1. A Modern Financial System Flashcards
Return/Yield
Financial benefit or compensation from investment typically expressed as a %
Risk
Likelihood of different outcome compared to the expected return of a investment
Liquidity
How quickly an asset can be converted into cash or liquid funds
Time Pattern of CFs`
Frequency of cash flows generated from an investment or asset (monthly, annually, etc.)
Matching Principle
Short term assests should be funded by short term liabilities
Five financial institutions that compromise the financial system
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)
Explain the difference between primary and secondary markets
Primary market is Where new financial instruments are issued. The secondary market is where existing securities are traded between buyers and sellers
Explain the difference between direct financial flow and intermediated financial flow markets
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
Explain the difference between wholesale and retail markets
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
Explain the difference between money and cpital markets
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)