CHAPTER 1: Direct funds transfers are common among individuals and small

RATIONALE IN STUDYING FINANCIAL MARKETS AND INSTITUTIONS businesses and in economies where financial markets and institutions
are less developed. But large businesses in developed economies
generally find it more efficient to enlist the services of a financial
In a market system, businesses of all types face risks, and many
institution when the time comes to raise capital.
businesses fail. Economists and policy makers are particularly
concerned about the risk and potential failure that financial Financial institutions are what make financial market work. Without
institutions (bank and non-bank) face because they play vital role in them, financial markets would not be able to move funds from people
the financial system. who save to people who have productive investment opportunities.
Thus, they also have important effects on the performance of the
Financial markets and institutions not only influence your everyday
economy as a whole.
life but also involve huge flows of funds – trillions of dollars –
throughout the world economy which is turn affect business profits, Financial institutions are financial intermediaries that acquire funds
the production of goods and services and the economic well-being of by issuing liabilities and in turn use those funds to acquire assets by
the countries around the world. purchasing securities or making loan.
The study of financial markets and institutions will reward you with Financial institutions allow small savers and borrowers to benefit
an understanding of many exciting issues such as how funds are from the existence of financial markets thereby increasing the
transferred from people who have an excess of available funds to efficiency of the economy.
people who have a shortage.
CHAPTER 2:
Markets exercise enormous influence over modern life comes is not INTRODUCING MONEY AND INTEREST RATES
news. But although people around the world speak glibly of “Wall
Street”, the “stock market” and the “currency marks”, the meanings
Money is any item or commodity that is generally accepted as a
they attach to these time-worn phrases are often unclear and out-of-
means of payment for goods and services or for repayment of debt,
date.
and that serves as an asset to its holder.
The word market usually conjures up an image of the bustling, paper-
Money is composed of the bills and coins which have been printed or
strewn floor of the New York Stock Exchange and of Philippine Stock
minted by the National Government, called currency. But money also
Exchange and of traders motioning frantically in the “futures” cubicles
includes the funds stored as electric entries in one’s checking account
in Chicago.
and savings account.
Financial markets have been around ever since mankind settled down
Because money in a modern economy is not directly backed by
to growing crops and trading them with others. The independent
intrinsic value, the financial system works on an entirely fiduciary
decisions of all of those farmers constituted a basic financial market,
basis, relying on the public’s confidence in the established forms of
and that market fulfilled may be the same purposes as financial
monetary exchange.
markets do today.
Money is the oil that keeps the machinery of our world turning. It  limited supply
facilitates the billions of transactions that take place every day.  usable as a means of exchange
Without it, the industry and trade that form the basis of modern
Store of value – Money acts as a means which people can store their
economies would grind to a halt and the flow of wealth around the
wealth for future use. It must not be perishable and it helps if it is of a
world would cease.
practical size that can be stored and transported easily.
Money has fulfilled this vital role for thousand years. People bartered,
Items of worth – Most money originally has an intrinsic value, such as
swapping goods they produced themselves for things they needed
that of the precious metal that was used to make the coin. It is acted
from others. It has a recognized uniform value and is widely accepted.
as some guarantee the coin would be accepted.
Barter is sufficient for simple transactions, but not when the things
Means of exchange – It must be possible to exchange money freely
traded are of differing values, or not available at the same time.
and widely for goods, and its value should be as stable as possible. It
At the start of modern age, individuals and governments began to helps if that value is easily divisible and if there are sufficient
establish banks, and other financial institutions were formed. denominations so change can be given.
Ordinary people could deposit their money in a bank account and
Unit of account – money can be used to record wealth possessed,
earn interest, borrow money and buy property, invest their wages in
traded or spent personally and nationally. It helps if only one
business, or start companies themselves. Banks could also insure
recognized authority issues money. If anybody could issue it, then
against the sorts of calamities that might devastate families or
trust in its value would disappear.
traders, encouraging risk in the pursuit of profit.
Standard of deferred payment – money is also useful because of its
The Federal Reserve, known as “The Fed”, is the central bank in the
ability to serve as a standard of deferred payment. It can facilitate
US. It issues currency, determines how much of it is in circulation, and
exchange at a given point by providing a medium of exchange and
decides how much interest it will charge banks to borrow its money.
unit of account
Bangko Sentral ng Pilipinas is the central bank in the Philippines that
THE EVOLUTION OF MONEY
controls the country’s economy.
People originally traded surplus commodities with each other in a
CHARACTERISTICS AND KEY FUNCTIONS OF MONEY
process known as bartering. The value of each good traded can be
Money is not money unless it has all the following defining debated, however, money evolved as a practical solution to the
characteristics: complexities of bartering of hundreds of different things. Over the
centuries, money has appeared in many forms, but whatever shape it
 value;
takes, whether as a coin, a note, or stored on a digital server, money
 durable;
always provides a fixed value against which any item can be
 portable;
compared
 uniform;
 divisible
Barter (10,000 – 3000BCE)
Barter – the direct of exchanged goods formed by basis of trade for
thousands of years.
Adam Smith, 18th century author of The Wealth of Nations, was one
of the first to identify it as a precursor to money.
Barter in practice – involves the exchange of an item for one or more
perceived equal “value”. For the most part of the two parties bring
the goods with them and hand them over at the time of a transaction.
Sometimes, one of the parties will accept an “I owe you” or IOU, or
even a token, that is agreed can be exchanged for the same goods or
something else at a later date.
Advantaged of Barter

 Trading relationship – fosters strong links between partners

 Market needed – both parties must want what the other