1. A Modern Financial System

Question 1

Return/Yield

Answer 1

Financial benefit or compensation from investment typically expressed as a %

Question 2

Risk

Answer 2

Likelihood of different outcome compared to the expected return of a investment

Question 3

Liquidity

Answer 3

How quickly an asset can be converted into cash or liquid funds

Question 4

Time Pattern of CFs`

Answer 4

Frequency of cash flows generated from an investment or asset (monthly, annually, etc.)

Question 5

Matching Principle

Answer 5

Short term assests should be funded by short term liabilities

Question 6

Five financial institutions that compromise the financial system

Answer 6

AIFCU
• Authorized deposit taking institution (ADIs) – receive deposits from customers and provide loans (e.g. Mortgages, credit cards) Examples include commercial banks, building societies and credit unions
• Investment banks – primary provide off-balance sheet business services. Are not permitted to provide loans. OBS services for institutional, corporate or government clients.
• Finance companies – issue securities directly into the markets to provide loans
• Contractual savings institutions – contracts where payout if specified event occurs in return for periodic payments (e.g. car insurance, home and contents insurance)
• Unit trusts – investors purchase units in a trust, and the pooled savings from all investors are invested into specified assets (stated in the trust deed)

Question 7

Explain the difference between primary and secondary markets

Answer 7

Primary market is Where new financial instruments are issued. The secondary market is where existing securities are traded between buyers and sellers

Question 8

Explain the difference between direct financial flow and intermediated financial flow markets

Answer 8

A direct financial flow market is where investors and issuers od securities interact directly with one another. There is no intermediary, Conversely an intermediated financial flow facilitates the transaction bringing together buyers and sellers of a security

Question 9

Explain the difference between wholesale and retail markets

Answer 9

A wholesale market involves transactions between institutional investors and high net worth individuals. Thus, transactions are of large monetary value. The retail market, on the other hand involves transactions of a smaller scale and of higher frequency between business and individuals (eg if YOU buy shares on CommSec

Question 10

Explain the difference between money and cpital markets

Answer 10

Money markets are where short-term securities (less than 12 months) are traded. Capital Markets are where longer-term securities are traded (greater than 1 year maturity)