BUSINESS FINANCE

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 Discipline Bachelor of Science in Business Administration Program BSBA I – BSHM I
Course Code FIN Course Title Business Finance
Credit Units 3 Duration TTH 2:30-4:00
Program Place- 1st year 1st Sem Prerequisite
ment
COURSE DESCRIPTION AND COURSE INTENDED LEARNING OUTCOME
The course focuses on the concepts money, credit or debt and banking system to have better understanding of financial decision
making which is the core of planning and implementation of business related activities. The three-unit course equips business stu-
dents an understanding of finance theory and working knowledge on financial environments in which company’s’ operate in order to
Drake, P. P., & Fabozzi, F. J. (2010). The basics of finance: An introduction to financial markets,
develop appropriate financial strategies and manage strategic businesses sustainably. It covers basic finance concepts, economics,
business finance, and portfolio management. Hoboken: John Wiley & Sons. financial environment, financial statement analysis, risk analysis, the valuation process, capital budgeting, capital structure and
dividend policy. The course covers financial analytical tools, cash flow management techniques and working capital management.
These financial tools and techniques will enable students to select the appropriate decision making tools to critically, analytically and
creatively solve business problems and drive results.

At the end of the course, the learners are able to: (1) Demonstrate the ability to integrate and synthesize the theories, methods and
practices of finance. (2) Produce innovative concepts or ideas that are beneficial to the community as a whole. (3) Demonstrate the
ability to utilized skills, talents and know-hows in finance for community involvement. (4) Prepare mitigation plans in case of unex-
pected business changes. (5) Apply appropriate quantitative tools to address business case problems. (6) Embrace challenges and
create development opportunities.
COURSE OUTLINE
Timeframe Topic Timeframe Topic
(Week & Hour) (Week & Hour)
1 NORSU Preliminaries 9 – 10 Financial Strategy and Financial
Planning
2 Introduction: The Basics of Finance 11 – 12 The Corporate Financing Deci-
sion
3-4 Financial Instruments and Financial Markets 13 – 14 Investment Management
5–6 The Financial System’s Cast of Characters 15 – 16 Asset Pricing Theory
7–8 Business Finance 17 – 18 The Structure of Interest Rates
Midterm Final
COURSE REQUIREMENT COURSE GRADING SYSTEM
The students’ responsibility is to come to each class prepared. BSBA Major Examinations (Mid-Term/ Final)…….. 40%
and BSHM students are expected to take all examinations on the date
Participation… ……………………………….. 20%
scheduled. All students are expected to be academically honest. Spe-
cial examinations will be allowed only in special cases, such as pro- Quiz/Written Works ………………………….. 20%
longed illness. It is the responsibility of the student to monitor her/his
tardy incidents and absences that might accumulate leading to a grade Project/Output ………………………………... 10%
of Failed/Dropped. Attendance/Behavior………………………… 10%

Demonstration, Full-Adherence to Performance Task _______

requirements and Active participation in collaborative Final Grade 100%
activities. Submission of expected outputs and compli-
ance to attendance requirements in Blended Mode of
Instruction (BMI) with the observance of the standard:
75% classroom face-to-face and 25% technology medi-
ated sessions.

List of References/Reading Materials:

Drake, P. P., & Fabozzi, F. J. (2010). The basics of finance: An introduction to financial markets, business finance, and portfolio
management. Hoboken: John Wiley & Sons. Page 1
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 ___________________________________________________________________
__________________________________________________________________
The basics of finance allow you to study the basic framework of the financial system and the players 5. Latency Period
in this system. These contain financial management and topics such as financial statement, analysis ___________________________________________________________________
and financial decision-making within a business enterprise. And lets you examines the analytical part
of finance, which involves valuing assets and analyzing performance. ___________________________________________________________________
___________________________________________________________________
___
6. Liquidity
___________________________________________________________________
a. Produce innovative concepts or ideas that are beneficial to the community as a whole;
b. Demonstrate the ability to utilized skills, talents and know-hows in finance for community involvement; ___________________________________________________________________
c. Prepare mitigation plans in case of unexpected business changes; ___________________________________________________________________
d. Apply appropriate quantitative tools to address business case problems; and ___
e. Embrace challenges and create development opportunities. 7. Post-trading
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
Lesson 1: What is Finance? ___
Lesson 2: Financial Instruments and Financial Markets
8. Structured Bond
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
This module will benefit you much through following all points carefully. The necessary key points for you to
___
familiarize are summarized as follows:
1. This module contains two (2) lessons. Each lesson is expounded goodly. Read the explana- 9. Manipulating Transactions
tions thoroughly so that you could fully understand the lesson. ___________________________________________________________________
2. You will find the specific learning outcomes of each lesson in the first page. Specific learning ___________________________________________________________________
outcomes are knowledge and skills that you can acquire at the end of the lesson, so read ___________________________________________________________________
them thoroughly. ___
3. You must answer the Learning Activities/Exercises; these will help you to acquire the specific 10. Intermediary
learning outcomes. ___________________________________________________________________
4. If you have questions, reactions, or reflections about the contents or activities in this module,
___________________________________________________________________
feel free to call/ text at this contact number 09362234414 or send an email messages to
[email protected] .In addition, you can also message me through our Facebook Mes- ___________________________________________________________________
senger group. ___
5. The Learning Activity, Practice Task/Assessment and the Assignment shall be checked by
yours truly.

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 The Basic Finance

Answer key to D. Learning Activity/Exercise

At the end of the lesson you will be able to:

1. Seek to clarify the definition of finance;
2. Discuss and develop financial management and investment management; and
10. CREDIT UNION 15. BANKING 20. DIVIDENDS 5. PAYMENTS
9. INTEREST 14. WAGES 19. NONBANKING LENDER 4. LOANS
8. ASSETS 13. EXPENSES 18. COMPOUND 3. SHARES 3. Identify the investment activitis.
7. MONEY 12. STOCKS 17. SUPERANNUATION 2. FINANCIAL INSTITUTIONS
6. RECEIPTS 11. INCOME 16. CLIENTS 1. BUDGETS

Do you ever ask yourself “What would I do if I wouldn’t make it a try?” or “What if I didn’t choose to
take the risk?”, how will you ever know that you can?

DEFINITION OF TERMS. Define the following terms in your own words.

1. Collateral Defining Finance
____________________________________________________________________ Finance – is the application of economic principles to decision-making that will involve the allotment
____________________________________________________________________ of money under the conditions of uncertainty.
_________________________________________________________________ - it provides the framework for decision making as to how and where to get funds and finding
the right thing to do once we already have the funds.
2. Complex Product
- it is also often referred as “financial economics” for the reason that its foundation draws from
____________________________________________________________________ the field of economics.
____________________________________________________________________ Exhibit 1.1 Finance and its Relation to other Fields
_________________________________________________________________ MATHEMATICS PROBABILITY
3. Conflicts of Interest THEORY
____________________________________________________________________
____________________________________________________________________ FINANCIAL STATISTICAL
_________________________________________________________________ ACCOUNTING THEORY
4. Cross-market Behaviour FINANCE
ECONOMICS PSYCHOLOGY
____________________________________________________________________

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FINANCE is…..
Analytical, using statistical, probability, and mathematics to solve problems;
Base on economic principles and uses accounting information as inputs to decision-making;
The study of how to raise money and invest it productively.
For clarifications, feel free to chat me on my messenger JJ Calibo or send an email
([email protected]) message to me if you have questions, reactions, or reflections about the
Capital Markets
contents or activities in the lesson.
and Capital
Market Theory

Financial Investment
Management Management

Answer the following questions briefly in your own understanding.

Exhibit 1.2 The Three Areas within the Field of Finance 1. What distinguishes indebtedness and equity?
________________________________________________________________________________
Capital Markets and Capital Market Theory ________________________________________________________________________________
________________________________________________________________________________
This field focuses on the study of the financial system, the structure of interests’ rates, and the pricing
________________________________________________________________________________
of risky assets.
________
The three (3) Components of Financial System that often
2. Is preferred stock a debt or equity instrument? Explain.
refer to this area as Financial Markets and Institutions.
________________________________________________________________________________
1. Financial Markets
________________________________________________________________________________
2. Financial Intermediaries
________________________________________________________________________________
3. Financial Regulators
________________________________________________________________________________
Some of the important topics that includes in this
________
area of finance are the Pricing Efficiency of financial
3. What distinguishes the money market from the capital market?
markets, The Role and Investment Behaviour of the play-
________________________________________________________________________________
ers in the financial markets, The Best Way to Design and
________________________________________________________________________________
Regulate financial markets, The Measurement of risk, and The Theory of Asset Pricing.
________________________________________________________________________________
The pricing efficiency of the financial markets is censorious because of the reason that it deals with wheth-
________________________________________________________________________________
er investors can “beat the market.” If a market is highly price efficient, it is very hard for investors to earn re-
________
turns that are bigger than those expected for the investment’s level of risk.
4. How does the efficiency of a market affect an investor’s strategy?
An investor who will go after an investment strategy that seeks to “beat the market” should believe that the
________________________________________________________________________________
sector of the financial market to which the strategy is applied is not highly price efficient.
________________________________________________________________________________
Active Strategy – such a strategy that seeks to “beat the market.”
________________________________________________________________________________
Passive Strategy – seeks to match how the market performs.
________________________________________________________________________________
In finance, winning the market means outperforming the market by producing a return on investment
________
beyond what is expected after adjusting for risk and transaction costs. To be able to determine measurably

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 what is “expected” from an investment after adjusting for risk, it is required to formulate and empirically test
theories on how assets are priced or, equivalently, valuing an asset to determine its fair value.
The fundamental principle of valuation is that the value of any financial asset is the present value of the
expected cash flows. Thus, the valuation of a financial asset involves (1) estimating the expected cash flows;
Arrange the following words related to finance. Write your answers on the space provided. (2) determining the appropriate interest rate or interest rates that will be used to discount the cash flows; and
1. DUSEGTB ___________________________________________ (3) calculating the present value of the expected cash flows. For example, in valuing a stock, we often esti-
mate future dividends and gauge how uncertain are these dividends. We use basic mathematics of finance to
2. INLACNIFA IUTOISSTTINN ____________________________ compute the present value or discounted value of cash flows. In the process of this calculation, we must use
3. ESARHS ____________________________________________ a suitable interest rate, which we will refer to as a discount rate.
Capital Market Theory – this will produce theories that will lead investors in selecting the appropriate
4. ALSNO _____________________________________________ interest rates.
5. YPSEATNM __________________________________________ Financial Management
Financial Management, sometimes called business finance or corporate finance, is the area of fi-
6. EEPIRSCT __________________________________________ nance concerning with financial decision-making within a business entity. The principle of financial manage-
ment also applies to the other forms of businesses
7. MENOY _____________________________________________
and to government entities even if it is often refer to
8. SSAETS ____________________________________________ as corporate finance. Financial manager’s primary
concerns are with investment decisions and financ-
9. ITNETESR __________________________________________ ing decisions within the organizations.
10. TDCIER ONNUI ______________________________________ Investment decisions are concerned with
the use of funds – the buying/selling and holding of
11. CIOMNE ____________________________________________ all types of assets: Should a business purchase a
12. TSCOKS ____________________________________________ new machine? Should a business introduce a new
product line? Acquire another business? Maintain a
13. SSXPEEEN __________________________________________ higher level of inventory?
Financing decisions are concerned with the
14. SGWEA _____________________________________________
procuring of funds that can be used for long-term
15. GKINBAN ___________________________________________ investing and financing daily operations. Should the financial managers use profits raised through the compa-
ny’s revenues or distribute those profits to the owners? Should financial managers look for money from out-
16. TLISCNE ___________________________________________
side of the business? Financing decision also includes the dividend decision, which involves how much of a
17. OARUNAESPNUTIN ____________________________________ company’s profit should be kept and how much to distribute to owners.
A company’s financial strategic plan is a framework of reaching its aim of maximizing owner’s wealth.
18. OUDMPNCO __________________________________________ Applying the strategic plan requires both long-term and short-term financial planning that brings together
19. OBNAINNGNK ERNELD _________________________________ forecasts of the company’s sales within the financing and investment decision-making.
The capital structure of a company is the combination of debt and equity that management selects to
20. IDIDVNDES _________________________________________ raise to finance the assets of the company.
Capital Budgeting Decisions – investment decisions assemble by the financial manager require the
long-term commitment of a company’s scarce resources in long-term investments. These decisions do an
important role in determining the success of a business enterprise.
A financial manager must also make decisions about a company’s current assets.
Current Assets – are those assets that could be converted to cash within one operating cycle or one

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year. These include cash, marketable securities, accounts receivable, and inventories, and support the long- value from the value of the underlying.
term investment decisions of a company.
Risk Management – one of the critical tasks in financial management in a company. Its process re- Derivatives Market – the market in which they trade.
quires regulating which risks to accept, which to neutralize, and which to transfer. The primary role of derivative instruments is to provide a transactional efficient vehicle for protecting against
Four (4) Key Processes in Risk Management: various types of risk encountered by investors and issuers.
Identification
Assessment THE PRIMARY MARKET
Mitigation Primary Market – it is sold here when an issuer first is-
Transference sues a financial instrument. Companies sell new issues
The traditional process of risk managements’ canter of attention is on managing the risks of only parts of the and thus raise new capital in this market. Therefore, it is
business (products, departments, or divisions), disregarding the implications for the value of the company. the market whose sales generate proceeds for the issuer
Enterprise Risk Management – permits management to align the risk appetite and strategies across the com- of the financial instrument.
pany, enhance the quality of the company’s risk response decisions, recognize the risks across the com-
pany, and control the risk across the company. Underwriting – the process of investment banks bringing
these securities to the public markets.
Investment Management Auction Process – through this another method of offer-
Investment Management – is the ing new issues.
area within finance that deals with the THE SECONDARY MARKET
management of individual or institutional
Secondary Market – is one in which financial instru-
funds. Other terms commonly used to ments are resold among investors. Issuers do not
describe this area of finance are asset raise new capital in the secondary market and,
management, portfolio management, and therefore, the issuer of the security does not re-
wealth management. In industry jargon, ceive proceeds from the sale. Trading takes place
an asset manager “runs money.” among investors.
Market Structure – categorizing secondary markets
based on the way in which they trade.
Measuring and – is the mechanism by which
Setting Selecting Evaluating buyers and sellers interact to determine price and
Investment Investment Investment quantity.
Objectives Strategy Performance
There are two overall market structures for trading financial instruments:
1. Order-Driven Market Structure – buyers and sellers submit their bids through their broker, who relays these
bids to a centralized location for bid-matching, and transaction execution.
Establishing an Selecting
2. Quote-Driven Market Structure – intermediaries (market makers or dealers) quote the prices at which the
Investment Specific Assets
public participants trade.
Policy
Market Makers – provide a bid quote (to buy) and an offer quote (to sell), and realize revenues from the
spread between these two quotes. Thus, market makers derive a profit from the spread and the turnover of
Exhibit 1.3 Investment Management Activities their inventory of a security

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and bankers’ acceptances. Investment management includes five (5) primary activities, as we draw up in Exhibit 1.3. Setting
Treasury Bills – are short-term securities issued by the U.S. government; they have original maturities of four Investment Objectives starts with in-depth analysis of what the entity or client wants to achieve. Given the
investment objectives, the investment manager develops policy guidelines, taking into consideration any cli-
weeks, three months, or six months.
ent-imposed investment limitation, legal/regulatory control, and tax restrictions. This task begins with the deci-
Commercial Paper – is a promissory note—a written promise to pay—issued by a large, creditworthy corpora- sion of how to distribute assets in the portfolio (i.e., how the funds are to be allotted among the major asset
tion or a municipality. This financial instrument has an original maturity that typically ranges from one day to classes). The portfolio is simply the set of investment manager must choose a portfolio strategy that is coher-
270 days. Commercial paper may be either interest bearing or sold on a discounted basis. ent with the investment objectives and investment policy guidelines.
In general, portfolio strategies are grouped as either active or passive. Taking the specific financial
Certificates of Deposits (CDs) – are written promises by a bank to pay a depositor. Investors can buy and sell
assets to be contained in the portfolio, which is referred to as the portfolio selection problem, is the next step.
negotiable certificates of deposit, which are CDs issued by large commercial banks.
The theory of portfolio selection was developed by Harry Markowitz in 1952. This theory proposes how inves-
Bankers’ Acceptances – are short-term loans, usually to importers and exporters, made by banks to finance tors can establish portfolios based on two parameters: mean return and standard deviation of returns. The
specific transactions. An acceptance is created when a draft (a promise to pay) is written by a bank’s customer final parameter is a measure of risk. The main task is the evaluation of the performance of the asset manag-
and the bank “accepts” it, promising to pay. er. This task let a client to regulate answers to questions such as: How did the asset manager perform after
adjusting for the risks similar with active strategy employed? And, how did the asset manager attain the re-
THE CAPITAL MARKET
ported return?
Capital Market – is the sector of the financial
market where long-term financial instruments
issued by corporations and governments trade.
D. Assessment
Here “long-term” refers to a financial instrument
TRUE or False. Write F if the statement is True and T if the statement is false. Write your answer
with an original maturity greater than one year
and perpetual securities (those with no maturi- on the space provide before each number.
ty). ________1. The valuation of a financial asset is based on the concept of determining the present
value of future cash flows.
A capital market debt obligation is a financial
instrument whereby the borrower promises to repay the maturity value at a specified period of time beyond one ________2. The prices of financial assets are based on the expected value of future cash flows,
year. We can break down these debt obligations into two categories: bank loans and debt securities. discount rate, and past dividends.
Syndicated Bank Loan – this is a loan in which a group (or syndicate) of banks provides funds to the borrower. ________3. The market determined required rate of return is also called the discount rate.
The need for a group of banks arises because the ________4. The discount rate depends on the market's perceived level of risk associated with an
exposure in terms of the credit risk and the amount individual security.
sought by a borrower may be too large for any one ________5. By using different discount rates, the market allocates capital to companies based on
bank. their risk, efficiency, and expected returns.
THE DERIVATIVE MARKET ________6. In estimating the market value of a bond, the coupon rate should be used as the dis-
count rate.
Cash Market – also referred to as the spot market, it
________7. Most bonds promise both a periodic return and a lump-sum payment.
is the market for the immediate purchase and sale of
________8. Personal finance is the cheapest source of finance.
a financial instrument.
________9. Venture capitalists tend to invest their money in medium to large-sized businesses
Underlying Asset – the ‘something’ that is the subject since they have the best investment track record.
of the contract. ________10. If interest rates in an economy increase, dividend payments to shareholders will also
Derivative Instrument – such contracts derive their have to increase.

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 utes. In a price-efficient market, prices reflect the aggregate information collected by all market
participants.

Types of Financial Markets

For clarifications, feel free to chat me on my messenger JJ Calibo or send an email
Earlier we give the general role
([email protected]) message to me if you have questions, reactions, or reflections about the
of financial markets in a finan-
contents or activities in the lesson.
cial system. In this part, we
tackle the many ways to classi-
fy financial markets.
Country’s Financial Market
1. Internal Market/National
E. ESSAY. Market
Define the scope of financial management and investment management. What role should the
a. The Domestic Market – is
financial manager play in a modern enterprise?
where the issuers domiciled in
___________________________________________________________________
the country issue securities
___________________________________________________________________ and where investors then trade
___________________________________________________________________ those securities. For example,
___________________________________________________________________ from the perspective of the
___________________________________________________________________ United States, securities is-
___________________________________________________________________ sued by Microsoft, a U.S. corporation, trade in the domestic market.
___________________________________________________________________
b. The Foreign Market – is where securities of issuers not domiciled in the country are sold and traded. For
___________________________________________________________________ example, from a U.S. perspective, the securities issued by Toyota Motor Corporation trade in the foreign
__________________________________________________________________. market. We refer to the foreign market in the United States as the “Yankee market.”
2. External Market – this is the market where securities with the following two distinguishing features are trad-
ing: (1) At issuance the securities are offered simultaneously to investors in a number of countries. (2) The
Answer key to D. Learning Activities . securities are issued outside the jurisdiction of any single country. We also refer to the external market as the
international market, the offshore market, and the Euromarket (despite the fact that this market is not limited
10.T 9.T 8.F 7.F 6.T to Europe).
5.F 4.F 3.F 2.T 1.F
THE MONEY MARKET
Money Market – is the sector of the financial
market that includes financial instruments with a
maturity or redemption date one year or less at
the time of issuance. Typically, money market
Provide your insights and/or reflection of the lesson discussed. Answer the following questions briefly.
instruments are debt instruments and include
1. What distinguishes investment management from financial management?
__________________________________________________________________________________ Treasury bills, commercial paper, negotiable
______________________________________________________________________________ certificates of deposit, repurchase agreements,

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Sirius XM Radio (ticker: SIRI) issued convertible notes in October 2004. These notes pay an interest rate of 2. What is the role of a discount rate in decision-making?
3.25%, and can be exchanged for the common stock of Sirius XM Radio Inc. at a rate of 188.6792 shares of ________________________________________________________________________________
the company’s common stock for every $1,000 principal amount of the notes. ________________________________________________________________________________
The notes mature in 2011, so investors in these convertible notes have until that time to exchange their note 3. What is the responsibility of the investment manager with respect to the investment portfolio?
for shares; otherwise, they will receive the $1,000 face value of the notes. ________________________________________________________________________________
________________________________________________________________________________
Two (2) legal reasons why the classification of debt and equity is important: (1) In the case of a bankruptcy of
4. Distinguish between capital budgeting and capital structure.
the issuer, investors in debt instruments have a priority on the claim on the issuer’s assets over equity inves-
________________________________________________________________________________
tors.; (2) in the United States, the tax treatment of the payments by the issuer differs depending on the type of
________________________________________________________________________________
class.
5. What is enterprise risk management ?
The Role of Financial Markets _____________________________________________________________
Investors interchange financial instruments in a _____________________________________________________________
financial market. The more desired term used for
exchanging of financial instruments is that they
are “traded.”
Three (3) major economic functions that the fi- Financial Instruments and Financial Markets
nancial markets provide:
Price Discovery – means that the interac-
tions of buyers and sellers in a financial
market determine the price of the trad-
ed asset. Equivalently, they determine At the end of the lesson you will be able to:
the required return that participants in a 1. provide the definition of financial system;
financial market demand in order to buy 2. specify and discuss the role of financial markets; and
a financial instrument. 3. evaluate and classify the types of financial markets.
Liquidity – is the presence of buyers and sellers ready to trade. This is an appealing feature when circum-
stances arise that either force or motivate an investor to sell a financial instrument.
Without liquidity, an investor would be compelled to hold onto a financial instrument until either: (1)
conditions arise that allow for the disposal of the financial instrument, or (2) the issuer is contractually
obligated to pay it off.
If I lost my entire business that I venture tomorrow, What would I do to start investing for start-up?
Reduce Transaction Costs – the third economic function of a financial market is that it reduces the cost of
transacting when parties want to trade a financial instrument.

2 Classifications of costs:
Search Costs – in turn fall in to two categories:
Explicit Cost – include expenses to advertise one’s intention to sell or purchase a financial The Financial System
instrument. A country’s financial system contains of entities that help facilitate the flow of funds from those that have
Implicit Costs – include the value of time spent in locating counterparty that is, a buyer for a funds to invest to those who need funds to invest. Weigh up if you had to finance a purchase of a home by
seller or a seller for a buyer to the transaction. rounding up sufficient folks willing to lend you. This would be challenging and a bit awkward. In addition, this
Information Costs – are costs associated with assessing a financial instrument’s investment attrib- would need a careful planning and lots of paperwork to monitor the loan contracts, and how much you must

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repay and to whom. What is the difference between Debt and Equity?
Information Asymmetry – it deals with the study of decisions in transactions where one party has lot of
information than the other. Just like in lending and investing cases, there is not only the awkwardness of trad- Debt – a financial instrument in which the issuer agrees to pay the investor interest, plus repay the amount
ing directly with the other party, but there is the problem that one party has different information set than the borrowed, can also be called as debt instrument. A debt can be in the form of a note, bond, or loan. The issu-
other. er must pay interest payments, which are fixed contractually.
Asset – is any resource that we expect to give future benefits and has economic value. The investor who lends the funds and expects interest and the repayment of the debt is a creditor of the issu-
Two (2) Types of Assets: er.
Tangible Assets – the value of this asset depends on its physical properties. Examples are buildings,
land, and machinery, which often refer as fixed assets. Fixed Income Instrument – we often refer to debt instruments when the reason is the point is that the investor
Intangible Assets – this asset means a legal claim to some future economic benefits. Examples in- in a debt instrument can realize no more than the contractual amount.
clude patents, copyrights, and trademarks. Its value brings no relation to the form, physical or Example: MICKEY MOUSE DEBT
otherwise, in which the claims are being listed.
Financial Assets, such as stocks and bonds, are also tangible assets because the future benefit comes in The Walt Disney Company bonds issued in July 1993, which mature in July 2093, pay interest at a rate of
the form of a claim to future cash flows. Another term we use for a financial asset is financial instru- 7.55%. This means that Disney pays the investors who bought the bonds $7.55 per year for every $100 of
ment. We often refer to certain types of financial instruments as securities, which involve stocks and principal value of debt they own.
bonds. Equity Instrument – in contrast to a debt obligation it specifies that the issuer pay the investor an amount
Two (2) minimum parties for every Financial Instrument: based on earnings, if any, after the obligations that the issuer is required to make to the company’s creditors
1. Issuer – the party that has agreed to make future cash payments.
are paid. Examples of equity instruments are common stock and partnership shares.
2. Investor – the party that owns the financial instrument and therefore the right to receive the payments made
by the issuer. Common Stock – is the ownership interest in a corporation, whereas a partnership share is an ownership
Why do we need Financial Assets? interest in a partnership.
Financial assets serve two principal functions:
Dividends – refer to any distribution of a company’s earnings.
1. They allow the transference of funds from those entities that have surplus funds to invest to those who need
funds to invest in tangible assets. An Example of Common Stock
2. They permit the transference of funds in such a way as to redistribute the unavoidable risk associated with
At the end of 2008 there were 3,032,717 shares of common stock outstanding of Proctor & Gamble, a U.S.
the tangible assets’ cash flow among those seeking and those providing the funds.
consumer products company. At that time, financial institutions owned almost 60% of this stock. These insti-
EXHIBIT 2.1 The Role of the Financial Intermediary tutions include pension funds and mutual funds. Individual investors owned the remainder of Proctor & Gam-
ble’s stock.
FUNDS

The stock is listed on the New York Stock Exchange with the ticker symbol PG.
Preferred Stock – is such a hybrid because it looks like debt because investors in this security are only enti-
tled to receive a fixed contractual amount. It is similar to equity because the payment to investors is only
made after obligations to the company’s creditors are satisfied.
Preferred Stockholders – they are typically entitled to a fixed contractual amount, we refer to preferred stock
as a fixed income instrument. Hence, fixed income instruments include debt instruments and preferred stock.
FINANCIAL ASSETS
Convertible Bond/Convertible Note – is a debt instrument that allows the investor to convert it into shares of
common stock under certain circumstances and at a specified exchange ratio.
DO YOU WANT DEBT OR STOCK?

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