Chapter 12: The role of financial markets in the eco

Question 1

what are financial markets

Answer 1

financial markets create products that provide a return for those who have excess funds, making these fund availbale to those who need additional money for expenditure or investment

Question 2

what are financial intermediaries and what do they do

Answer 2

finanacial intermediaries are firms that receive the accumulated funds of individuals or firms
- factor markets for capital
- can be lent out to other firms or individuals who can make use of them
- create bidge b/w savers and borrwoers
- provide efficient process where income not expended immediately can still be contributed to the present lvl of AD

Question 3

what are the different financial services of financial intermediaries

Answer 3

home mortgages, credit cards, personal loans, superannuation management, insurance and investment products

• contributed around $160bn (8%) to aus’s GDP in 21-22

Question 4

what are some reasons for borrowing

Answer 4

• in situations where the demand for goods and services exceeds their current capacity to pay for them
• entrepreneurs borrow to fund the expansion of their businesses
• government borrows when they are in deficit
• australian financial institutions can lend money overseas to borrowers

Question 5

what are primary markets

Answer 5

these markets facilitate the creation of financial assets, known as securities, than can be sold into the eco

• ie if bus wants to raise funds, they can either borrow by issuing debt securities or expand the ownership of company be selling to new shares (eg issuing IPO or shares to investors

debt securities are debt instruments which businesses give investors promising to pay back the amount they invest plus interest

Question 6

what are secondary financial markets

Answer 6

involve transactions with financial assets that have already been issued on a primary market some time in the past
- buses do not receive any money from secondary market transactions
- ie when existing financial asset is transferred from one individual or business to another

Question 7

what are the different kinds of financial markets

Answer 7

• the share or equity market: where ownership shares in companies are issued or exchanged
• the debt market: where debt securities are exchanged, or cash is lent or borrowed (not rlly a thing)
• the derivatives market: where people buy/sell financial assets that are based on the value of other financial assets (4 types of derivs: swaps, futures, options and warrants)
• the foreign exchange markets: where financial assets defined in one currency are exchanged for assets defined in another country’s currency

Question 8

describe the distinction b/w banks and non-bank financial intermediaries

Answer 8

distinction b/w banks and non-bank financial intermediaries is less significant as almost all sevrices provided by banks are offered by other financial institutions
- banks are also now offering a range of products (such as insurance, superannuation funds and investment options)

Question 9

list the financial market products

Answer 9

• consumer credit
• housing loans
• business loans
• short term money market
• bonds
• shares
• financial futures and options
• Foreign exchange or Forex market

Question 10

what is consumer credit

Answer 10

• this allows consumers to purchase good and sevrices in advance of actual payment eg credit cards
• the liability is interest on the used amount
• other major form is personal loans offered by banks and credit unions

Question 11

what is a housing loan

Answer 11

• offered by both banks and non-banks financial insititutions
• long term loans used to purchase property and require periodic payments with interest
• competition in home laon market fell since GFC 2008 which resulted in traditional banks taking over many non-bank lenders

Question 12

what are business loans

Answer 12

form of debt that allows buses to invest in their bus operations, such as with new technology or expanded office space
- rates on loans to sme r typically higher as mortgages are less risky

Question 13

what are short term money markets

Answer 13

bring tgt ppl and buses to with temporary shortages or surpluses of funds
- maturity of these debts is less than one year

Question 14

what are bonds

Answer 14

long term securities where lenders receive regular fixed payments from the issuing institution and finally receive the coupon payment (ie face value of the bond) at maturity
- often issued by small companies and banks
- up until 2008, bond were triple A graded by govs (ie very safe - gov could 100% pay back) until PIIGS (european countries) went bankrupt

Question 15

whate are shares

Answer 15

long term equity securities that give their owner a % share of a company and a right to share in the company’s profits
- the total value of all the shares on the share market is called total market capitalisation

Question 16

what are financial futures and options

Answer 16

contracts to trade in financial instruments (such as shares or bonds) at a later date for a certain price
- protect investors form adverse mobements in interest rates, currency fluctuations or share prices by agreeing on a price to buy/sell financial product now even though transaction is later

Question 17

what si the foreign exchange (forex market)

Answer 17

the makret for buying and selling of foreign currencies

Question 18

what is the stock exchange in relation to the share market

Answer 18

the share maket brings tgt buyers and sellers in a medium of exchange. Most share transactions take place through a market facilitator known as a stock exchange.

Question 19

what is the role and functions of the share market

Answer 19

• investors or shareholders gain a stake in companys profits and to make capital gains from increases in share prices (selling shares for a higher price)
• according to RBA, total yearly returns on shares (capital gains+dividends) has been aoround 10% on average over the past 100 years
• for a company, share market provides opp to raise new funds for investment and bus growth through a float or an initial public offering (IPO)
• share prices rising and falling, affects shareholders and managers as it reflects how well the bus is doing thru confidence in management, previous earnings, expected earnings and general eco conditions

Question 20

what is the share market’s effect on the eco

Answer 20

• share market values are often a relfection of a country’s economic conditions –> rising share prices generally suggest eco is enjoying good conditions –> recessions will have fewer opps for companies leading to lower share prices

Question 21

what is the all ordinaries index

Answer 21

a downtrun or upturn in the share market can be measured by the AOI which measures changes in overall value of companies listed on the ASX
- shows that the market generally rises and falls in line with a country’s economic prospects
- small changes in economic growth can contribute to enormous changes in share value

Question 22

what is speculation

Answer 22

occurs when investors buy assets with the intentions of reselling them for a higher price within a short period –> certain shares or industries having greatly overvalued prices, drawing further investment and leading to a misallocation of reosurces

Question 23

define net borrower and net lender

Answer 23

net borrower - borrows more than it saves or lends out
net lender - lends more than it borrows

Question 24

what are some international organisations that regulate global financial markets

Answer 24

1. bank for international settlements - international organ that helps central banks such as RBA promote financial stability thru appropriate market regulations
2. IMF - oversees general stability of the international financial system, thru monitoring economies and markets and providing financial assistance to countries having difficulty meeting their international financial obligations

Question 25

what is the main benefit of global financial markets

Answer 25

• allow aus access to foreign capital to invest in houses and business
• without it, borrowing costs would be much higher and might not be able to finance as easily
  -opp to invest and earn returns from buses overseas

Question 26

wha is the main disadvantage of integration with global financial markets

Answer 26

• regular disturbances in markets overseas are more quickly transmitted to aus esp thru financial market speculation

Question 27

what are the four gov bodies that are responsible for regulation and supervision of the financial system

Answer 27

1. RBA - responsible for MP, payments system regulation, probiding bank services to gov, supply of banknotes and stability of financial system
2. Aus prudential regulation authority (APRA) - supervises and regulates all deposit-taking institutions, life and general insurance, and superannuation funds
3. Aus securities and investments commission (ASIC) - responsible for corporate regulation, consumer protections an oversight of financial service products
4. Australian treasury - advises gov on macroeco and financial stability issues as well as the legislative and regulatory framework for the financial system

Question 28

what is the coucil of financial regulators

Answer 28

a coordinating body for financial market regulation that rpovides for cooporation and collab b/w its 4 members

Question 29

what are the three broad objectives of the RBA

Answer 29

stability of aus currency, maintenance of full employment and the eco prosperity and welfare of the ppl in aus

in reality, its highest priority ove rpast few decades has been to sustain low and satble inflation