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and Markets
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Chapter 1
The Financial System
Websites:
http://www.rba.gov.au
http://www.asx.com.au
http://www.ft.com/asia/
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Learning Objectives
Explain the functions of a financial system
Describe the main classes of financial
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Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
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1.1 Introduction
Money
Medium of exchange
Allows specialisation in production
Solves the divisibility problem, i.e. where
medium of exchange does not represent
equal value for the parties to the
transaction
Facilitates saving
Store of wealth
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Surplus units
Savers of funds available for lending
Deficit units
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Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
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Risk
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portfolio restructuring
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Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
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Dividend
Liquidation
Types
Ordinary share
Hybrid (or quasi-equity) security
Preference shares
Convertible notes
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Financial security
Interest rate-sensitive debt instruments,
currencies and equities
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Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
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transactions
Direct and intermediated financial flow
markets
Wholesale and retail markets
Money markets
Capital markets
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Matching principle
Short-term assets should be funded
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Businesses
Company shares or debentures
Governments
Treasury notes or bonds
Individuals
Mortgage
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Advantages
Avoids costs of intermediation
Increases range of securities and markets
Disadvantages
Matching of preferences
Liquidity and marketability of a security
Search and transaction costs
Assessment of risk, especially default risk
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Advantages
Asset transformation
Maturity transformation
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Advantages (cont.)
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Retail markets
Transactions conducted primarily with
financial intermediaries by the household
and small- medium business sectors
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Money markets
Wholesale markets in which short-
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Banks
Finance companies
Funds managers
Building societies
Credit unions
Companies
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Capital markets
Markets in which longer-term
Equity markets
Corporate debt markets
Government debt markets
Foreign exchange markets
Derivatives markets
year
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Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
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Chapter Organisation
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1.2
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1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
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Categories of
financial institutions
Depository financial institutions
Attract savings from depositors and
investors to provide loan facilities to
borrowers
Commercial banks
Building societies
Credit unions
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Categories of
financial institutions (cont.)
Investment banks and merchant banks
(money market corporations)
Mainly provide off-balance-sheet (OBS)
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Cont. .
For example, loans issued by a bank
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Categories of financial
institutions (cont.)
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Categories of
financial institutions (cont.)
Finance companies
Funds are raised by issuing financial
ultimate borrowers
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Categories of financial
institutions (cont)
Unit trusts
Investors purchase units in the trust
Trust manager invests funds in a range
of investments specified by trust deed
Types of unit trusts
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Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
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1.7 Summary
The financial system is composed of
debt or hybrid
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according to
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