3.2.3 Financial institutions

Question 1

What are major participants in financial markets?

Answer 1

Major participants in financial markets include financial intermediaries, which accept deposits from lenders and make loans to borrowers. Such intermediaries are vital in the provision of external funding for the establishment, growth and operations of businesses.

Question 2

What are the participants in the financial market?

Answer 2

The participants in the financial markets include:

• Banks
• Investment Banks
• Finance companies
• Superannuation funds
• Life insurance companies
• Unit Trusts

Question 3

What are banks?

Answer 3

Banks are the main providers of finance to businesses and consumers. Banks make available a wide range of financial products and services to business. The monies deposited for investment are used as loans for borrowers. The interest rate charged is the cost of borrowing these funds.

Question 4

What are the financial products of banks?

Answer 4

• Deposit accounts (transaction, cheque, savings, fixed-term)
• Overdrafts
• Credit Cards
• Short- and long term loans
• Mortgages
• Leases
• Services including advice, resources and online banking

Question 5

What are investment banks?

Answer 5

Investment banks are banks that specialise in investment banking for medium to large corporations. Their mains functions include private equity activities, international finance, funds management and advisory services, including advice related to mergers and acquisitions.

Question 6

What are the financial products of investment banks?

Answer 6

• Commercial bills (Bills of exchange issued by investment banks)
• Loans (secured and unsecured)
• Private and project equity raising (underwriting new share issues)
• Investment funds (managed funds, hedge funds)
• Financial market trading (debt securities, foreign exchange, futures)

Question 7

Explain the role of finance companies

Answer 7

Finance companies make loans to consumers and businesses. These loans usually have a higher interest rate and less strict criteria for loans than other creditors. The companies raise funds through debenture (company bond) issue.

Question 8

What are the financial products of finance companies?

Answer 8

• Loans (short term and long term)
• Credit cards
• leasing
• factoring

Question 9

Define superannuation / mutual funds

Answer 9

• Superannuation is the financial contributions that individuals and their employees make to a fund for use in retirement
• Mutual funds are not specifically for retirement but, like superannuation funds, pool a large amount of money to be invested in a wide range of securities, including shares, bonds and the money market.

Question 10

Explain the role of insurance companies

Answer 10

Insurance companies cover various risks that people and businesses face, such as lose or damage to property and motor vehicles, as well as life insurance. To purchase insurance, customers pay a premium to an insurance company. These companies invest in other businesses as a method of spreading their exposure risk.

Question 11

What is a unit trust?

Answer 11

A unit trust is a fund that is managed by a trustee, which is usually a company. It raises funds from investors which it holds in trust from them and invests those funds in various investments.

Question 12

What does the Australian Securities Exchange do?

Answer 12

The ASX provides a market for investors and companies to buy and sell shares. Investors (through stockbrokers) can provide funds by purchasing shares, bonds and derivatives (futures). This provides equity for a business to grow and expand, assisting its liquidity and long-term stability (solvency).

Question 13

What are the roles of the ASX?

Answer 13

The ASX has many roles including

• Assisting companies to raise initial capital finance through the issue of shares (securities), whereby those buying the shares (investors) become part-owners (primary market)
• Providing a market for existing company shares to be traded (exchanged) between buyers and sellers (secondary market)
• Providing a system for the transfer of share ownership, including the electronic trading system known as the Integrated trading system
• setting and monitoring rules and requirements that listing and listed companies must obey

Question 14

What is the issues of shares for the first time called?

Answer 14

The issue of shares for the first time is called an ‘initial public offering (IPO)

Question 15

Why is the primary market important?

Answer 15

The primary market is especially important as it is a launchpad for companies that want to raise capital for the first time.