The Financial Markets: Powerpoint To Accompany

Chapter 3
The financial
markets
PowerPoint to accompany:
Objectives
Define financial markets
Explain the role of financial markets in a developed

economy
Describe financial intermediaries in a developed financial

market
Discuss movement of funds to finance business activities
Describe the various component market groups that

make up the overall Australian financial markets
Outline the main pattern of fund flows underlying the

financing of businesses in Australia
Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442539174/Petty/Financial Management/6th edition
What are financial markets?

A complex of institutions,
procedures and arrangements
that facilitate a transfer of funds
from one entity in the economy
to another
Examples of financial sub-markets:
debt market & share market
Role of financial markets

Net savers of funds
Surplus savings
Suppliers of funds
Fu
nd
s
FINANCIAL
INTERMEDIARY
Facilitation
Fu
nd
s
Net users of funds

Shortage of savings
Demanders of funds
Development of a financial
market system: Figure 3.1 p. 62
Stage 1
Real assets = net worth
Stage 2
Cash + Real assets = net worth
Stage 3
Cash + Real assets

+ other financial assets
= financial liabilities + net worth
Stage 4
The addition of loan brokers, security

underwriters, and secondary markets
Stage 5
The addition of financial intermediaries
Types of assets
Real assets
Tangible assets
Houses, equipment, inventory
Financial assets
Securities (e.g. shares, debentures, bills, notes)
Claims for future payments
Owners anticipate earning a future rate of return
Financial intermediaries
Financial intermediaries facilitate the movement of

money from savers to borrowers:
commercial banks
non-bank authorised deposit-taking institutions
investment banks
insurance companies
superannuation funds
investment companies
private equity firms
Movement of funds
Examples:
Banks, building societies, credit unions, life insurance

companies, trust funds
Sell indirect securities to net savers
Use the proceeds to purchase direct securities with

increased size and maturity
e.g. Fixed term deposits, life insurance policies
e.g. Debentures, shares
This process is called asset transformation
Direct transfer of funds: Figure 3.2

(p.69)
Indirect transfer of funds: Figure

3.3 (p.69)
10
Components of Australian financial

markets
11
Stock market and Bond market
public offerings and private placements
primary and secondary markets
Foreign-exchange markets
Derivatives markets
Money and capital markets
Foreign-exchange markets
12
Transfer of purchasing power from one currency

to another
Networks of licensed foreign-exchange dealers
Very efficient markets
Major types of transactions
Spot transactions
Forward transactions
Derivatives markets
Derivatives are financial instruments that are

derived from, or based on, the value of an
underlying asset. They are often used to
manage risk
Examples of derivatives:
Futures, options, & swaps
Derivatives may be traded through an organised exchange or
over-the-counter (OTC)
13
Derivatives markets
(cont)
Futures markets
A
futures contract is a legally binding agreement to buy

or sell the underlying financial instrument or commodity
14
specific quantity
specific quality
deliverable at an agreed location
deliverable at an agreed future time
at an agreed price
Derivatives markets
(contd)
Options markets
An
options contract is an agreement that gives the

holder the right (but not the obligation) to buy or sell
the specified commodity or financial instrument on or
before a specified date
15
Call option: the right to buy an asset
Put option: the right to sell an asset
There is a large variety of options-type products
Money and capital markets

Capital markets
Markets in long-term financial instruments
By convention: terms greater than one year
Long-term debt and equity markets
Bonds, debentures, shares, leases, convertibles
Money markets
16
Markets in short-term financial instruments
By convention: terms less than one year
Treasury notes, certificates of deposit, commercial bills,

promissory notes
Public offerings and Private

Placements
Public offerings
New securities offered to the public
Securities issued through a share-broking firm or a

syndicate of firms
Examples: shares, bonds
Private placements
17
New securities only offered to some investors
Often only to existing investors in the company
Examples: shares, bonds
Primary & Secondary Markets

Primary markets
18
Selling of new securities
Funds raised by governments and businesses
Secondary markets
Reselling of existing securities
Adds marketability and liquidity to primary markets
Reduces risk on primary issues
Funds raised by existing security holders
The Australian Securities Exchange

In July 2006, the ASX and SFE merged
Australian
Stock
Exchange
19
Australian
Securities
Exchange
Sydney
Futures
Exchange
The Australian Securities Exchange

(contd)
20
Major primary and secondary equity market
Secondary market for debentures, notes and

bonds
Publicly listed company
ASX listing rules
Aim: To provide an efficient, honest, competitive

and informed market for trading
Pattern of fund flows in Australias

financial markets: Figure 3.4 (p.77)
21
End of Chapter 3
22

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Chapter 3

Define financial markets

Explain the role of financial markets in a developed

Describe financial intermediaries in a developed financial

Discuss movement of funds to finance business activities

Describe the various component market groups that

Outline the main pattern of fund flows underlying the

What are financial markets?

Role of financial markets

Net users of funds

Real assets = net worth

Cash + Real assets = net worth

Cash + Real assets

The addition of loan brokers, security

The addition of financial intermediaries

Houses, equipment, inventory

Securities (e.g. shares, debentures, bills, notes)

Claims for future payments

Owners anticipate earning a future rate of return

Financial intermediaries facilitate the movement of

non-bank authorised deposit-taking institutions

private equity firms

Banks, building societies, credit unions, life insurance

Sell indirect securities to net savers

Use the proceeds to purchase direct securities with

e.g. Fixed term deposits, life insurance policies

e.g. Debentures, shares

This process is called asset transformation

Direct transfer of funds: Figure 3.2

Indirect transfer of funds: Figure

Components of Australian financial

Stock market and Bond market

public offerings and private placements

primary and secondary markets

Money and capital markets

Transfer of purchasing power from one currency

Networks of licensed foreign-exchange dealers

Very efficient markets

Major types of transactions

Derivatives are financial instruments that are

futures contract is a legally binding agreement to buy

deliverable at an agreed location

deliverable at an agreed future time

options contract is an agreement that gives the

Call option: the right to buy an asset

Put option: the right to sell an asset

There is a large variety of options-type products

Money and capital markets

Markets in long-term financial instruments

By convention: terms greater than one year

Long-term debt and equity markets

Bonds, debentures, shares, leases, convertibles

Markets in short-term financial instruments

By convention: terms less than one year

Treasury notes, certificates of deposit, commercial bills,

Public offerings and Private

New securities offered to the public

Securities issued through a share-broking firm or a

Examples: shares, bonds

New securities only offered to some investors

Often only to existing investors in the company

Examples: shares, bonds

Primary & Secondary Markets