FINANCIAL INSTITUTIONS Non-banks

Banks - an institution or company that provides some banking services but is

not a bank, or does not have the legal status of a bank
- an organization where people and businesses can invest or borrow
money, change it to foreign money, etc Examples of Non-banks
Examples of Banks - insurance companies, pension funds, and hedge funds.
- Pag-ibig
- commercial banks, savings and loan associations, and credit unions
- Social Security System (SSS)
UNIVERSAL BANKS - Philhealth
- Pawnshop
Universal banks are financial service conglomerates that combine - Insurance Company
investment banking, commercial banking, development banking, and - Payday lending
insurance to encompass a wider variety of services.
LESSON 4: Sources and Uses of Short-term and Long- term Funds
- Land Bank of the Philippines
- Bank of the Philippine Islands (BPI)
- Banco de Oro (BDO Unibank, Inc.)
Financing – it means to provide funding for a particular need.
- China Banking Corporation
- East West Banking Corporation Short-term Financing is debt scheduled to be paid within a year, while Long-
- Philippine National Bank (PNB) term Financing is debt to be paid in more than a year.
COMMERCIAL BANKS Banks – are financial establishments where money deposited by customers
earns interest and can be withdrawn anytime when ordered by the
Commercial banks are privately-owned institutions that accept deposits
signatories.
and lend money to projects to earn interest.
Non-Banks – are also financial institutions that can provide fund
- Bank of Commerce
requirements of businesses. But its operations are not supervised by a
- BDO Private Bank, Inc.
national or international banking regulatory agency or they have no full
- Philippine Bank of Communications
banking license.
- Philippine Veterans Bank
- Robinsons Bank Corporation Debt Financing – borrowing money from lenders and not giving up
- CTBC Bank (Philippines) Corporation ownership.
Equity Financing – the method of raising capital by selling company stock to
investors in exchange of ownership interests in the company.
Liquidity Risk – typically refers to the inability of an investor to buy or sell an
Settlement Risk – risk that the bank may not be able to give back their asset to avoid financial loss.
deposit.
 DEBT FINANCING EQUITY FINANCING
Advanta Disadvan Advantage Disadvantages
ges tages s
Cost It is It does not It has the
limited require a highest cost.
to fixed
interest dividend
paymen payment.
ts.
Control Lender It may
has no limit cash
control dividend
over declaratio
operatio n by
ns and manage
investm ment.
ent
decision
s.
Maturity There is There is no
specified maturity
maturity date. It is
date or perpetual.
periodic
amortizati
on
payments
.
Risk There is Among the obligation
a risk of sources of (default
not financing, it is risk).
meeting the riskiest. Tax Interest Dividends are
the expense not tax
 is tax deductible.  Banks
deductib  Bonds
le (it can  Lending companies
minimiz
e tax 5 C’S OF CREDIT
expense
Character – the willingness of the borrower to repay the loan
).
Capacity – a customer’s ability to generate cash flows
Collateral – security pledged for payment of the loan
Capital – a customer’s financial resources
Condition – current economic or business conditions

SOURCES AND USES OF FUNDS

WHAT IS LOAN?
SHORT-TERM FUNDS
Is financial arrangement where a borrower who receives money from a lender
 Suppliers credit agrees to repay the principal along with the interest within a specific period of
 Advances from stockholders or other owners time.
 Credit cooperatives
 Bank Formula:
 Credit cards I=P r/n
 Lending companies
 Pawnshops Where:
 Informal lending sources I – amount of interest
P – Principal
LONG-TERM FUNDS
R – interest rate
 Equity investors
 Internally generated funds N - number of payments in a year (most often n = 12)
DIFFERENT TYPES OF LOAN
1. Personal loan – is a type of loan from banks that may or may not
require any form of collateral as security of payment.
2. Housing loan – is availed either for buying a real estate for dwelling
purposes or for house construction or renovation purposes.
3. Auto loan – a car loan allows an individual to buy a vehicle that is
more expensive than what could be afforded in a lump sum or cash OBLIGATIONS OF ENTREPRENEURS TO CREDITORS
purchases. A. General – obligation based on moral duty that ties two or more parties
together.
B. Accounting – duty to make future payment when a purchase order is
placed
C. Legal – liability or duty based on what is agreed upon like the
LOAN PROCESS APPLICATION
provisions or terms as stated in a contract under the terms of the loan
agreement.

𝑟 = annual interest rate

LESSON 5: Basic Long-Term Financial Concept n = NUMBER OF PERIODS INTEREST HELD

FUTURE VALUE AND PRESENT VALUE OF MONEY EXAMPLE

FUTURE VALUE (FV) – is the value of a current asset at a future date based  Assume we have 8,000 today and we invest it at 5% for one year. The
on an assumed rate of growth. FV of the 8,000 investment is:
Formula: FV = PV〖(1+𝑟) ^𝑛 FV= 8,000 (1+ 0.05)1
FV = Future value = 8000 (1.05)1
Pv = present value =8000 (1.05)
FV= 8,400  You have the choice of being paid 2,000 today or 2,200 one year from
now. You expect that you could safely invest the 2,000 and earn 3% on
 Josie invest money amounting 10,000 with 6% Interest for 3 years. it. Which is the better option?
What is the Future Value?
FV= 10,000 (1+0.06)3 PV = 2,200 ÷ (1 + 0. 03)1
= 10,000 (1.06)3 PV = 2,135.92
= 10,000 (1.191016)
FV= 11,910.16
FACTORS THAT MAY AFFECT INTEREST RATE
Present value (pv) – is the value right now of some amount of money in the
future. 1. Inflation expectation – the rise and fall in price of products.
Formula: PV =𝐹𝑉 1/〖(1+𝑟)〗^𝑛 2. Monetary policy – the effect of reducing or increasing money supply.
FV = Future value 3. Business cycle - the downward and upward movement of gross domestic
product (GDP) around its long-term growth trend. (Refer to next slide)
Pv = present value
𝑟 = rate of return
4. Government budget deficit – the lack of government budget to pay debts.
5. Savings – the amount of money deposited in banks.
n = NUMBER OF PERIODS
6. Investment demand - it depends on the volume of investment needed at
the moment.
EXAMPLES 7. Money supply and demand – it is in accordance to the existing supply and
 Mia invested some amount in a bank where her amount gets demand of the money supply.
compounded daily at 5% annual interest. What is the amount invested
by Mia if the amount she got after 10 years is $1,650? Round your
answer to the nearest thousands. MEASUREMENT OF INTEREST RATE

PV = FV / (1 + (r / n)) n t 1. SIMPLE INTEREST

PV = 1650 / (1 + 0.05/365)365(10) = 1000 It is calculated on the principal or original amount of loan you may observed
that bank changed higher interest to their loan products/services but a give
minimal amount of interest to their saving/deposit, product/services.
  Months ÷ 12 months
Examples:
Formula:
1. 6 months ÷ 12 months = 0.5
I=prt 2. 1 year and 9 months (get the months first and add the year) 9
months ÷ 12 months = 0.75 plus year = 1.75
Where;
HOW TO CONVERT DECIMAL TO TIME?
I = Interest
 Decimal x 12 months
P = Principal examples
r = Rate of Interest 1. 0.5 x 12 months = 6 (6 months
2. 1.75 (1 is equivalent to year)
T = Time 0.75 x 12 = 9
Other Formulas: Answer: 1 year and 9 months

P=I/rt Examples:

r=I/pt INTEREST PRINCIPAL RATE TIME

P 20 P 500 1.5% 1.
T=I/pr 2. P 8,000 4.5% 6 months
P 500 3. 7% 1 yr. & 2
months
P 450 P 15,000 4. 2 yrs.

1. T = I / p r
T= 20 / (500 x 0.015)
T= 2.666667 years or about 2 years and 8 months
2. I= P x r x t
HOW TO CONVERT TIME TO DECIMAL?
I = (8,000) (0.045) (0.5)
I= 180 F = future value
3. P = I / r t P = principal
P= 500 / (0.07 x 1.17) I = interest rate
P= 6105.0061050061 (2 decimal only) The interest rate (r) is usually expressed as an annual and must be
changed to the interest rate conversion or periodic rate denoted by i,
P= 6,106.01
which can be solved as follows.
4. R= I / p t
I=r/m
R= 450 / (15,000 x 2)
where:
R= 0.015 ( move two decimal places from right to left or multiply it to 100)
r= interest rate per annum
R = 1.5%
m= conversion period per year
n=tM
COMPOUND INTEREST
where:
It is calculated on the principal amount and also on the accumulated
t = time
interest of previous period and can be regarded as interest on interest.
M = conversion period per year
The more compounding period there are, the higher will the future of your
money. Conversion period:
The accumulated or compounded amount is represented by F, to compute ANNUALLY - m=1
for the f.
SEMI ANNUALLY - m=2
QUARTERLY- m=4
F = P (1+i)
MONTHLY- m=12

Where:
FORMULA: F = P (1+r/m)t M
 = 90000(1+(0.0108))3
Example: = 90000(1.0328)
Ms. Y invests php 90,000 with different rates of interest in which for the = Php 92952
first three years is 1.08%, for the next two years is 5.68%, and for the next
F2 = 90000((1+0.0568/1))2
year is 8.9% compounded monthly. What is the total amount after these
periods? = 90000((1+0.0568))2
= 90000(1.1168)
GIVEN: = Php 100512
P= 90000 F3 = 90000(1+0.089/12))1(12)
r1= 0.0108; t1= 3; n1=1 = 90000(1+0.0074)12
r2= 0.0568; t2= 2; n2=1 = 90000(1.0925)
r3= 0.089; t3= 1; n3=12 = Php 98325
OPTION 1 F = F1 + F2 + F3
F = 90000(1+(0.0108/1))3(1) + 90000((1+0.0568/1))2(1) + = 92952 + 100512 + 98325
90000(1+0.089/12))1(12)
= Php 291789
= 90000 (1+(0.0108))3 + 90000 ((1+0.0568))2 + 90000 (1+0.0074)12
NOTE:
= 90000 (1.0328) + 90000 (1.1168) + 90000 (1.0925)
 4 decimals
= 92952 + 100512 + 98325  Always remember PEMDAS
 When you see the word compounded monthly in the problem, the
F = Php 291789
conversion period is 12.
 Year, years, annual = 1
 Don’t forget the TOTAL AMOUNT
OPTION 2
LOAN AMORTIZATION
F1 = 90000(1+(0.0108/1))3
 is a type of loan with scheduled, periodic payments that are applied to
both the loan's principal amount and the interest accrued.
An amortized loan payment first pays off the relevant interest expense for
the period, after which the remainder of the payment is put toward
reducing the principal amount.
Common amortized loans include auto loans, home loans, and personal
loans from a bank for small projects or debt consolidation.
FORMULA
A = P (𝒊 (𝟏+𝒊)𝒏/((𝟏+𝒊)𝒏 −𝟏)
Example:
TEN J INC. HAS A PRINCIPAL LOAN AMOUNTING TO PHP 520,000.00
THAT WILL BE PAID PER ANNUM FOR 5 YEARS WITH AN INTEREST OF
Loan Amortization Schedule
3.75%.
GIVEN: An= 520,000, i= 3.75% (0.0375) , T= 5 years

BALANCE x INTEREST RATE = INTEREST VALUE

AMORTIZATION VALUE – INTEREST VALUE = PRINCIPAL 1
BALANCE - PRINCIPAL 1 = NEW BALANCE
i (1+i ) n
A = P ( 1+ i ) n−1
NOTE:
 Include all decimals when using this formula: 𝒊 (𝟏+𝒊) 𝒏 / ((𝟏+𝒊) 𝒏 − 𝟏).
 Use only 2 decimal places for the amortization value and in the Loan
Amortization Schedule.
 Ending balance should be 0.