Topic 5 - Financial Markets Flashcards
(40 cards)
Explain the difference between M1 and Broad Money, as monetary aggregates.
Include the factors they cover.
M1 is the more narrow form of liquidity, including currency and deposits from private, non-bank sectors.
Broad Money consists of M1, M3, and borrowings by all financial intermediaries from the private sector.
Less liquid monetary aggregate.
What financial aggregate is used as a strong economic growth indicator?
Credit growth is the strongest economic indicator of a country, mainly seen in M3.
How do banks earn money?
Charges ____, extends ____
Banks earn money by lending out loans, charging interest rates on these loans and extending the credit interests. (Pay later, higher cost)
Define Financial intermediaries.
State an example of one.
Firms that receive the funds of borrowers, then make loans to lenders. The financial banking bridge between borrowers and savers.
E.g.: Credit Unions, Banks, etc.
State the four types of lenders (savers) and borrowers (spenders) within the Australian Financial System.
- Households
- Businesses
- Governments
- Overseas Foreigners
Distinguish between a primary and secondary market.
State 1 example for each market.
Primary markets - Facilitates the creation of financial securities that are mainly sold to ‘professional’ investors.
e.g. IPO
Secondary Markets - Buying and selling of financial assets issued from a primary market to a more broad range of customers.
e.g. ASX
List the four main types of financial markets.
S___/E___, D___, D___, F___E___
- Share/Equity Market
- Debt Market
- Derivatives Market
- Foreign Exchange Market
Explain the Share/Equity Market
Where ownership shares in companies are issued or exchanged.
Explain the Debt Market
Where debt securities are exchanged, and cash is lent/borrowed between consumers, businesses and ADTI’s.
Explain the Derivatives Market through shares.
List the 4 different types of contracts made from Derivatives.
Where people buy and sell financial assets that are base on the value of other financial items/shares, etc. through contracts.
1) Forward 2) Future 3) Call 4) Options
Explain the Foreign Exchange Market
Where financial assets defined in one country’s currency are exchanged for assets designed in another countries currency.
Describe the share market and in relation to buyers and sellers.
State the largest one in Australia as well.
A regulated, financial market for investors to buy and sell shares. When buyers and sellers agree on an equilibrium price point.
The largest share market in Australia is ASX.
State the 2 reasons for investing in shares.
(D____ and C___ G___)
Briefly explain each reason.
- Dividends - Proportions of profits that are returned to the shareholders. Awarded on a ‘per-share basis’.
- Capital Gain - Profit from the sale of property or investments. Selling shares higher than previously bought.
State the 2 formulas (name + equation) for measuring the value of shares.
(D__ Y__) and (__/__ Ratio)
1) Dividend Yield = (Annual Dividend ÷ Price per share)
2) P/E Ratio (Price-per-earning) =
Share Price ÷ Company’s earnings
State the similarity between Australian and global financial markets.
How do these markets raise funds?
(B & D)
Linked through the offshore borrowings of ‘all financial intermediaries’.
Both raise funds through bonds and debts.
Explain the economic role of superannuation.
State its importance to the government.
Superannuation contributes to saving rates being built up into long-term retirement.
Government taxes these rates, reducing the cost of government spending on social security and welfare.
What is the CFR’s role in Australia’s financial market?
(Council of Financial Regulators)
Which government bodies do they control?
A coordinating body for financial market regulation that promotes regulation and stability. Allows information to be shared between RBA, APRA, ASIC and the Treasury.
State the RBA’s role in Australia’s economy.
(Reserve Bank of Australia)
List the 3 financial regulations undertaken in order.
Prints currency notes and regulates the Australian monetary/banking system.
1) Stabilise Australia’s currency (Inflation rates)
2) Maintain full-employment rates
3) Ensure economic prosperity and welfare.
What is APRA’s role in the Australian economy? (Australian Prudential Regulation Authority)
Which 3 areas of the financial system do they regulate?
A government body that oversees and protects financial entities. Regulates: 1) All deposit-taking institutions 2) Life and general insurance 3) Superannuation funds
State ASIC’s responsibility for the Australian financial market (Australian Securities and Investments Commission).
How do they maintain consumer confidence?
Responsible for company regulation, consumer protection and oversight of financial service products.
Maintains consumer confidence by regulating financial offences (jailing, freezing assets, fines).
What is the Australian Treasury’s main role to the Australian Government and Australia?
The main source of economic policy advice which influences the Australian Budget. They collect taxes and allocate government expenditure, whilst implementing fiscal policies.
List the roles which an individual consumer has when it comes to borrowing and lending?
(Roles=What they do with B&L)
Borrowing: Mortgage for loans + Short-term transactions.
Lending: Deposits money into financial institutions and invests in shares or property to gain interest or profit.
List the roles which businesses have when it comes to borrowing and lending (to shareholders)?
Borrowing: Floating new shares to raise capital equity, expand production and invest in research.
Lending: Through dividends, and has no immediate plan to expand.
List the roles which the Government has when it comes to borrowing and lending?
Borrowing: Borrowing from banks and foreign exchange markets - Raise economic activity and increase spending in the economy. (Long-term investment).
Lending: On a budget surplus - Allows them to pay outstanding debts when revenue is higher than spending.
