Understanding Loan Repayment, Financial Markets, and Ratios
Loan Repayment Methods
Equal Principal Payments
The loan is repaid in equal amounts of principal. The installments are unequal because the interest payment is largest in the first year and becomes smaller as the principal is gradually paid.
Equal Amortization
The loan is repaid in equal installments. The amount applied to principal is smallest in the first year and gradually increases through the payment years. The decreasing payments on interest equalize the uneven payments on principal.
Balloon Payment
The loan is repaid in equal installments for a number of years, and then a large final payment is made at the maturity date.
Deferred Principal Payment with Grace Period
The payment of principal is deferred, even though payments of interest are made. This repayment program suits loans to finance projects with long gestation periods, such as livestock projects.
Philippine Financial System
The Philippine financial system includes:
- Banking Institutions
- Bangko Sentral ng Pilipinas (Central Bank of the Philippines)
- Non-Bank Financial Institutions (NBFI)
Securities Market Components
Auction-Type Markets
These include international and national stock exchanges. A stock exchange is a market where securities are bought and sold. The most popular are the New York Stock Exchange (the largest in the world in terms of US dollar value traded), the American Stock Exchange, and the London Stock Exchange. Larger exchanges are qualified as international when they include stock issues of corporations from foreign countries.
The Philippine Stock Exchange is one of the world’s smaller exchanges. Its sectors include:
- Banks and Financial Services (banking, investments, and finance)
- Commercial and Industrial (food, construction, transportation services, etc.)
- Property (land and property development)
- Mining (mineral extraction)
- Oil (exploration, extraction, and production)
Negotiation-Type Markets
These include over-the-counter markets.
An over-the-counter (OTC) or off-board market is a market where securities are traded outside of organized exchanges. It is provided by dealers who are ready to buy and sell securities at certain prices. Transactions are negotiated using various forms of communication, such as mail or telephone.
Classes of Financial Ratios
Liquidity Ratios
Measure a firm’s ability to pay its bills on time or to meet its current obligations. The firm’s ability to cover its obligations is determined by its amount of cash, marketable securities, and funds in its receivables and inventory.
Activity Ratios
Measure how effectively the firm employs the resources at its command.
Profitability Ratios
Measure management’s effectiveness as shown by returns on sales and investment.
Solvency Ratios
Measure the ability of the firm to pay its debt eventually, even if not paid on time.
I learned about the activities and disciplines revolving around the management of money and other valuable assets. This subject helps students understand accounting methodologies, investing strategies, and effective debt management. If in the future we decide to build a small business, we will remember we had an understanding of the principles of finance to keep the business profitable.