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Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
Learning Objectives
Explain the functions of a financial system Describe the main classes of financial
instruments issued in a financial system Distinguish between various types of financial markets according to function Discuss the flow of funds between savers and borrowers, including direct and intermediated finance
Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
financial markets Categorize the main types of financial institutions Understand the impact of a financial crisis on a financial system and a real economy
Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
Chapter Organization
1.1 1.2 1.3 1.4 1.5 1.6 1.7 Introduction Functions of the Financial System Financial Instruments Financial Markets Impact of Globalization Financial Institutions Summary
Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
1.1 Introduction
Money
Medium of exchange Allows specialization in production Solves the divisibility problem, i.e. where medium of exchange does not represent equal value for the parties to the transaction Facilitates saving Store of wealth Any commodity that is widely accepted in exchange transactions
Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
Surplus units Savers of funds available for lending Deficit units Borrowers of funds for capital investment and consumption
Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, Financial Instruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slides prepared prepared by by Anthony Kaye Watson Stanger
Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
Chapter Organisation
1.1 1.2 1.3 1.4 1.5 1.6 1.7 Introduction Functions of the Financial System Financial Instruments Financial Markets Impact of Globalisation Financial Institutions Summary
Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, Financial Instruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slides prepared prepared by by Anthony Kaye Watson Stanger
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Total financial compensation received from an investment expressed as a percentage of the amount invested Probability that actual return on an investment will vary from the expected return
Risk
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restructuring
The combination of assets and liabilities comprising the desired attributes of return, risk, liquidity and timing of cash flows
Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
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Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
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Chapter Organisation
1.1 1.2 1.3 1.4 1.5 1.6 1.7 Introduction Functions of the Financial System Financial Instruments Financial Markets Impact of Globalisation Financial Institutions Summary
Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
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Dividend Liquidation Ordinary share Preference shares or Equity Hybrid (or quasi-equity) security
Preference shares Convertible notes
Types
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Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, Financial Instruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slides prepared prepared by by Anthony Kaye Watson Stanger
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Chapter Organisation
1.1 1.2 1.3 1.4 1.5 1.6 1.7 Introduction Functions of the Financial System Financial Instruments Financial Markets Impact of Globalisation Financial Institutions Summary
Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, Financial Instruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slides prepared prepared by by Anthony Kaye Watson Stanger
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Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger
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Matching principle
Short-term assets should be funded with
short-term liabilities
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Businesses
Company shares or debentures
Governments
Treasury notes or bonds
Individuals
Mortgage
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No direct impact on original issuer of security Transfer of ownership from one saver to another saver Provides liquidity which facilitates restructuring of portfolios of security owners
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Advantages
Avoids costs of intermediation Increases range of securities and markets
Disadvantages
Matching of preferences Liquidity and marketability of a security Search and transaction costs Assessment of risk, especially default risk
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Advantages
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Advantages (cont.)
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Retail markets Transactions conducted primarily with financial intermediaries by the household and smallmedium business sectors
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Money markets
Wholesale markets in which short-term
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Banks Finance companies Funds managers Building societies Credit unions Companies
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Capital markets
Markets in which longer-term securities are
Equity markets Corporate debt markets Government debt markets Foreign exchange markets Derivatives markets
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Chapter Organisation
1.1 1.2 1.3 1.4 1.5 1.6 1.7 Introduction Functions of the Financial System Financial Instruments Financial Markets Impact of Globalisation Financial Institutions Summary
Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, Financial Instruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slides prepared prepared by by Anthony Kaye Watson Stanger
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Chapter Organisation
1.1 1.2 1.3 1.4 1.5 1.6 1.7 Introduction Functions of the Financial System Financial Instruments Financial Markets Impact of Globalisation Financial Institutions Summary
Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, Financial Instruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slides prepared prepared by by Anthony Kaye Watson Stanger
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transactions to corporations and government Advice on mergers and acquisitions, portfolio restructuring, finance and risk management Provide some funding
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borrowers
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Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, Financial Instruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slides prepared prepared by by Anthony Kaye Watson Stanger
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Chapter Organisation
1.1 1.2 1.3 1.4 1.5 1.6 1.7 Introduction Functions of the Financial System Financial Instruments Financial Markets Impact of Globalisation Financial Institutions Summary
Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, Financial Instruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slides prepared prepared by by Anthony Kaye Watson Stanger
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1.7 Summary
The financial system is composed of
financial institutions, instruments and markets facilitating transactions for goods and services and financial transactions
or hybrid
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according to
Primary and secondary transactions Direct and intermediated flows Wholesale and retail markets Money markets and capital markets Financial institutions
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