactions such as
investment, trade or business production.

Three Ways of Capital flows:

a. Direct Transfer

Stocks & The users of funds directly sell or deliver its

Users of Sources bonds & stocks to the sources of funds without
funds of going through any type of financial institutions
Funds to turn on their need for money.
Money Small firms used small capital during this
Business or Savers & transaction.
burrower Investors

b. Indirect Transfer through Investment

Primary Second
Issues Investme Savers &
Busines (Stocks nt Bank ary Investors
& Bonds) (Underwrit
Mon Mon
Sells new
issues of
security
The business sells its issues to the investment bank then sells the
same securities to the savers & investors.
Primary market transaction the business sells its issues to the
investment bank.
Underwriter serves as a middleman and facilitates the issuance of
securities.
Underwriting buying and selling new issues.
Underwriting Spread commission or profit earned by Investment
Bank through selling new issues.

c. Indirect Transfer through Financial

Intermediary

Busin Intermedi
ess arys

Securi Financial Savers &

Busine Intermed Investors
ss iary
Mon Mon

The savers & investors deposited to the financial intermediary

(banks, insurance company or mutual fund) to gain the
intermediarys securities likewise the financial intermediary gain a
fund. With a receivable of funds, the financial intermediary will used
the funds to buy the business securities.
Roles of Financial Intermediaries in Financial Markets
Financial Intermediaries are organizations that create
various loans and investments from fund provided by
depositors.
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Financial Intermediaries facilitates the transfer of funds
from those who have funds (savers) to those who need
funds (borrowers) by manufacturing a variety of financial
 Principles of Finance

Two Types of Securities:

Stocks shares contributed on the business.

It has no maturity date because it involves assets which you owned.
It has a compensation of dividends. (surplus profit)
Stock certificate legal document that serves as title in owning a stock.
(certificate of credit)
Bonds debts or obligations that the issuing entity should pay in the future.
It has maturity date because you are held liable to pay incoming debts which
has deadline.
It has a compensation of interest.
Bond certificate legal document that serves as title for a future expenses.
(certificate of debit)
*Stocks and Bonds are considered to be the parameters of the economy.
Escrow middleman between the buyer and the seller.
Financial instrument that is used for trusting purposes towards a specific
disbursement.
Philippine or Manila Stock Exchange establishment in the Philippines in which
securities and commodities are bought and sold.
Philippine or Manila Future Exchange establishment in the Philippine in which
buyers and sellers meet for a tradeable agreement through contracts that certain
securities and commodities will be given in the future.

Investment Banking Process when a business raise funds in the financial market, it
generally enlists the services of an investment banker. Such organizations perform
three tasks:
They help corporations design securities with the features that are most
attractive to investors.
They generally buy these securities from the corporations.
They resell the securities to investors.
Financial Market a system consisting of individuals and institutions, instruments
and procedures that bring together borrowers and savers.

Types of Markets:
Physical Asset Markets versus Financial Asset Markets

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 Principles of Finance

Physical Asset Markets tangible or real market

Products such as wheat, autos, real estates, computers and
machinery
Financial Asset Markets deal with stocks, bonds, notes and
mortgages.
Also deal with derivative securities whose values are derived
from changes in the prices of other assets.
Spot Markets versus Future Markets
Spot Markets are markets in which assets are bought or sold for on-
the-spot delivery.
Future Markets are markets in which participants agree today to buy
or sell an asset at some future date with future price.
Money Markets versus Capital Markets
Money Markets are markets in which funds are
borrowed or loaned for short periods(less than one year).
Capital Markets are markets for intermediate (1-10 years) or long-
term (more than 10 years) debt and corporate stocks.
Primary Markets versus Secondary Markets
Primary Markets are markets in which corporations raise new capital.
Secondary Markets are markets in which existing, already
outstanding securities are traded among investors.
Stock Exchange where secondary markets traded their existing
outstanding securities.
Private Markets versus Public Markets
Private Markets are markets where transaction are negotiated directly
between two parties.
Examples: Bank loans and private debt placements with
insurance companies
Public Markets are markets where standardized contracts are traded
on organized exchanges.
Examples: Common stock and corporate bonds.
Flow of Capital or Investment:

Financial
Institutio
ns

T-bills or
Treasury
Bills short- Direct
Users of Sources
term debt funds of
with a Funds
maturity of Transact
Business or ion Savers &
less than burrower Investors
one year.
Security
with no

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 Principles of Finance

Financial
Market:
Capital
Market
Money
Market

Money anything that is generally accepted as a means of payment for the goods
and services.

Functions of Money:
a. As a medium of exchange which means that people use money by giving it
in exchange for goods and services.
Legal tender power money issued by the government and approved
by public and private. (Genuine currency)
Cheques money substitute but not really considered as money.
Counterfeit or Fake Money illegal money or fraud.
Philippine peso currency of the Philippines. Centavos (smaller units)
b. As a unit of account or standard of value money services as a yardstick for
measuring prices and values for comparing items.
c. As a store of value money can retain its value for a certain period of time
through savings and investment.
d. As a standard of deferred payment the function that money serves when
people buy something one day and pay for it later; and the repayment is
denoted in terms of money. (for future debt)
Bangko Sentral ng Pilipinas (BSP) central bank of the Republic of the
Philippines that regulates or functions as, Manage Currency System.
Also produces the material for cheques.
Philippine National Bank (PNB) and Bank of the Philippine Islands (BPI)
were the first banks that was allowed to print Philippine money due
to shortage during 1916.

1 1. Logo of Philippine Clearing House Corporation (PCHC)
set the bank rules regarding checks. Clearing
2 whether the check has sufficient funds or not.
IIIIIIIIIIIIIIIIII 2. Magnetic Ink Recognition Character (MICR)
IIIII represents the account number and check number.

On-us item drawing or paying of accounts at the same bank.

Yellow money cowry or cyprae moneta first commodity money in the
Philippines.
Payment System is the set of mechanisms used for making transactions.
Price measures the value of money.

Category of Money:
a. Outside money money created by the government or by nature, not by
groups or institutions in the private sector.
Commodity money or full blooded money its value as money equal its
value as material.

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 Principles of Finance

Fiat money money that has value mainly because the government
decrees that it has value for payment of taxes.
b. Inside money money that is created in the private sector.
Example: Checking account, because it is created in the banking
system.
These are further classified into:
Non-electronic payments:
Checks is used to transfer an amount of money from your
bank account to another persons account when he/she
deposits it.
Money order is an order for the payment of a specified
amount of money, usually issued and payable at a bank or
post office.
Electronic payments:
E-money is a new trend in the payment system. Scientists
call this a cryptographic algorithm due to the program
placed inside the microchips. Examples are:
Automated Bill Payment people cooperate with
financial institutions to pay their bills. These
organizations will automatically deduct the
amount of payment from the said persons bank
account.
Credit Card shoppers usually used this to
purchase goods/services today to pay the cost,
together with interest, at a later date.
Debit Card like the credit card, it also used in
acquisition of goods/services but the difference is
that it directly transfer money from the buyers
bank account to the sellers account.
E-cash buyers are now able to purchase items in
the internet. It will be automatically transferred
from their PC to the sellers PC.
Smart card contains a microchip where digital
cash can be loaded from the owners bank
account.
Stored Value Card it allows the holder to prepay
an amount of money to have goods/services in
return. Example: Prepaid phone cards
Wire transfers indicate payments done through
fiber-optic cables such as a telephone lines.

Two types of Bank Account:

a. Checking account also known as demand deposit.
Money is withdrawable with the use of issuing a check that has no
interest.
b. Savings Account account provided by the bank to individuals in saving
money.
It includes Passbook, ATMs and etc.

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 Principles of Finance

c. Combo Account has both the ability to check an account and to save an
account.
Characteristics of Money:
a. General Acceptability it refers to the willingness of people to accept the
money in exchange of goods and services.
b. Stability of value it means that the purchasing power of money should not
be change abruptly, but gradual.
c. Portability this refers to quality of money being carried from one place to
another.
Paper currency can only be lasted for 5 years,
Coins can only be lasted for 10 years.
Currency Retirement Division where Mutilated Currency (a badly
damaged money) was to be given,
d. Cognizability the money circulating within a country can be easily
distinguished from other kinds of money,
e. Divisibility the material used as money can be divided into smaller unit
without changing its value.
f. Homogeneity or uniformity the material used as money should not only be
capable of being divided into smaller units but should have equal weight and
fineness.
Weight heaviness of the metal.
Fineness purity of the metal.
g. Elasticity it refers to the volume of money that can be increased or
decreased by the monetary authority depending upon the needs of the
economy.
h. Durability it enables money to withstand normal wear and tear.

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