Financial Markets

Question 1

Financial Markets

Answer 1

Any situation where the buyers and sellers of finance are brought together to exchange finance for financial products/assets/securities and a payment (interest/dividends)

Question 2

Financial markets are considered to be a part of the…

Answer 2

Factor market

Question 3

Primary Financial Markets

Answer 3

allow for the creation of financial assets/securities that can be ‘sold’ in the Australian economy

Question 4

Secondary Financial Markets

Answer 4

involve transactions in financial securities that have already been issued in the primary market for some time in the past

Question 5

Financial Market Products

Answer 5

Consumer Credit

Housing Loans

Business Loans

Short-Term Money Market

Bonds

Financial Futures & Options

The Foreign Exchange

Question 6

Share Market

Answer 6

The share market or stock exchange is the market for:

The issue of and trading in “shares” or ownership of public companies

Question 7

Why do individuals invest in the share market?

Answer 7

Investors who buys share in a company gain part ownership in that company

The company then may pay dividends (a percentage of the company’s profits) to shareholders

Capital gains are the profits made by investors who sell their shares at a price above the level that they originally paid for them

Shareholders are also allowed to vote for the company’s board of directors

Question 8

Why dod companies sell shares?

Answer 8

For companies, the share market provides an opportunity to raise new funds for investment

Question 9

The All Ordinaries Accumulated Index

Answer 9

measures the changes in the level of share prices at any given time of the 500 largest Australian companies to determine the overall performance of the ASX

Question 10

Foreign Exchange Markets

Answer 10

where financial assets defined in one country’s currency are exchanged for assets defined in another country’s currency

Question 11

Debt Markets

Answer 11

where debt securities (such as bonds) are exchanged, or cash is lent/borrowed

Question 12

Equity Markets

Answer 12

where ownership of shares in companies are issued or exchanged

Question 13

Derivaties Market

Answer 13

where people buy and sell financial assets that are based on the value of other financial assets

Question 14

Roles of the RBA

Answer 14

Ensure the overall stability of the Australian financial system

Conduct monetary policy on behalf of the Australian Federal government

Control the issue of currency notes

Regulate the payments system (credit cards & electronic cash)

Hold accounts that allow banks to settle transactions between themselves

Hold reserve of foreign exchange currency and gold

Act as a banker and source of economic advice to the Australian government

Question 15

The Australian Prudential Regulation Authority

Answer 15

APRA regulates all authorised deposit taking institutions (ADIs) such as banks and NBFI’s

They ensure that ADIs maintain their financial obligations to their investors

Question 16

The Australian Securities and Investment Commission

Answer 16

ASIC is responsible for consumer protection in the financial system by monitoring and investigating institutions whose financial intermediaries are acting illegally

It registers businesses and monitors the operation of companies and the ASX to ensure that they follow the Corporations Act 2001

Question 17

The Australian Treasury

Answer 17

Monitors the Australian economy and overseas countries economic performance

Provides advice to the government in relation to Monetary Policy and Fiscal Policy

Question 18

The Council of Financial Regulators

Answer 18

The co-ordinating body for Australia’s main financial regulatory agencies

Advises the government on the effects of Australia’s financial system of events in the Australian and global economy

Question 19

Why do governments borrow?

Answer 19

Governments borrow to stimulate economic activity, as well as to:

Finance budget deficits
Build infrastructure
Finance tax cuts

Question 20

Commonwealth Government Bonds

Answer 20

A financial security which has a fixed rate of interest over a given period of time

Question 21

At high rates of interest…

Answer 21

demand will be low and supply will be high

Question 22

At low rates of interest….

Answer 22

demand will be high and supply will be low

Question 23

Factors that impact the supply and demand of funds

Answer 23

Level of Economic Activity

Government Budget Outcome

Level of household income and their APS/MPS

Access to international financial markets

Success of Business (Profit Levels)

Question 24

Transactionary Motive

Answer 24

the demand or supply of finance is a result of the demand for goods and services

Question 25

Precautionary Motive

Answer 25

a desire to have some finance set aside for unforeseeable events, such as an economic downturn, unemployment or illness

Question 26

Speculative Motive

Answer 26

the holding, supplying or borrowing of finance so that investment opportunities which bring about a return can be taken advantage of

Question 27

What is money?

Answer 27

A medium of exchange A measure of value A store of value A method of deferred repayment

Question 28

Money Supply

Answer 28

the total amount of funds in an economy

Question 29

Currency

Answer 29

all notes and coins in circulation (accounts for less than 5% of the money supply)

Question 30

Money Base

Answer 30

all currency in circulation and all bank deposits with the Reserve Bank (a measure of most liquid financial assets)

Question 31

M3

Answer 31

Consists of the money base plus all bank deposits

Question 32

Broad Money

Answer 32

consists of M3 plus deposits in non-bank financial intermediaries (NBFIs) minus their holdings of bank deposits

Question 33

Credit

Answer 33

Loans that are provided by banks to household and business borrowers

Question 34

Factors that Impact the Interest Rate

Answer 34

Demand For Capital Goods The Level of Savings Demand for Liquid Funds Rate of Inflation Government Budget International Interest Rates RBA

Question 35

Monetary Policy

Answer 35

Macroeconomic policy that aims to influence the supply and cost of money in an economy Focuses on targeting/controlling inflation

Question 36

Overnight or Short Term Money Market

Answer 36

Where banks borrow and lend from each other from short periods of time to maintain the balances in their ESA

Question 37

Exchange Settlement Accounts

Answer 37

Used to settle transactions between the RBA and with other banks - must maintain a minimum balance at all times

Question 38

Cash Rate

Answer 38

Interest Rate in the OMM

Question 39

Interest Rate Corridor

Answer 39

25% above and below the cash rate

Question 40

Open/Domesitc Market Operations

Answer 40

actions taken by the RBA to achieve a predetermined target cash rate (% rate in the overnight money market)

Question 41

Tightening Monetary Policy

Answer 41

RBA sells CGBs to Banks ESA Decrease in the supply of cash in the OMM Shortage of cash in the OMM Increase in the cash rate & interest rate corridor Banks increase their interest rates to maintain their interest rate differential Decrease in consumption and the levels of investment Decrease in the level of economic activity, employment & inflationary pressures

Question 42

Loosening Monetary Policy

Answer 42

RBA buys CGBs from Banks ESA Increase in the supply of cash in the OMM Surplus of cash in the overnight money market Decrease in the cash rate & interest rate corridor Banks decrease their interest rates to maintain their interest rate differential Increase in consumption and the levels of investment Increase in the level of economic activity, employment and inflationary pressures