Business

Finance
Module 3
Prepared by: MS. MA. RHIZA D. CAÑETE
Student: ________________________________ Strand & Section: ______________
Subject Teacher: MS. MA. RHIZA D. CAÑETE

Good day our dear students!

Welcome to Business Finance: Module 3 for Grade 12!
This module was created and designed for you to learn and for you to be provided with fun and meaningful
activities which will enhance your skills in independent learning.
Please be reminded of the important activities to be accomplished upon the use of this module:
1. Please do the OPENING PRAYER before proceeding to the entire lessons and activities given for the day.
Please take a moment of silence and proceed to the opening prayer.
Opening Prayer
Heavenly Father, who by the light of the Holy Spirit, did instruct the hearts of the faithful, grant that by the
same spirit that we may be truly wise and ever enjoy His consolation. All of these we pray in Jesus name.
Amen.
2. Please use and answer your module with love, eagerness and care.
3. All the instructions are clearly written on your module. Please read them carefully and make sure to follow
them faithfully.
4. Please read and understand the intended lesson for the day.
5. Please observe honesty and integrity in accomplishing the tasks given.
6. Please practice to have a motivating mood, patience and perseverance in understanding and
accomplishing the self – learning module.
7. You have to finish the tasks at hand before proceeding to the next. Make sure no activities will be neglected.
8. Please be reminded that all the activities and lessons on the module must be finished on the given time
frame.
9. After finishing the module, make sure to submit this on the given schedule.
10. Once all the lesson and activities were accomplished, please do not forget to do the CLOSING PRAYER.
Please take another moment of silence and proceed to the closing prayer.
If you encounter problems or difficulties in answering this module, please do not hesitate to address your
concerns to the responsible teacher. The contact number of the teacher and the consultation hours are
provided in this module. Please bear in mind that you have someone that will guide and will help you in finishing
your module.
It is with a positive mind that this material will really help you to have meaningful learning and gain deep
understanding of the most essential learning competencies intended for this subject. We hope that you will be
fully equipped with the necessary knowledge that will enhance you into a wholesome human being.
TOGETHER EVERYONE ACHIEVES MORE!
Enjoy your module! Thank you and God bless!

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 SENIOR HIGH SCHOOL SELF-LEARNING MODULE
Grade: 12 Semester: Second Semester
Core Subject Title: Business Finance No. of Hours/Semester: 80 hours
MODULE 3

Topic/Lesson Name Financial System

The learners demonstrate an understanding of the definition of finance, the activities

Content Standards
of the financial manager, and financial institutions and markets.
Performance Standards The learners are able to describe the role of financial institutions and markets
The learners shall be able to distinguish a financial institution from financial instrument
and financial market; enumerate the varied financial institutions and their
Most Essential Learning
corresponding services; compare and contrast the varied financial instruments; and
Competencies
explain the flow of funds within an organization – through and from the enterprise—
and the role of the financial manager.
References (Books and other Cayanan, A. S., Barrido Jr., A. P., Dy, D. C., Rodriguez, J. A., Rodriguez, R. A., &
learning portals or websites) Yusoph, A. B. (2016). Business Finance. Commission on Higher Education.

LEARNING OBJECTIVES:
Upon the completion of this module, you will be able to:

• Prepare a diagram illustrating how the Financial System works.

• Define Financial Markets, Financial Institutions and Financial Instruments.
• Identify the types of Financial Markets, Financial Institutions and Financial Instruments.

DISCUSSION LEADING TO THE MASTERY OF THE LESSON

TERMS DEFINED

• Financial Institutions- intermediaries that channel the savings of individuals, businesses, and
governments into loans or investments.
• Private Placements - the sale of a new security directly to an investor or group of investors.
• Public Offering - The sale of either bonds or stocks to the general public.
• Financial Instruments - is a real or a virtual document representing a legal agreement involving some
sort-of monetary value. These can be debt securities like corporate bonds or equity like shares of stock.
(Source: Investopedia - Sharper Insight. Smarter Investing. | Investopedia. (2016).

Financial System

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Question:
How transactions between suppliers and users of funds take place. How would they prove that there was
a transaction so that the demander will be able to repay the supplier on time and at the right amount?
Answer:
- Verbal agreement
- Written agreement

Financial Instruments

When a financial instrument is issued, it gives rise to a financial asset on one hand and a financial liability or
equity instrument on the other.

Recall the following definitions:

A Financial Asset is any asset that is:

• Cash
• An equity instrument of another entity
• A contractual right to receive cash or another financial asset from another entity.
• A contractual right to exchange instruments with another entity under conditions that are potentially
favorable. (IAS 32.11)
• Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds

A Financial Liability is any liability that is a contractual obligation:

• To deliver cash or other financial instrument to another entity.
• To exchange financial instruments with another entity under conditions that are potentially unfavorable.
(IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds Payable

An Equity Instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all liabilities. (IAS 32)
• Examples: Ordinary Share Capital, Preference Share Capital

Questions
1. Who are the holders of Financial Assets?
2. Who the makers of Financial Liabilities and Equity instruments are?
Answers:
1. Suppliers of Funds
2. Users of Fund

When companies are in need of funding, they either sell debt securities (or bonds) or issue equity
instruments. The proceeds from the sale of the debt securities and issuance of bonds will be used to finance the
company’s plans. On the other hand, investors buy debt securities of equity instruments in hopes of receiving
returns through interest, dividend income or appreciation in the financial asset’s price.

Common examples of Debt and Equity Instruments

Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt instruments are
as follows:

• Treasury Bonds and Treasury Bills are issued by the Philippine government. These bonds and bills
have usually low interest rates and have very low risk of default since the government assures that these
will be paid.
• Corporate Bonds are issued by publicly listed companies. These bonds usually have higher interest
rates than Treasury bonds. However, these bonds are not risk free. If the company which issued the
bonds goes bankrupt, the holder of the bonds will no longer receive any return from their investment and
even their principal investment can be wiped out.
Equity Instruments generally have varied returns based on the performance of the issuing company.
Returns from equity instruments come from either dividends or stock price appreciation. The following are types
of equity instruments:

• Preferred Stock has priority over a common stock in terms of claims over the assets of a company. This
means that if a company were to be liquidated and its assets have to be distributed, no asset will be
distributed to common stockholders unless all the claims of the preferred stockholders have been given.
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 Moreover, preferred stockholders have also priority over common stockholders in cash dividend
declaration. Dividends to preferred stockholders are usually in a fixed rate. No cash dividends will be
given to common stockholders unless all the dividends due to preferred stockholders are paid first.
(Cayanan, 2015)
• Holders of Common Stock on the other hand are the real owners of the company. If the company’s
growth is spurring, the common stockholders will benefit on the growth. Moreover, during a profitable
period for which a company may decide to declare higher dividends, preferred stock will receive a fixed
dividend rate while common stockholders receive all the excess.

Classification of Financial Markets into comparative groups:

Primary vs. Secondary Markets

• To raise money, users of funds will go to a primary market to issue new securities (either debt or equity)
through a public offering or a private placement.
• The sale of new securities to the general public is referred to as a public offering and the first offering
of stock is called an initial public offering. The sale of new securities to one investor or a group of
investors (institutional investors) is referred to as a private placement.
• However, suppliers of funds or the holders of the securities may decide to sell the securities that have
previously been purchased. The sale of previously owned securities takes place in secondary markets.
• The Philippine Stock Exchange (PSE) is both a primary and secondary market

Money Markets vs. Capital Markets

• Money markets are a venue wherein securities with short-term maturities (1 year or less) are sold. They
are created because some individuals, businesses, governments, and financial institutions have
temporarily idle funds that they wish to invest in a relatively safe, interest-bearing asset. At the same
time, other individuals, businesses, governments, and financial institutions find themselves in need of
seasonal or temporary financing.
• On the other hand, securities with longer-term maturities are sold in Capital markets. The key capital
market securities are bonds (long-term debt) and both common stock and preferred stock (equity, or
ownership).

Financial Institutions
Examples of financial institutions:

• Commercial Banks - Individual’s deposit funds at commercial banks, which use the deposited funds to
provide commercial loans to firms and personal loans to individuals, and purchase debt securities issued
by firms or government agencies.
• Insurance Companies - Individuals purchase insurance (life, property and casualty, and health)
protection with insurance premiums. The insurance companies pool these payments and invest the
proceeds in various securities until the funds are needed to pay off claims by policyholders. Because
they often own large blocks of a firm’s stocks or bonds, they frequently attempt to influence the
management of the firm to improve the firm’s performance, and ultimately, the performance of the
securities they own.
• Mutual Funds - Mutual funds are owned by investment companies which enable small investors to enjoy
the benefits of investing in a diversified portfolio of securities purchased on their behalf by professional
investment managers. When mutual funds use money from investors to invest in newly issued debt or
equity securities, they finance new investment by firms. Conversely, when they invest in debt or equity
securities already held by investors, they are transferring ownership of the securities among investors.
• Pension Funds - Financial institutions that receive payments from employees and invest the proceeds
on their behalf. - Other financial institutions include pension funds like Government Service Insurance
System (GSIS) and Social Security System (SSS), unit investment trust fund (UITF), investment banks,
and credit unions, among others.

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The figure above illustrates how the key financial institutions serve as intermediaries for suppliers and users of
funds

Closing Prayer

We give you thanks Almighty Father through your son Jesus Christ for all the benefits you have given us
to you who live and reign forever and ever. Amen.

Well done! So, you have successfully completed the activities and tasks for the module 3. It is expected
that you have gained insights and meaningful experiences. What a great achievement!
Again, CONGRATULATIONS AND GOD BLESS!

Name of Teacher Email Address Consultation Day Consultation Hours

Ms. Ma. Rhiza D. Cañete [Link]@[Link] Monday to Thursday 1:00 PM - 5:00 PM

“Your EDUCATION is your LIFE, Guard it well”

- Proverbs 4:13b

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