ACCO 20083: FUNDAMENTALS OF FINANCIAL MARKETS

CHAPTER 2

FINANCIAL INTERMEDIARIES

AND OTHER PARTICIPANTS

Submitted by:

Diesma, Michelle Angela F.

Feliciano, Angela Marie R.

Ligsay, Louis Albert L.

BSA 2 – 3

Submitted to:

Prof. Luzviminda S. Payongayong, CPA

NARRATIVE REPORT

Financial Intermediaries were discussed or was defined on the previous chapter

or group as a special type of entity that acts as a third party to facilitate the borrowing

activity between lenders and borrowers. Here in the second chapter, we are going to

discuss further about financial intermediaries; the services it provides, the benefits to

the lenders and borrowers and to the economy as well, its economic functions,

classification of financial intermediaries, and the other participants in the financial

system.

We all know that not every business earns or gain profit, some of them acquire

loss because their expenditures were greater than their income. This is the negative

balance in the capital or what we known as deficits. But it doesn’t mean that we need to

close immediately the business. One aid for the deficits is to borrow money directly or

indirectly. Having funds directly from the fund providers, or those with excess funds, to

the fund demanders, or those with deficits, are called direct financing. Once that the

market conditions make it hard for the fund providers to transact directly to the fund

demanders, indirect financing enters through the intervention of financial

intermediaries.

The process of indirect financing using financial intermediaries as the main route

to transfer funds from lenders to borrowers is called Financial Intermediation.

Remember that intermediation is the process and intermediaries are the special entities.

Financial intermediaries provide services such as (a) enabling the trading of

financial assets for their customers through brokering arrangements, (b) enabling the
trading of financial assets through its own capital by buying a stake in a financial asset

that its customers want to transact in, (c) assisting in forming financial assets needed by

its customers and distribute these to its customers and other market participants as

well, (d) providing investment advice and consultation services to customers, (e)

managing financial assets of customers, and (f) facilitating payment mechanism

between merchants and customers. These services can be noticed in the further

discussions if we tackle the classifications of financial intermediaries.

Now, let’s talk about the benefits of financial intermediaries.

1. Acceleration of flow of funds between entities

Financial intermediaries serve as a savings and wealth storage function, allowing

parties with excess funds to store their funds in risk-free or low-risk financial

instruments. If there are no financial intermediaries, most of the savings of the fund

providers may not be easily available for the fund demanders. Therefore, it benefits both

the lender and the borrower.

2. Efficient allocation of funds

When the financial intermediaries have the funds from the lenders, they need to

make sure that it will flow in the most efficient manner. With this, they manage

asymmetric information to a certain degree in its operations to ensure efficient

allocation. What do we mean by asymmetric information? Well, it occurs when potential

borrowers have more information about the transaction compared to the bank.
However, asymmetric information may lead to two problems: adverse selection and

moral hazard.

Adverse Selection – it usually occurs before a transaction takes place. It means that

high risk borrowers that would tend to default happens to be more active in borrowing

funds than low risk borrowers who pay on time. Since they are more eager to look for

loans, they have a higher chance of being chosen. With this as a known fact, potential

direct lenders may decide not to extend their loans to the financial intermediary.

Moral Hazard – in contrast to adverse selection, moral hazard happens after the loan is

granted. It occurs when the borrowers receive the money, they tend to take undesirable

or immoral risk for the not disclosed during loan granting process. In connection to this,

lenders may decide again not to extend their loans since it reduces the probability to be

repaid.

With these problems stated, financial intermediaries can be trusted because they

ensure that they are better equipped at screening out bad borrowers that reduces risk of

adverse selection, and they have the mechanism to monitor the actions of their

borrowers to fight against moral hazard. Knowing that financial intermediaries are in

control of their transactions, it means that they efficiently allocate the funds for the

benefit of the lenders.

3. Creation of money

Financial intermediaries allow creation of money through bank loan services.

Through this, consumers can have money to spend while waiting and working to have

future income and businesses to get physical capital. And it results in more output for
the economy and employment growth. This benefit of financial intermediaries is for the

borrowers and economy.

4. Support in price discovery

Price discovery is the process of setting a price which is acceptable for the buyer

and the seller. Financial intermediaries play the role as experts and facilitators to enable

to assign values to financial instruments based on different factors. It benefits the

lender, the borrower, and the economy as well.

Other Benefits of Financial Intermediaries

a. Improved liquidity for lenders

Liquidity is the ability to meet currently maturing obligations. Financial

intermediaries can manage cash from different lenders through immediately encashable

products and at the same time offer non-marketable financial products. As a result, the

lenders have better liquidity compared to directly lending funds to providers.

b. Reduced price risk for lenders

As defined in the book, price risk means that prices of financial instruments may

vary over time. It can be reduced through the process called risk sharing. Risk sharing

happens when financial intermediaries create and sell financial assets with risk profile

that their clients are comfortable to invest on. It can also be called asset transformation

since risky assets are converted into safer assets for the investors.
c. Diversification of lenders

Diversification is the process of investing funds in a portfolio of assets that have

individual returns that do not move at the same direction together. It usually results in an

overall portfolio risk that may be lower than risk of each individual asset. It also allows

lenders to share risk from their investments.

d. Economies of scale

Economies of scale occurs when fixed cost are optimized per unit as a result of

sheer volume of transactions. There are two main economies of scale that are

optimized by financial intermediaries.

Transaction Costs – the costs associated with trading or managing funds and

investment transactions.

Research Costs – the costs incurred to monitor performance of potential companies to

be invested in through economic, industry and financial analysis and look for other

investment opportunities that will pay off in the long run.

e. Payments system

The financial system serves as the main structure for making payments for any

goods, services, or securities that are purchased. Certain financial assets like bank

notes, coins, and bank deposits are accepted to become the medium of payment and

are settled efficiently.

f. Risk mitigation

Some types of financial intermediaries like Insurance Companies offer protection

to individuals and organizations against adverse incidents that may occur.

g. Implementation of monetary policy function

The financial system provides the best mechanism to allow the government to

implement its monetary policies to manage economic growth, steady employment rate,

equilibrium of balance payments of and inflation.

Two-Step Process

Obtaining of Lending or
funds from investing fund
fund providers obtained to
(lenders or the fund
investors) demanders

In the figure, we can see the process of financial intermediaries wherein the first

process is the obtaining of funds from fund providers or lenders or investors. The funds
obtained become either a liability or equity of financial intermediaries. The second

process is the lending or investing of the obtained fund to the fund demanders. These

funds were now recognized as assets of financial intermediaries. So how do they earn

from this? They simply receive a fee as a cost of providing their service. The fee usually

pertains to the difference between cost of issuing financial securities and revenues

earned from primary securities bought.

"Fees =Cost of issuing financial securities –Revenues earned from primary securities

bought "

Three Economic Functions of Financial Intermediaries

1. Maturity intermediation

Maturity intermediation gives fund providers more alternatives in terms of how

long they want to invest in financial instruments and borrowers have more choices on

the length of maturity of their debts with lower interest rates.

2. Risk reduction through diversification

Diversification is the economic function exercised by financial intermediaries

which converts more risky assets to less risky assets through sharing of risk. Best

example for this is the activities performed by mutual funds.

3. Cost reduction for contracting and information processing

Let us first define information processing cost and contracting cost. Information

processing costs refers to the cost of acquiring and processing information needed to

evaluate purchase or subsequent sale of a financial instrument while contracting costs

refers to the cost incurred for writing loan agreements and enforcing terms of

agreements to the concerned parties. Both of these require time before they can be

done and investors mostly do not have time for this activities that’s why they choose to

compensate others to do these for them. This is the reason why financial intermediaries

employ personnel to act in behalf of the investors and also because their main business

is managing and investing funds. They can reduce the costs for the both activities

through employing personnel on their own.

Classification of Financial Intermediaries

The diverse role of financial intermediaries gives rise to its three main
classifications wherein it extends financial support to demanders, mitigate risk and
generate greater funds.

1. Depository Institutions

A financial institution that obtains its funds mainly through deposits from
the public. Once the deposit is received, this becomes liability of the institution to the
depositor. Through the funds accumulated by the institution, it extends loan to different
entities.

The biggest portion of the asset comes from loans, because on the point of view
of the bank or institution these are receivables. Loans can be divided into four the
Business Loans, Commercial/Residential Loans, Individual Loans, and Other Loans. On
the other hand deposits dominates the largest portion of the liability, the deposits
contains the money received from the public. Since one of the main activity is to extend
loans, interest earned from these loans are the main source of revenue for depository
institutions.

Depository institutions are subdivided to commercial banks, thrift banks and

savings banks.

1. Commercial Banks

These banks are authorized to Accept drafts/checks,discount and

negotiate promissory notes , other evidences of debts,receive deposits, lend
money , mortgage and commercial loans to borrowers, purchase government
 securities and corporate bonds. Commercial Banks raise funds through offering
checking deposit accounts, savings deposit accounts and time deposit accounts.
From the amount received, commercial banks use these to extend consumer
mortgae, and commercial loans to borrowers and purchase government
securities and coporate bonds.

Commercial bank industry in the Philippines is dominated by BDO

Unibank, Metropolitan Bank and Trust Company, Landbank of the Philippines,
Bank of the Philippine Islands and Philippine National Bank. This is according to
their networth as of December 2018.

2. Thrift Banks

According to R.A 7906 of 1995 Section 3 “"Thrift banks" shall include

savings and mortgage banks, private development banks, and stock
savings and loans associations organized under existing laws, and any
banking corporation that may be organized for the following purposes:

1. Accumulating the savings of depositors and investing them, together with capital
loans secured by bonds, mortgages in real estate and insured improvements
thereon, chattel mortgage, bonds and other forms of security or in loans for
personal or household finance, whether secured or unsecured, or in financing for
homebuilding and home development; in readily marketable and debt securities;
in commercial papers and accounts receivables, drafts, bills of exchange,
acceptances or notes arising out of commercial transactions; and in such other
investments and loans which the Monetary Board may determine as necessary in
the furtherance of national economic objectives;

2. Providing short-term working capital, medium- and long-term financing, to

businesses engaged in agriculture, services, industry and housing; and

3. Providing diversified financial and allied services for its chosen market and
constituencies specially for small and medium enterprises and individuals.
 (b) "Monetary Board" shall mean the Monetary Board of the Bangko Sentral ng
Pilipinas.

(c) "Bangko Sentral" shall refer to the Bangko Sentral ng Pilipinas created
under Republic Act No. 7653.

3. Savings Banks

The purpose is to accumulate savings deposits and investing them for

specified purposes: readily marketable bonds and securities, commercial papers
and accounts recaivables, bills of exchange, acceptance or notes arising from
loans, mortgages on real financing for home building or home development,
such other investments and loans as allowed by the Monetary Board of the BSP
in pursuit of national economic objectives.

The services offered by the banks can be classified into three groups namely individual
banking, institutional banking and global banking.

1. Individual Banking suffice the financial requirements of an individual. Usually

these services are consumer lending, consumer installment loans, automobile
financing, credit card financing, brokerage services, mortgage lending
and individual oriented financial investment services.

2. Institutional Banking caters to needs of financial and non financial

corporations and government entities. These activities includes commercial real
estate financing and leasing.

3. Global Banking is a sector wherein commercial banks contend with

investment banks. Services offered are service offering on corporate
financing, providing financial advice, corporate restructuring, facilitating
transactions involving the capital market and foreign exchange
products/services.

As have mentioned above, banks often issue four types of deposit accounts: demand
deposits, savings deposits, money market demand, and time deposits. These deposit
accounts vary on the interest earned and date of maturity.

1. Demand Deposits
A demand deposit is an account with a bank or other financial institution
that allows the depositor to withdraw his or her funds from the account
without warning or with less than seven days' notice. Banks offer a very
minimal interest since this can be withdrawn easily.
2. Savings Deposits
 Deposits that earn interest at a level below market interest rates, can be
withdrawn upon demand and do not have specific maturity date.
3. Money Market Demand
Deposits that are placed on money markets that have slightly higher rates
(the rate of money market) compared to savings deposits but can only be
withdrawn after a short period of time.
4. Time Deposits
Deposits that have a fixed maturity date and interest earn is at a fixed or
floating interest rate.

Contractual Savings Institutions

A financial intermediary that acquire funds at periodic intervals on a contractual

basis. Because they can predict with reasonable accuracy how much they will have to
pay out in benefits in the coming years, they do not have to worry as much as
depository institutions about losing funds quickly. As a result, the liquidity of assets is
not as important a consideration for them as it is for depository institutions, and they
tend to invest their funds primarily in long-term securities such as corporate bonds,
stocks, and mortgages.

An example of contractual savings institution is an insurance company. There are

numbers of insurance companies in the market and each of them caters different
products. Insurance Companies offer services to assume risk or become underwritters
of the risk associated with various insurable occurences. Most of the time commercial
banks also offers insurance services same as what insurance comoanies offer.

Insurance companies offers life, health, property and casualty, liability, disability,
long term care, financial guarantee insurance. Insurance companies collect payments
in exchange for selling protection against future potential risks. The collected payment is
then used to earn returns by investing it on financial market.
2. Investment Intermediaries

Financial intermediaries whose main objective to maximize return from

investments in various financial instruments to add value for the investors. There are 2
firm under investment intermediary the asset management firm and investment bank.

1. Asset management Firm manages investment funds pooled from clients,

putting the capital to work through different investments including stocks, bonds,
real estate, master limited partnerships, and more. Asset management firms are
compensated based on the amount of fund being managed. Nowadays asset
management firms are subsidiaries of commercial banks, investment banks and
insurance companies.

The types of accounts/funds usually handled by asset management firms are:

1. Regulated Investment Companies are financial intermediaries that sells

shares to the general public in exchange of cash. The flow of transaction
usually happens as illustrated below

Upon they receive the cash it will be invested in a diversed portfolio of

financial instruments, at this stage asset management firms take an
action.

2 Divisions of Asset Management Strategies in Portfoios:

1 . Passive Funds are managed to mimic movements in the market

index.

2. Active Funds are managed by asset management firms with the

intention to outperform the index fund via actively trading securities
in the
 fund portfolio.

Each share stands for proportional interest in the portfolio of financial

instrument managed by the RIC. It is computed by getting the net asset
value, each share is valued at NAV.

NAV= Market value of Portfolio – Liability

Number of shares
2 Types of RIC

1. Open-end funds or Mutual funds

-No fixed number of shares and can offer additional shares

2. Closed-end Funds

- Have a fixed number of shares upon its inception and do not

issue additional or redeem shares

2 . Exchange Traded Funds- an open-ended investment that is traded in

the exchange or more commonly known as the stock market but unlike
open-ended funds the pricing has small premium/discount on NAV just
like closed ended funds. An exchange traded fund (ETF) is an
investment fund that holds assets, such as stocks and bonds. It is like
a mutual fund or UITF where each fund contains different holdings.
However, ETFs differ in the sense that ETFs are traded within the day
like a regular stock, while mutual funds and UITFs can be purchased
only with their end-of-day value.

3 .Hedge funds are alternative investments using pooled funds that

employ different strategies to earn active return, or alpha, for their
investors. Hedge funds may be aggressively managed or make use of
derivatives and leverage in both domestic and international markets
with the goal of generating high returns (either in an absolute sense or
over a specified market benchmark). It is important to note that hedge
funds are generally only accessible to accredited investors as they
require less SEC regulations than other funds. One aspect that has set
the hedge fund industry apart is the fact that hedge funds face less
regulation than mutual funds and other investment vehicles.

2 . Investment Banks
A special segment of banking operation that helps individuals or
organizations raise capital and provide financial consultancy services to them.
a. Public Offering of Securities

Investment banks do the following:

What To Whom Why

To consolidate funds for
Guide enterprise to offer the company to use in
General public
securities achieving their business
objectives
Give suggestions on the
issuing company on what To allow fluent flow of
Potential investors
kind of securities seem to funds
be fetching

Investment banks have the ability to attain information about the level of

willingness do the potential investors have in buying financial securities and on

what price they are willing to outlay or settle.

They participate in initial public offering (first time that a corporation offers

stock to the general public.) and subsequent public offering (secondary or

seasoned offering).

Issuing company will select a specific investment banks that will

underwrite (to agree to purchase such as security issue usually on a fixed

date at a fixed price with a view to public distribution) its offered securities,

then the investment banks perform and observe due diligence to evaluate closely

the accurate value of the enterprise.

to look and evaluate

issuing investment the value of the documented
company banks enterprise with due via prospectus
diligence
Prospectus

 document required by the Securities and Exchange Commission in public

offerings

 result of the due diligence manifested by the investments banks

 has all the necessary information considered relevant that will help the

potential investors decide whether to buy or not.

 manifests company’s profitability, net worth, and risks (pending lawsuits

and competition)

Preliminary Prospectus

 shared to potential investors

 known as red herring (notice printed in red in front cover that’s why

tentative in nature)

 tentative in nature

After the SEC gave approval on the pending prospectus, the investment

banks start to find institutional investors and offer them the securities which are

available in the market. In return, these investors check the prospectus and

securities offered thoroughly so they can make a sound decision. While looking

for prospective investors, company officials observe a quiet time for a certain

duration.
 approved pending investment banks investors run
prospectus/ visit institutional through the Quiet
prospectus and
registration investors (pension securities time
statement and mutual funds) offered

Quiet time

 duration of time where company officials were restricted to say about the

entity

 given so the potential investors has a uniform information that will not give

them an unfair advantage

investment banks
investment bank
information shared establish price based on
underwrites the share
demand

After the information is properly shared with the investors, the investment

banks will now establish the price on the securities offered mainly based on the

demand of the prospective investors. Then they proceed on underwriting the

shares.

When does underwriting occur?

When an investment banks bought securities from the issuing company

and they showcase these securities purchases in the market with a view to public

distribution representing the issuing company.

When From Whom Why

To showcase these securities
purchases in the market with
Bought securities Issuing company a view to public distribution
representing the issuing
company
How does an investment bank earn then?

Of course, investment banks do not do it as a charity work. They need to

incur something out of their efforts in purchasing and selling these securities from

the issuing banks. These banks earn from their underwriting works by acquiring

gross spread.

These investment banks need to be extra careful when assessing the

condition of the market for them not to incur losses on their part and on the part

of the issuing company as well.

Gross Spread

Difference between the initial price paid from the issuing company of the

investment banks and the reoffering price when laid out to the general public.

Underwriting syndicate

Group of investment banks that was formed by the primary investment

bank in order to lower down the risk level of exhausting the securities of the

issuing company

gross spread shared

Primary investment bank
securities reoffered by the underwriting
creates underwriting syndicate
syndicate

Distribution of securities is very crucial since it requires an enormous

marketing effort to issue all of them. Each investment bank in the underwriting

syndicate must offer these securities on their client base.

If the goal is not constantly reach, then the primary investment bank can

form a selling group excluded from the underwriting syndicate to further their

investors reach.
 Primary investment bank remaining gross spread shared by the
underwriting syndicate
creates selling group securities together with the selling
excluded reoffered group

On the other hand, investment banks do not buy securities from the

issuing company, instead they showcase their expertise in offering these

securities in the general public and gain gross spread through them.

Potential investors and the general public put their trust on the

underwritings provided by the investment bank since they believe that these

banks put their reputation in line with their company’s assessment. It was also

believed that the investment banks have exercised their due diligence in valuing

the issuing company’s securities.

b. Private Placement of Securities

Instead of offering the issuing company’s securities in the general public,

investment banks can also offer them on selected number of entities like pension

funds, insurance companies, and mutual funds.

c. Trading of Securities

Trading securities can be one of the functions of an investment bank. This

kind of service allows them to have a commission based income when they act

as broker or dealer between with the issuing company and the investor. As a

dealer, they do not put themselves on a risk level since there’s no capital
 required on their side. But on some special cases, they use their own capital in

trading securities.

When investment banks act as a market maker

 They earn from trading securities through price appreciation of security

on hand

 Difference between the selling price and the actually price paid by them

for the security

Proprietary

 Prop trading

 Investment banks studies the future movements in price, interest, and

foreign currency

 Exposes two major risks: interest rate risk and credit rate risk

Interest rate risk

 The price of the long-term held securities might go down if the market

rates went up.

Credit rate risk

 Risk that the borrower may not pay their loans when due

d. Advisory services for mergers, acquisitions and financial restructuring

 Capital restructuring and reorganizing financially afflicted companies

needed help from investment banks for them to have advisory engagements in

looking for prospective mergers and acquisitions.

Investment banks often provide advice for both buyer and seller since they

have an open access on their information that can help them properly

recommend what to do base on the potential sales, purchases and mergers.

They can also look for potential buyers who are willing to pay higher than the

book value. After prospecting, they can now prepare for acquisition estimations

and bids.

estimate firm's value investment

companies investment bank
lead negotiations banks earn
seek for look for
prepare acquisition from
help potential M&A
bids advisory

Investment banks earn more from this depending on the sizeable portion

of the project advisory since they are not required to invest anything on this

matter except for the salary of the employee who constantly worked for it.

e. Merchant banking

Investment banks utilize and lend their money as a creditor and even buy

shares to be an investor but they took risk in this manner since their money goes

through an equity fund which is very risky.

f. Securities Finance and Prime Brokerage Service

 One of the investment strategies of the investors is to enter in a

repurchase agreement (repo) when they opt to borrow funds in the security

market rather than in a bank since the agreement allows them to have the

borrowed funds to be the collateral itself. This agreement is often provided by the

investment banks and they collected gains on them through service fee charge.

Securities finance

 Borrowing securities or funds

Prime brokerage

 Offered by investment banks to have funds and investors

 Priority servicing for major clients

 Offers services like securities finance, global custody

g. Asset Management

Asset management services include the following:

 Endowments

 Insurance companies

 Pension funds

 Foundations

Investment banks earn through a percentage income from the assets they

manage.

h. Research
 This involves a thorough procedural process in indentifying a potential

acquirer or acquire by an investment bank on various market players.

Here the key process on the steps being done by an investment bank:

investment banks collect visit firm

identify
conduct research informatio and run inspect
and assign an potential
n about an facilities
analyst acquirer
the subject interview

The research information gathered by the analyst of an investment is

published publicly so prospects can foresee the chances that they’re going to

buy, sell, or hold stocks. Their findings and opinions have a huge effect on the

market price as they can put weight on investors’ perception.

The analyst can as well give relevant information about the current status

of the some variables that affects our economy like inflation, gross domestic

product, and interest rates.

FINANCIAL COMPANIES

These companies collect fund through issuing stocks and bonds and they usually

raise fund by selling commercial papers as well. Right after hedging enough funds, they

would lend out portions of it to individual consumers and small enterprises.

Collect fund through Raise fund by selling lend the money to

issuing stocks and bonds commercial papers individual consumers
Other Participants

There are other important participants who integrate themselves in buying and

selling various financial instruments aside from the financial intermediaries. Fellow

market participants were divided into five different sectors.

Household Sector

This sector is mainly composed of the following:

 Individuals and families

 Families serving charity

 Religious organizations

 Non-profit organizations

 Unincorporated businesses (retailers and professional partnerships)

All of the transactions in this sector cannot be simply separated from the owner’s

transactions.

Government

In this sector, it gives emphasis on regulating in all active participants in the

market and they raise fund in the governing help of the Bureau of Treasury. This bureau

has the function on managing the continuous improvement through disciplined and well-

execution of integrity as it provide effectiveness on its operational function.

It includes the following:

 National government agencies

  Local government units

 Government owned and controlled corporations

Corporate Sector and Non-financial Corporations

Financial corporations

 Depository institutions

 Investment banks

 Asset management companies

 Insurance companies

They act as financial intermediaries since they largely offer investment, advisory

services, and asset management services as a way to encourage private sectors in

improving their net-worth.

Non- financial corporations

They are originally engage and entitled in producing market goods and non-

financial services and their transactions are relatively distinct from those who own them.

They issue financial instruments in collecting funds in the money and capital market

whenever they possess an excess fund. They also offer pension plans for the retirement

of their employees.
 There are some non-financial corporations that have subsidiaries that involve in

activities same as the financial corporations and they were called as captive financial

companies.

Captive financial company

The sole operation of this type of company is the provision of credit for customers

of the parent enterprise. It makes loan for the expensive services of the company to its

customers.

Foreign Sector

This sector constitutes all the organizations, assets, personalities, and

companies that’s excluded within the jurisdiction of a certain country. It includes

transactions with overseas countries like the import and export of goods and services as

well as the capital movements in connection with financial transactions.

Foreign central bank and enterprises invest and put their capital in other

countries because of the following:

 To attain stability for their currency against with other foreign currency

 To achieve gains and return from the excessive funds

Supranational institutions
  An entity that is formed by the combination of two or more national

governments through national claimed treaties

 Example of each are the multilateral development banks

Multilateral Development Banks

 An institution created by a group of countries that gives financing and

advisory for the sole purpose of development.

 Regional integration among countries was achieved

 Example of which are the European Investment Bank, World Bank, inter-

American Development Bank and Asian Development Bank

Non-profit organizations

These organizations are dedicated to further implementation of projects having a

social cause. They uses surplus of their revenues to achieve their objectives rather than

distributing its income to shareholders. These organizations include foundation and

endowment.
QUESTIONNAIRE

I. True or False

___________1. Capital is strictly required for the investment banks to participate as a

broker in trading of securities between the issuing company and the potential investors.

___________2. Securities and Exchange Commission has the function on managing

the continuous improvement through disciplined and well-execution of integrity as it

provide effectiveness on its operational function.

3. BDO Unibank is a savings bank.

4. All banks are commercial banks.

5. Hedge funds are alternative investments using pooled funds that

employ different strategies to earn active return, or alpha, for their investors.

___________6. Investment banks can both offer securities to public general and to

some private investors.

___________7. Financial intermediaries were formed during the time when market

conditions make it hard for lenders of funds to transact directly with borrowers of funds.

___________8. Price discovery is the process of setting a price which is acceptable for

the buyer and the seller.

___________9. Diversification is the economic function exercised by financial

intermediaries which converts more risky assets to less risky assets through sharing of

risk.
 10. Asset management firm is classified as commercial bank.

II. Identification

___________1. They have the ability to attain information about the level of willingness

do the potential investors have in buying financial securities and on what price they are

willing to outlay or settle.

___________2. The price of the long-term held securities might go down if the market

rates went up.

___________3. Difference between the initial price paid from the issuing company of

the investment banks and the reoffering price when laid out to the general public.

___________4. It gives fund providers more alternatives in terms of how long they want

to invest in financial instruments and borrowers have more choices on the length of

maturity of their debts with lower interest rates.

___________5. The costs incurred to monitor performance of potential companies to be

invested in through economic, industry and financial analysis and look for other

investment opportunities that will pay off in the long run.

___________6. It occurs when potential borrowers have more information about the

transaction compared to the bank.

7. Financial intermediaries whose main objective to maximize return from

investments in various financial instruments to add value for the investors.

 8. A financial institution that obtains its funds mainly through deposits from

the public

9. The purpose is to accumulate savings deposits and investing them for

specified purposes.

10 These banks are authorized to Accept drafts/checks, discount and

negotiate promissory notes , other evidences of debts, receive deposits, lend money ,

mortgage and commercial loans to borrowers, purchase government securities and

corporate bonds.

ANSWERS

TRUE OR FALSE

1. FALSE 6. TRUE

2. FALSE 7. TRUE

3. FALSE 8. TRUE

4. FALSE 9. TRUE

5. FALSE 10. TRUE

IDENTIFICATION

1. INVESTMENT BANK

2. INTEREST RISK RATE

3. GROSS SPREAD

4. MATURITY INTERMEDIATION

5. RESEARCH COSTS

6. ASYMMETRIC INFORMATION

7. INVESTMENT INTERMEDIARIES

8. DEPOSITORY INSTITUTIONS

9. SAVINGS BANK

10. COMMERCIAL BANKS

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