1B - Overview Of The Australian Financial System Flashcards
(78 cards)
What is a Financial System?
The financial institutions, markets and instruments that provide an economy’s financial services.
What are Financial Functions?
The Major functions formed performed by the financial system.
What are the five financial functions of Australia’s financial system?
- to arrange the settlement of commercial transactions. 2. to promote the flow of funds.
- to provide opportunities for participants in the financial system to manage the risks they face.
- to promote the financial system’s efficient operation and development.
- to promote the financial system’s stability.
What is the settlement function?
The arrangements that can be used to settle commercial transactions. This function is performed by the payments system.
What is the flow of funds?
The supply of funds, usually on the basis the users compensate the suppliers for the use of their funds.
What is the difference between money and finance?
Money’ is a means of exchange used to settle financial transactions and is therefore part of the financial system’s settlement function. ‘Finance’ usually refers to the flow of funds function where surplus units supply funds to deficit units through the financial system.
What is Finance?
The term given to the “funds” that are made available for use under agreed terms and conditions. The principal source of finance is savings from households followed by earnings from firms (the difference between a firm’s revenue and costs).
What are Surplus Units and Deficit Units?
We use the terms surplus units and deficit units to represent the flow of funds. Surplus units are
households, firms, governments and other organisations that have funds surplus to their immediate needs. Deficit units, conversely, need additional funds to meet their requirements.
What are the two basic ways of arranging the flow of funds?
through transactions in financial markets, and
through transactions with financial institutions.
What is direct financing?
The flow of funds arranged by the market process is called direct financing, because deficit units raise funds directly from surplus units, usually through the issue of securities.
What is indirect financing?
It is called indirect financing, because the deposit-taking institution acts as an intermediary, borrowing from surplus units to make loans to deficit units. Indirect financing involves two sets of contracts: those the institution has with surplus units (such as its depositors), and those it has with deficit units (its loan contracts).
What are the two basic forms finance?
Debt and Equity.
What is Debt Financing?
Debt refers to borrowed funds (i.e. a loan). It commits the borrower to make the agreed loan-servicing payments, which comprise interest and the repayment of the loan. Debt is provided as loans by financial institutions (indirect financing) and security markets (direct financing) for either short or long periods.
What is Interest?
Interest is the borrowers cost of debt. It compensates the lender for the use of the funds and for the credit risk posed by the borrower. Interest payments may be scheduled during the loan period (such as monthly or quarterly) and/or at the end of the loan. They are based on the agreed interest rate, which may be a fixed rate for the whole period of the loan or a floating rate.
What is a secured and unsecured loan?
An unsecured loan is a loan that does not have a charge over the borrower’s assets whereas a secured loan is a loan made on the basis of assets pledged by the borrower.
What is Fixed Rate and Floating Rate Interest?
A Fixed rate is an interest rate that applies over the whole period of a loan whereas a Floating rate is an interest rate that can change at agreed periods during the life of a loan.
What is Equity Capital?
Equity capital is the funding provided to the business by its owner(s). It is ‘permanent’ capital, because it has no maturity date (unlike debt) and imposes no payment commitments on the business. Equity provides a company with financial strength because it provides the capacity to remain solvent during loss-making Periods.
How do Companies Raise Equity Capital?
Equity is raised through the issue of ordinary shares (also known as common stock) and through the retention of earnings.
What is Risk Capital?
Equity is often referred to as risk capital, because the returns to its suppliers have the lowest payment
priority, behind the payment priority of debt holders. The returns to equity suppliers are a residual claim on the firm’s earnings and assets, meaning they are met only after all obligations have been paid.
What is a Financial Asset?
A financial asset is an intangible asset - its value depends on legal claims or rights to cash flows.Shares in a company represent financial assets. Other names for financial assets are financial instrument, contract, claim or security. Financial assets that are traded in the financial markets are called securities.
What are the Four Attributes of Financial Assets?
Return, Risk, Liquidity, and Maturity.
What is Return as it pertains to a financial asset?
The financial benefits from the supply and/ or use of funds, such as interest and dividends, an increase (or decrease) in an asset’s market value, whether or not the asset is sold, generating either a cash payment (known as a realised capital gain) or a loss (known as a realised capital loss).
What is Risk as it pertains to a financial asset?
Returns on investments are exposed to risk – namely, the possibility that actual returns will be less than expected.
What is Liquidity as it pertains to a financial asset?
Liquidity is the access suppliers of funds have to their funds (The realisation of the cash value of an asset).