AEC13 FINANCIAL MARKETS
SW#2 FINANCIAL SYSTEM
Name:CAMELIA CANAMAN Program/Year/Block:BSIA 2A Date:
PART I: IDENTIFICATION
Direction: Identify the term or concept being described in the following statements and write your answer on
the space provided.
Lenders 1. Those who have saved and are lending funds
Borrowers 2. Those who must borrow funds to finance their spending
Direct finance 3. The flow of funds through the financial system where borrowers borrow funds directly
from lenders in financial markets
Diversification 4. The splitting of wealth into many assets to reduce risk.
Liquidity 5. The ease with which an asset can be exchanged for money which savers view as a benefit.
Asymmetric 6. The situation in which one party to an economic transaction has better information than
information does the other party.
Adverse 7. The problem investors experience in distinguishing low-risk borrowers from high-risk
selection borrowers before making an investment.
Moral hazard 8. The problem investors experience in verifying that borrowers are using their funds as
intended.
Transaction 9. The cost of a trade or a financial transaction; for example, the brokerage commission
cost charged for buying or selling a financial asset.
PAG-IBIG 10. Provides housing loans to both government and private employees.
Fund
PART II: TRUE OR FALSE
Direction: If the statement is True, write the number “1”. If False, write the number “0” on the space provided.
0 1. The main task of the financial system is to channel funds from borrowers to sectors that have a
shortage of funds.
1 2. Financial markets and intermediaries help make financial assets more liquid.
1 3. The financial system has increased the liquidity of many assets besides stocks and bonds through the
process of securitization
0 4. Savers lend to borrowers even if they are unlikely to pay back.
1 5. Because of transaction costs and information costs, savers receive a higher return on investments
and borrowers must pay more for the funds they borrow
1 6. SEC requires publicly traded firms report their performance in financial statement.
1 7. The financial system helps overcome an information asymmetry between borrowers and lenders.
1 8. Transaction costs are the cost that savers incur to determine the credit worthiness of borrowers and
to monitor how they use the funds acquired.
0 9. SSS provides retirement benefits, housing loans, personal loans, emergency and calamity loans to
government employees.
1 10. The chance that the value of financial assets will change relative to what one expects is referred to as
"risk".
PART III: ENRICHMENT
1. What is the most important reasons why lender-savers and borrower-spenders resort to the use of financial
instruments in financial system?
Lender-savers and borrower-spenders use financial instruments because they make the transfer of funds smooth
and efficient. These tools, such as stocks, bonds, and loans, help connect those with extra money to those who
need financial support. They create a secure and structured way to lend and borrow, reducing risks and ensuring
transparency. Financial instruments also set clear terms, like repayment schedules and interest rates, which protect
both parties. Without them, direct transactions would be difficult, costly, and uncertain.
2. Would you rather lend money directly through private placement, or use intermediaries such as financial
market and financial institutions?
I would choose to use financial institutions instead of lending money directly through private placement. Banks
and investment firms help minimize risks by evaluating borrowers' creditworthiness and enforcing legal
agreements. They also provide protection against fraud and ensure proper handling of funds. Additionally,
financial institutions offer flexibility, allowing lenders to access their money when needed. If I were to lend
money directly, I would have to assess the borrower myself, which could be time-consuming and risky. Using
financial intermediaries makes the process safer, more convenient, and more reliable.
3. What are the primary financial markets? Why is it critically important for the effective operation of the
primary markets to have well-developed secondary markets where investors can trade with confidence?
Primary financial markets are where newly issued securities, such as stocks and bonds, are sold for the first time.
Companies and governments use these markets to raise funds for various projects. Examples include initial public
offerings (IPOs) and government bond sales. Having strong secondary markets is crucial because they allow
investors to buy and sell securities after their initial purchase. Without secondary markets, investors might hesitate
to participate in primary markets, fearing they won’t be able to resell their assets. A well-functioning secondary
market builds investor confidence and supports a stable financial system.
4. What is a prospectus? Why do firms prepare these documents?
A prospectus is a detailed document that provides important information about a company’s finances, operations,
and risks. Companies create this document when offering new securities like stocks or bonds to attract investors.
It helps potential investors make informed decisions by outlining the company’s strengths, challenges, and
expected returns. A prospectus also promotes transparency and prevents fraud by ensuring that all necessary
financial details are disclosed. Regulatory agencies, such as the Securities and Exchange Commission (SEC),
require companies to publish a prospectus to protect investors and maintain trust in the financial market.
5. “Debts can be risky. You can lose business through having it.” Is this true? Give reason for your answer.
Yes, this statement is true because excessive debt can lead to financial struggles and even business failure. If a
company borrows more than it can afford to repay, high-interest payments can reduce profits and limit growth. In
severe cases, failure to repay debts can result in legal action, loss of assets, or even closure of the business. Poor
debt management can also harm a company’s reputation, making it harder to secure loans in the future. However,
debt can also be beneficial if used wisely, as it can provide funding for business expansion and investment. The
key is responsible borrowing and ensuring that the business can generate enough income to meet its financial
obligations.
