Chapter 4 - Review Questions

1. Define financial instrument.

► A financial instrument is any asset that holds capital and may be exchanged in the
market. Cheques, shares, stocks, bonds, futures, and options contracts are all types of financial
instruments. stocks, bonds, and currency, among others. Any spot market that trades the 'cash'
asset involves a primary instrument.

2. Explain the nature of derivative.

► A derivative is a financial instrument whose value is determined by the underlying asset,
index, rate, or reference point. Derivatives are financial instruments that entail the transfer of risk
from one party to another. They can be used to either limit a party's exposure to a variable or to
allow that party to acquire exposure to that variable.

3. Indicate whether the following instruments are examples of money market or capital
market securities.
 BSP treasury bills – Capital Market Securities
 Long-term corporate bonds – Capital Market Securities
 Ordinary Shares – Capital Market Securities
 Dealer commercial paper – Money Market Securities

4. Distinguish between financial assets and nonfinancial assets.

► Nonfinancial assets are defined by the value of their physical characteristics and
include items such as real estate and industrial equipment. A financial asset is a liquid asset
that indicates a claim of ownership of an entity or contractual rights to future payments
from an entity and draws value from it.

5. Give examples of financial instruments represented by financial assets and explain each
briefly.
► Cash on hand and in banks refers to the quantity of money a corporation has in the
form of banknotes or coins, or the amount of money a bank has in the form of demand
deposits such as cheques and savings deposits. Derivative financial assets are financial
products whose value is derived from contractually mandated cash flows from another
investment or index. Investing in other firms' accounts receivable, loans, bonds, and other
debt certificates includes accounts receivable, promissory notes, and other bond
certificates. Stock certificates and listed securities are examples of shares and other equity
instruments issued by other corporations.

6. Distinguish between financial liabilities and nonfinancial liabilities.

► Financial liabilities are liabilities incurred because of typical company operations,
where liabilities are mostly subdued in cash. Non-cash obligations, on the other hand, are
required for non-financial responsibilities such as the provision of products and services,
guarantees, environmental duties, and customer loyalty programs. These are largely
contingent liabilities or obligations that are unconnected to financial transactions.

7. Give examples of financial equity instruments and explain briefly.

► Common stock is an example of a financial equity instrument that permits the
holder to vote at meetings and collect dividends from the company's revenues. Another
sort of stock is preferred stock, which has no voting rights but has a dividend payment
advantage over ordinary stockholders. Finally, a warrant or written call option enables
holders to subscribe to or acquire specified amounts of common stock or other financial
assets.

8. Give examples of derivatives and explain each briefly.

► Futures contracts. Are traded on exchanges where conditions are standardized,
and prices are settled daily until the contract expires.
► Forward contract. This is a customizable private contract settled and traded over
the counter at the end of the contract.
► A call option is a financial contract that gives the purchaser of a chance the right,
but not an obligation, to purchase stocks, bonds, commodities, or other assets at a specified
price within a specified time.
Matching quiz

D 1. This form of capital is found in the statement of financial position under long-
term liabilities and equity.
E 2. The purchasing power of the peso shrinks over time.
F 3. A market where the securities being traded are new public offerings.
C 4. Securities with a maturity of less than 1 year.
A 5. Redeploying the asset and liability structures of the firm.
H 6. A leveling off or slowing down of price increases.
B 7. Market composed of common stock, preferred stock, commercial and
government bonds, and other long-term securities.
G 8. This market trades previously issued securities.
I 9. The high inflation rates of the 1980s caused this form of capital to hold its value
better than other forms of capital during this time.

Chapter 5 - Review Questions

1. Why is there a need for an efficient financial system for a country have a strong
economy?
► A well-developed and well-functioning financial market is essential to a country's
economy and efficiency. It encourages the effective direct flow of savings and
investments into the economy, hence enabling capital accumulation and contributing to
the production of goods and services. Businesses must have access to enough sources of
finances in order to invest in capital, adopt new technologies, and expand, which is
critical for economic progress.

2. What comprises the financial system?

► The financial system is made up of the goods and services offered by financial
institutions, which include banks, insurance companies, pension funds, organized
exchanges, and several other businesses that support economic transactions.

3. Explain the nature and main objective of the financial system.

► A primary goal of a financial system is to institutionalize and standardize numerous
common financial operations, such as stock trading, and to offer common financial
products with comparable features, such as options and futures.

4. Explain the basic flow of funds through the financial system.

► Banks and other credit institutions act as intermediaries for funds, and securities are
issued directly through financial markets. Funds are transferred from lenders to borrowers
in two ways. In direct or market-based finance, debtors borrow cash directly from
financial market investors by selling financial instruments, also known as securities, that
represent claims on the borrower's future income or assets.

5. What are the key components of the financial system?

► Financial Institutions.
► Financial Markets.
► Financial Instruments (Assets or Securities)
► Financial Services.
► Money.

6. Describe the three important functions of the financial system, namely

a. Risk sharing - Risk sharing is allocating the premiums and losses of each member of a
group of policyholders according to a predefined formula.
b. Liquidity - The ease with which an asset, or security, may be changed into immediate
cash without impacting its market price is referred to as liquidity.
c. Information gathering & sharing - The financial system offers critical information that
is essential to the overall health of the economy.
7. Explain what asymmetric information is.
► Refers to when one party in a transaction has more information than the other. Sellers can
take advantage of buyers in some transactions due to asymmetric information, which
happens when the seller knows more about the product being sold than the buyer.

8. Describe the two problems arising from asymmetric information, namely:

a. Adverse Selection - Adverse selection happens when there is a lack of symmetric
knowledge prior to the conclusion of a transaction between a buyer and a seller.
b. Moral Hazard - The risk that one party did not enter into the contract in good faith or
gave incorrect information about its assets, obligations, or credit capacity is known as
moral hazard.

9. What are transaction and information costs?

► Transaction costs may include legal expenses, communication costs, the cost of obtaining
price information, or the work necessary to bring a commodity or service to market.
Transaction costs are an important consideration when selecting whether to manufacture
or buy a product.

10. Explain how financial intermediaries

a. Reduce "Adverse Selection" - They accomplish this by specialized in distinguishing
between good and bad credit and insurance risks.
b. Moral "Hazard Problem" - Lenders can reduce their risk of moral hazard when lending
to these small businesses by employing the standard debt contract, often known as the
ideal debt contract. Small businesses frequently borrow money for specific initiatives, but
lenders have a tough time determining the viability of those ventures.
c. Reduce "Transaction and Information Costs” - exploiting economies of scale

Chapter 6 - Review Questions

1. Compare the function of a commercial bank with the function of a universal bank.
► Universal banking combines the services of a commercial bank and an investment bank,
offering all services from a single institution, whereas Commercial Banking conducts activities
that primarily involve receiving deposits and lending money, along with certain other duties. A
universal bank is a commercial bank that also has the authority to act as an investment house and
engage in non-allied firms. That power does not exist in a normal commercial bank.
2. Enumerate 3 government banks.
► LANDBANK. Land Bank of the Philippines
► DBP. Development Bank of the Philippines.
► LBRDC. LBP Resources and Development Corporation.

3. Which of the following is not a thrift bank?

a. Private development bank
b. Stock savings and loan associations
c. Stock savings and mortgage banks
d. Cooperative banks

4. A bank which caters to farmers businessmen and cottage industries in the rural areas
a. Rural bank
b. Cooperative bank
c. Saving and loans association
d. Universal bank

5. Which of the following is not a government bank?

a. Land Bank of the Philippines
b. Al-Amanah Islamic Investment Bank
c. Philippine National Bank
d. Development Bank of the Philippines

6. Which of the following is not a government agency that regulates financial institutions?
a. Insurance Commission
b. Bangko Senral ng Pilipinas
c. Securities and Exchange Commission
d. Bureau of Internal Revenue

7. Explain briefly how the following regulatory agencies intend to align their policies, roles,
and practices with global standards
a. BSP - A strong prudential regulator is essential for a stable financial sector. The BSP
plays that duty exclusively in the Philippines. Ultimately, the goal is to guarantee that
banks maintain their solvency and liquidity. In general, the BSP conducts routine bank
investigations no more than once a year.
b. SEC - Given the globalization of the world's financial markets, the SEC supports
worldwide initiatives to strengthen regulatory standards and encourages collaboration
among securities authorities across the world. Through such collaboration, regulators can
obtain valuable insights on effective regulatory measures.
c. Insurance Commission - They provide, explain, and suggest insurance plans on which
the public may rely to protect themselves from certain risks. Insurance Agents'
Examinations are held on a regular basis by the Insurance Commission (IC) for approved
applicants. Certificates of Authority, or licenses to solicit and sell insurance, are then
awarded to successful examinees.

8. Discuss briefly the following current risks in the Philippine Financial system
a. Repricing, refinancing and repayment risks
b. Developments in the credit market
c. Increasing demand for credit by corporate business and households

9. Briefly describe the impact of the COVID-19 pandemic

a. on the global economy - The global economic recovery has been better than
anticipated a year ago, but it is becoming increasingly unbalanced as lower-income
economies struggle to keep up in areas where vaccination rates are low, while advanced
economies face very different challenges in terms of GDP growth, employment, the labor
market, and industries, depending on their protection models.
b. human lives - In many parts of the world, people's lives have changed. can change the
dynamics of people' direct relationships with nature
c. Philippine economy - The unemployment rate was 7.7% in the second quarter of 2021,
while underemployment was 12.3%. Private spending, which accounts for nearly 70% of
the Philippine economy, has remained subdued while public transit remains constrained.
This is the lowest rate of inflation since December 2020. With the surge in pork prices
caused by the African Swine Fever (ASF) epidemic, which drastically curtailed local pig
output, food inflation stayed at 4.9 percent in June 2021.

10. What positive developments are occurring that could possibly reverse some unfavorable
impact of the COVID-19 pandemic?
► Focus on Green Recovery.
The OECD Green Recovery Database focuses on COVID-19 economic recovery
initiatives that have demonstrable positive, negative, or "mixed" environmental
consequences on one or more environmental dimensions.

11. Write a short essay on how COVID-19 Pandemic affected you, as an individual, your
family and your local community.