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

b. Indirect Transfer through Investment

Business

Issues
Primary Investment Secondary
Savers &
(Stocks & Bank Investors
Bonds) (Underwriter)
Money Money
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.
Secondary market transaction the investment bank trade new issues such as Initial Public
Offering (first time securities only offered by the Investment Bank) to the Savers & Investors.

c. Indirect Transfer through Financial Intermediary

Business Intermediarys
Securities securities
Financial Savers &
Business Intermediary Investors
(Middleman)
Money Money

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.
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 products.
Transfers can also be made through a financial intermediary such as bank,
insurance company or a mutual fund.
The intermediary uses this money to buy and hold business securities. While the
savers hold the intermediarys securities

Property of IA14202
 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
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.

Property of IA14202
 Principles of Finance

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
Institutions

T-bills or
Treasury Bills
short-term debt Direct
Users of Sources of
with a maturity of funds Funds
less than one
year. Security Transaction
Business or Savers &
with no interest burrower Investors
but issued at a
discount on its
redemption price.
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 whether the check has sufficient funds or
not.
2. Magnetic Ink Recognition Character (MICR) represents the account
I I I I I I I I I I I2I I I I I I I I I I I I
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.

Property of IA14202
 Principles of Finance

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.
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.
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.

Property of IA14202
 Principles of Finance

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.

Property of IA14202