Topic 1 Intro To Fin Markets

Question 1

What are financial systems comprised of?

Answer 1

Financial institutions
Financial instruments
Financial markets

These facilitate the Flow of Funds in the system.
Savings are surplus units.

Question 2

What are the four attributes of financial assets?

Answer 2

Rates of Return or yield.
Risk.
Liquidity.
Time pattern of cash flows.

Question 3

What is the matching principle?

Answer 3

Short term assets should be funded with short term liabilities.

Long term assets should be funded with longer term liabilities and equity.

Question 4

What is a primary market?

Answer 4

This is a new financial instrument.
Surplus funds (savings) are given directly to users of funds (deficit units)
Primary markets allow governments and corporations to raise funds for capital and production.

Question 5

What is a secondary market?

Answer 5

Involve transactions with existing financial instruments.
These have already been created in the primary market.
It is simply a transfer of ownership from one party to the other.
Secondary markets are more liquid.
They increase savings and investment as they are more accessible.

Question 6

What is direct financing?

Answer 6

Funding obtained direct from the MONEY markets and CAPITAL markets.
A broker or dealer does not have to be involved, the funds are not provided by a financial institution.
An example is an IPO

Question 7

What is indirect financing?

Answer 7

When funds are borrowed from the financial market through indirect means, such as through an INTERMEDIARY.

Question 8

Advantages of financial intermediation?

(In consideration of the 2 main advantages - cost (cheaper because it is not a whole sale market) and market failure protection - because consumers needs are able to be met more efficiently)

Answer 8

Some investors have varying needs that can’t be met in the primary market. These are:
Asset transformation - providing a range of products that meet a customers needs.
Maturity transformation - a range of products with different terms of maturity.
Credit risk transformation - the saver is not exposed to risk, the borrower is (intermediaries have knowledge about who is a higher risk)
Liquidity transformation - ability of a saver to convert an instrument into cash.
Economies of scale - benefits gained from size, expertise and volume of business.

Question 9

Disadvantages of intermediaries?

Answer 9

Intermediary is the price taker and can set the deposit and lending prices.
Also there can be a lack of transparency, misleading some clients.

Question 10

Describe the main functions of the financial systems?

Answer 10

Encourage savings
Provides funds for investment
Facilitates transactions for goods and services