Finbank Group1

Money
Etymology
The word "money" is believed to
originate from a temple of Hera,
located on Capitoline, one of Rome's
seven hills. In the ancient world Hera
was often associated with money.
In the Western world, a prevalent
term for coin-money has been specie,
stemming from Latin in specie,
meaning 'in kind'.
any object or verifiable record that is
generally accepted as payment for goods
and services and repayment of debts in a
particular country or socio-economic
context.
The money supply of a country consists
of currency (banknotes and coins) and
usually includes bank money (the balance
held in checking accounts and savings
accounts).
Bank money, which consists only of
records (mostly computerized in modern
banking), forms by far the largest part of
broad money in developed countries
Functions of Money
Medium of exchange
used to intermediate the exchange of goods and services
Unit of account
a standard numerical unit of measurement of the market value of goods, services, and other
transactions
known as a "measure" or "standard" of relative worth and deferred payment
Store of value
a money must be able to be reliably saved, stored, and retrieved and be predictably usable
as a medium of exchange when it is retrieved
remain stable over time
Standard of deferred payment
an accepted way to settle a debt a unit in which debts are denominated, and the status of
money as legal tender, in those jurisdictions which have this concept, states that it may
function for the discharge of debts.
Measure of value
a standard measure and common denomination of trade
a method for comparing the values of dissimilar objects.

Copyright 2009 Pearson Addison-Wesley. All rights reserved.
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History of Money (Philippine Money)
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Philippine moneymulti-colored threads woven
into the fabric of our social, political and
economic life. From its early bead-like form to
the paper notes and coins that we know today,
our money has been a constant reminder of our
journey through centuries as a people relating
with one another and with other peoples of the
world.

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Pre-Hispanic Era
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Trade among the early Filipinos and with traders
from the neighboring islands was conducted
through barter. The inconvenience of barter later
led to the use of some objects as medium of
exchange. Gold, which was plentiful in many parts
of the islands, invariably found its way into these
objects that included the piloncitos, small bead-like
gold bits considered by the local numismatists as
the earliest coin of the ancient Filipinos, and gold
barter rings.
Spanish Era
1521-1897
3-7
Three hundred years of Spanish rule left
many indelible imprints on Philippine
numismatics. At the end of the Spanish
regime, Philippine money was a multiplicity
of currencies that included Mexican pesos,
Alfonsino pesos and copper coins of other
currencies.
Revolutionary Period
1898-1899
3-8
Asserting its independence, the Philippine
Republic of 1898 under General Emilio
Aguinaldo issued its own coins and paper
currency backed by the countrys natural
resources.

One peso and five peso notes printed as
Republika Filipina Papel Moneda de Un Peso
and Cinco Pesos were freely circulated. 2
centimos de peso copper were also issued in
1899.
The American Period
1900-1941
3-9
The Americans instituted a monetary system
for the Philippine based on gold and pegged the
Philippine peso to the American dollar at the
ratio of 2:1. The US Congress approved the
Coinage Act for the Philippines in 1903.

Beginning May 1918, treasury certificates
replaced the silver certificates series, and a one-
peso note was added.
The Japanese Occupation
1942-1945
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The outbreak of World War II caused
serious disturbances in the Philippine
monetary system. Two kinds of notes
circulated in the country during this
period.
The Japanese Occupation Forces issued
war notes in big denominations. Provinces
and municipalities, on the other hand,
issued their own guerrilla notes or
resistance currencies, most of which were
sanctioned by the Philippine government
in-exile, and partially redeemed after the
war.
The Philippine Republic
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A nation in command of its
destiny is the message reflected in
the evolution of Philippine money
under the Philippine Republic.

Having gained
independence from the United
States following the end of World
War II, the country used as
currency old treasury certificates
overprinted with the word
Victory.
Financial
Instruments,
Markets, and
Institutions
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Flow of Funds
Financial system provides a transmission
mechanism between saver-lenders and
borrower-spenders.
Savers benefitearn interest
Investors benefitaccess to money otherwise not
available
Economy benefitsefficient means of bringing
savers and borrowers together
3-14
Flow of Funds (Cont.)
Funds flow indirectly from ultimate lenders
[households] through financial intermediaries [banks
or insurance companies] or directly through financial
markets [stock exchange/bond markets] to ultimate
borrowers [business firms, government, or other
households]
(See Figure 3.1)
In order for financial system to function smoothly, must
be adequate information about the markets and their
operation
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FIGURE 3.1 Flow of funds from
lenders to borrowers.
3-16
FINANCIAL
SYSTEM
FINANCIAL
INSTITUTIONS
FINANCIAL
MARKET
consists of:
- Buy and sell financial
instruments such as stocks, bonds
and future contracts
- Dominate the financial system
worldwide, providing an array of
financial service to large
multinational firms and financial
services used by consumers
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Financial Instruments and Markets
Primary Markets
The market where newly issued securities are offered and be
sold by the issue or by their representatives

Secondary Markets
The market in which holders of outstanding securities offer
them for resale
TYPES OF FINANCIAL MARKETS
Exchange and over-the-counter market
Public and private markets
public market- organized financial markets where securities registered w/
Securities and Exchange Commission (SEC) are bought and sold
private market- private placement
less marketable
Future and options markets
called derivative securities- derive their value from some underlying asset
Foreign exchange markets
foreign currencies are bought and sold
International and domestic markets

3-18
3-19
(Cont.)
Bonds Represent Borrowing
Agreement by issuer to pay interest on specified dates and
redeem the bond upon maturity.
ConsolsBond with no maturity date, pay interest forever
Coupon SecuritiesAttached to bond and sent in to collect
interest [generally semi-annually]
Zero-couponSold at price well below face value. Collect
interest when the bond matures.
Tax ExemptInterest earned is not taxed (issued by state,
local, or municipal governments).
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(Cont.)
Stocks Represent Ownership
Stockholder owns part of the corporation and receives
dividends from the issuer.
No government stockindividuals cannot own part of the
government
Types of Corporate stocks
Preferred StockFixed dividends, priority over common stock
Common StockVariable dividends, based on companys profits.
ConvertibleConvert preferred into common at a stated price
3-21
(Cont.)
Stocks Represent Ownership (Cont.)
Like bonds, existing stock may be exchanged through
secondary markets.
Capital GainsDifference between price initially paid and
amount received when stock is sold.
Measures of trends in overall common stock prices
Standard & Poors 500 Stock Indexbased on prices of 500
individual stocks
NASDAQ Composite Indexbased on all stocks listed in NASDAQ
Dow Jones Industrial Averagebased on price of 30 blue-chip
stocks
3-22
(Cont.)
Both stocks and bonds [securities] represent a
claim to a stream of payments [cash flows] in
the future
BondsInterest payment and face value at maturity
StocksDividends and sales price when sold
3-23
(Cont.)
Mortgages Involve Real Estate
Debt incurred in order to buy land or building
Amortizedprincipal and interest is gradually repaid over
the life of loan
Fixed RateRate of interest is fixed
Variable-RateRate of interest varies depending on
financial environment
Cash flow for lender is uncertain
Interest payments may vary [variable rate mortgages]
Home owner may prepay
Refinance a fixed mortgage if interest rates decline
3-24
(Cont.)
Mortgages Involve Real Estate (Cont.)
SecuritizationIndividual mortgages may be
pooled and sold as a unit to reduce uncertainty.
Mortgages may be insured by government
agenciesFederal Housing Authority (FHA) or
Veterans Administration (VA)
3-25
(Cont.)
Derivatives: Options and Futures Contracts
Contractual agreement between two parties to exchange a
third asset in the future at a stated price
Often called derivative financial instruments because they
derive value from underlying assets
LongBuyer of the contract, receive commodity in the
future
ShortSeller of the contract, provide commodity in the
future
Speculators gamble on price fluctuations and hope to profit
Eliminate the risk of price fluctuations
3-26
(Cont.)
The Capital Market
Exchange of long-term securitiesin excess of one year
Generally used to secure long-term financing for capital investment
(Table 3.1)
Stock marketLargest part of capital market and held by private and
institutional investors
Residential and commercial mortgagesHeld by commercial banks and
life insurance companies
Corporate bond marketHeld by insurance companies, pension and
retirement funds
Local and state government bondsPrimarily held for tax-exempt feature
Government securitiesHeld by commercial banks, the Fed, individual
Americans/foreigners, and dealers
3-27
(Cont.)
The Money Market
Markets in which banks and businesses adjust their liquidity
position by borrowing, lending or investing for short period
of time
Exchange of short-term instrumentsless than one year
Highly liquid, minimal risk
Use of a temporary surplus of funds by banks or businesses
Commercial papershort-term liabilities of prime business firms
and finance companies
Bank Certificates of Depositsliabilities of issuing bank, interest
bearing to corporations that hold them
U.S. Treasury billsshort-term debts of US government
Federal Funds- acquires fed funds & bank deposits held w/ the
Federal Reserve bank
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Financial
Institutions:
Purposes and Profile
3-29
Act as agents in transferring funds from savers-lenders to
borrowers-spenders.
Acquire funds by issuing their liabilities to public and use
money to purchase financial assets
Earn profits on difference between interest paid and earned
Diversify portfolios and minimize risk
Lower transaction costs
Competition lowers interest ratesbeneficial to economic growth
Role Financial Intermediaries
Financial-Service Institutions
are identified as:
Depository Institutions
- An institutions where customers
leave money in checking, time
deposit or saving account
Non depository Financial
Institutions
- Financial company such as life
insurance company, or an investment
company, or an investment company
that pools funds from many
participants to fund investment
3-30
Financial-Service Institutions
Depository Institutions
Banks
Accept deposits, make loans
Credit unions

Non depository Financial
Institutions
Life insurance companies
Private pension funds
Finance companies
Securities firms
Govt-sponsored enterprises
3-31
3-32
Financial Institutions
Financial Institutions in Profilefocus on composition of
liabilities and assets
Commercial Banks
Most prominent
Range in size from huge (BankAmerica) to small (local banks)
Major source of funds used to be demand deposits of public, but now
rely more on other liabilities
Also accept savings and time depositsinterest earning
Purchase wide variety of assets
short-term government securities
long-term business loans
home mortgages

3-33
Financial Institutions: Purposes and
Profile (Cont.)
Credit Unions
Organized as cooperatives for people with common
interest
Members buy shares [deposits] and can borrow
Changes in the law in early 1980s broadened their powers
checking [share] accounts
make long-term mortgage loans
3-34

Life Insurance Companies
Insure against death
Receive funds in form of premiums
Use of funds is based on mortality statisticspredict
when funds will be needed
Invest in long-term securitieshigh yield
Long-term corporate bonds
Long-term commercial mortgages
Profile (Cont.)
3-35
Financial Intermediaries: Purposes
and Profile (Cont.)

Pension and Retirement Funds
Concerned with long run
Receive funds from working individuals building nest-egg
Accurate prediction of future use of funds
Invest mainly in long-term corporate bonds and high-grade stock
Mutual Funds
Stock or bond market related institutions
Pool funds from many people
Invest in wide variety of securitiesminimize risk
3-36
Financial Intermediaries: Purposes
and Profile (Cont.)
Money Market Mutual Funds
Individuals purchase shares in the fund
Fund invests in highly liquid short-term money market
instruments
large-size negotiable CDs
Treasury bills
high-grade commercial paper
3-37
Savings and Loan Associations [S&Ls]
Traditionally acquired funds through savings deposits
Used funds to make home mortgage loans
Now perform same functions as commercial banks
issue checking accounts
make consumer and business loans
Commercial and Consumer Finance Companies
Acquire funds primarily by selling short term loans (commercial
paper)
Lend money for consumer purchases or business firms to finance
inventories
Profile (Cont.)
3-38
Property and Casualty Insurance Companies
Insure homeowners and businesses against losses
Receive premiums
Need to be fairly liquid due to uncertainty of claims
Purchase a variety of securities
high-grade stocks and bonds
short-term money market instruments for liquidity
Profile (Cont.)
Reference:
http://www.bsp.gov.ph/
www.google.com
Financial Institutions, Markets and Money 11
th
edition
By: Kidwell 2013
Bank Management and Financial Services
By: Rose & Hudgins 2013
Banking theory and practices revised edition
By: Leuterio, M & Estepa, C.2004

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