Financial Markets Flashcards
Financial Markets
Any situation where the buyers and sellers of finance are brought together to exchange finance for financial products/assets/securities and a payment (interest/dividends)
Financial markets are considered to be a part of the…
Factor market
Primary Financial Markets
allow for the creation of financial assets/securities that can be ‘sold’ in the Australian economy
Secondary Financial Markets
involve transactions in financial securities that have already been issued in the primary market for some time in the past
Financial Market Products
Consumer Credit
Housing Loans
Business Loans
Short-Term Money Market
Bonds
Financial Futures & Options
The Foreign Exchange
Share Market
The share market or stock exchange is the market for:
The issue of and trading in “shares” or ownership of public companies
Why do individuals invest in the share market?
Investors who buys share in a company gain part ownership in that company
The company then may pay dividends (a percentage of the company’s profits) to shareholders
Capital gains are the profits made by investors who sell their shares at a price above the level that they originally paid for them
Shareholders are also allowed to vote for the company’s board of directors
Why dod companies sell shares?
For companies, the share market provides an opportunity to raise new funds for investment
The All Ordinaries Accumulated Index
measures the changes in the level of share prices at any given time of the 500 largest Australian companies to determine the overall performance of the ASX
Foreign Exchange Markets
where financial assets defined in one country’s currency are exchanged for assets defined in another country’s currency
Debt Markets
where debt securities (such as bonds) are exchanged, or cash is lent/borrowed
Equity Markets
where ownership of shares in companies are issued or exchanged
Derivaties Market
where people buy and sell financial assets that are based on the value of other financial assets
Roles of the RBA
Ensure the overall stability of the Australian financial system
Conduct monetary policy on behalf of the Australian Federal government
Control the issue of currency notes
Regulate the payments system (credit cards & electronic cash)
Hold accounts that allow banks to settle transactions between themselves
Hold reserve of foreign exchange currency and gold
Act as a banker and source of economic advice to the Australian government
The Australian Prudential Regulation Authority
APRA regulates all authorised deposit taking institutions (ADIs) such as banks and NBFI’s
They ensure that ADIs maintain their financial obligations to their investors
The Australian Securities and Investment Commission
ASIC is responsible for consumer protection in the financial system by monitoring and investigating institutions whose financial intermediaries are acting illegally
It registers businesses and monitors the operation of companies and the ASX to ensure that they follow the Corporations Act 2001
The Australian Treasury
Monitors the Australian economy and overseas countries economic performance
Provides advice to the government in relation to Monetary Policy and Fiscal Policy
The Council of Financial Regulators
The co-ordinating body for Australia’s main financial regulatory agencies
Advises the government on the effects of Australia’s financial system of events in the Australian and global economy
Why do governments borrow?
Governments borrow to stimulate economic activity, as well as to:
Finance budget deficits
Build infrastructure
Finance tax cuts
Commonwealth Government Bonds
A financial security which has a fixed rate of interest over a given period of time
At high rates of interest…
demand will be low and supply will be high
At low rates of interest….
demand will be high and supply will be low
Factors that impact the supply and demand of funds
Level of Economic Activity
Government Budget Outcome
Level of household income and their APS/MPS
Access to international financial markets
Success of Business (Profit Levels)
Transactionary Motive
the demand or supply of finance is a result of the demand for goods and services
Precautionary Motive
a desire to have some finance set aside for unforeseeable events, such as an economic downturn, unemployment or illness
Speculative Motive
the holding, supplying or borrowing of finance so that investment opportunities which bring about a return can be taken advantage of
What is money?
A medium of exchange
A measure of value
A store of value
A method of deferred repayment
Money Supply
the total amount of funds in an economy
Currency
all notes and coins in circulation (accounts for less than 5% of the money supply)
Money Base
all currency in circulation and all bank deposits with the Reserve Bank (a measure of most liquid financial assets)
M3
Consists of the money base plus all bank deposits
Broad Money
consists of M3 plus deposits in non-bank financial intermediaries (NBFIs) minus their holdings of bank deposits
Credit
Loans that are provided by banks to household and business borrowers
Factors that Impact the Interest Rate
Demand For Capital Goods
The Level of Savings
Demand for Liquid Funds
Rate of Inflation
Government Budget
International Interest Rates
RBA
Monetary Policy
Macroeconomic policy that aims to influence the supply and cost of money in an economy
Focuses on targeting/controlling inflation
Overnight or Short Term Money Market
Where banks borrow and lend from each other from short periods of time to maintain the balances in their ESA
Exchange Settlement Accounts
Used to settle transactions between the RBA and with other banks - must maintain a minimum balance at all times
Cash Rate
Interest Rate in the OMM
Interest Rate Corridor
25% above and below the cash rate
Open/Domesitc Market Operations
actions taken by the RBA to achieve a predetermined target cash rate (% rate in the overnight money market)
Tightening Monetary Policy
RBA sells CGBs to Banks ESA
Decrease in the supply of cash in the OMM
Shortage of cash in the OMM
Increase in the cash rate & interest rate corridor
Banks increase their interest rates to maintain their interest rate differential
Decrease in consumption and the levels of investment
Decrease in the level of economic activity, employment & inflationary pressures
Loosening Monetary Policy
RBA buys CGBs from Banks ESA
Increase in the supply of cash in the OMM
Surplus of cash in the overnight money market
Decrease in the cash rate & interest rate corridor
Banks decrease their interest rates to maintain their interest rate differential
Increase in consumption and the levels of investment
Increase in the level of economic activity, employment and inflationary pressures
