Introduction to Capital and Money Markets Flashcards
What is the difference between a money market and a capital market?
Money market refers to borrowing and lending for periods of up to a year, whereas the capital market exists for the trading of longer term financial instruments.
What are the different money market financial instruments?
Cash deposits – money in the bank accounts of banks and other financial intermediaries, offering a range of different investment periods and rates of return.
Negotiable instruments – a piece of paper representing ownership of debts and obligations. The ownership is passed on with the delivery of the piece of paper. Negotiable instruments traded in the money market include 90- and 180-day bills of exchange, promissory notes and certificates of deposit, which are written orders promising to pay a specified sum of money at a predetermined time to the order of a specified person or bearer.
Treasury notes – a short-term debt instrument issued through the Reserve Bank of Australia (RBA), by the Australian Government. Treasury notes are issued on a tender basis for periods of 5, 13 and 26 weeks, at a discount from face value. The notes are highly negotiable and are aimed at professional short-term money market investors rather than the ordinary individual.
Commercial bills – IOUs issued by large companies which can be held to maturity or sold to third parties before maturity.
Fixed interest short term bonds. LO1.1
What are the ways by which firms are able to obtain medium or long term capital in the capital market?
Firms obtain long-term or medium-term capital in one of the following ways:
They may raise share capital (equity). Most new issues of share capital are in the form of ordinary share capital. Firms that issue ordinary share capital are inviting investors to take an equity stake in the business, or to increase their existing equity stake. Equity securities consist primarily of ordinary shares which entitle the owner to a share of the company’s profits and give them voting rights.
They may raise loan capital (debt). Long-term loan capital might be raised by issuing corporate securities in the form of loan notes, corporate bonds, debentures, unsecured and convertible bonds. These may be issued domestically or in foreign capital markets. Debt securitiesare typically fixed interest borrowings with a set repayment date, often secured on the assets of the company.
Who are the biggest institutional investors in Australia?
The major institutional investors in Australia are superannuation funds and insurance companies and they are the biggest investors on the stock market.
What is the difference between the primary and the secondary market on the stock exchange?
The primary market is the market where securities (debt and equity) are issued for the first time. Primary markets enable organisations to raise new finance by issuing new shares or new bonds. The secondary market is the market where securities which have been issued in the primary market are traded, enabling existing investors to sell their investments, should they wish to do so. The marketability of securities is a very important feature of the capital markets, because investors are more willing to buy stocks and shares if they know that they could sell them easily. The secondary market does not raise new finance for companies.
What are the Derivatives Market (a type of Capital Market)?
Derivatives markets allow market participants to fix today the price at which trades will be made in the future. Efficient derivatives markets allow financial market participants to manage risk. The Sydney Futures Exchange (SFE), which is now part of the ASX, provides derivatives in interest rates, equities, currencies and commodities.
What are the different types of financial intermediaries?
Commercial banks are the major holders of public savings and the providers of loans to individuals and companies.
Building societies and credit unions use savings from individuals (members) to provide mortgages and consumer credit.
Institutional investors include pension funds, insurance companies and investment trusts.
Finance houses raise funds through borrowing and debentures and provide short-term and long-term finance to firms and individuals (e.g. major providers of lease finance).
Merchant and investment banks mobilise and allocate funds of large denominations for major projects or investments.
Explain Spot and Forward Rates.
The spot rate is the rate of exchange in currency for immediate delivery.
The forward rate is an exchange rate set now for currencies to be exchanged at a future date.
What are the influences on foreign exchange rates?
Foreign exchange rates are influenced by:
the comparative rates of inflation in different countries (purchasing power parity)
the comparative interest rates in different countries (interest rate parity)
the underlying balance of payments
sentiment, for example whether investors feel that a country’s economy, and thus its currency is healthy or not currency speculation
government policy on managing or fixing exchange rates.
Regulation is intended to protect the interests of investors. Explain the role of APRA.
AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY is the prudential regulator of the Australian financial services industry, funded largely by the industries that it supervises.
It oversees banks, credit unions, building societies, insurance and life insurance companies, and most members of the superannuation industry through the ASX Market Rules, ACH Clearing Rules and ASIC Settlement Rules, which are collectively referred to as the ASX Business Rules.
Regulation is intended to protect the interests of investors. Explain the role of ASIC.
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION is an independent Federal Government Statutory body which acts as Australia’s corporate, markets and financial services regulator.
ASIC enforces and administers Corporations law and Consumer Protection law for investments, life and general insurance, superannuation and banking (except lending) throughout Australia.
Its roles include the following:
As the corporate regulator, it is responsible for ensuring that company directors and officers carry out their duties honestly, diligently and in the best interests of their company.
As the markets regulator, it assesses how effectively authorised financial markets are complying with their legal obligations to operate fair, orderly and transparent markets.
As the financial services regulator, it licenses and monitors financial services businesses to ensure that they operate efficiently, honestly and fairly. These businesses typically deal in superannuation, managed funds, shares and company securities, derivatives, and insurance.
Explain the role of AFMA as a regulator?
AUSTRALIAN FINANCIAL MARKETS ASSOCIATION is the industry association for Australia’s wholesale banking and financial markets, representing participants such as Australian and foreign banks, securities companies, state government treasury corporations, fund managers and traders. Its role is to encourage high standards of professional conduct in wholesale financial markets and maintain effective self regulation of the over-the-counter financial markets.
What is the major exchange market in Australia?
The major exchange market in Australia is the Australian Securities Exchange (ASX) which brings together buyers and sellers of equity securities (shares) and futures instruments.
History of the ASX
The Australian Stock Exchange was formed in 1987 by the amalgamation of the stock exchanges of the six capital cities. In July 2006, the Australian Stock Exchange merged with the Sydney Futures Exchange (SFE), the major futures and commodities exchange, to form the current Australian Securities Exchange (ASX).
What are the requirements to be listed on the ASX?
ASX requires companies to meet either a profits test (aggregated profit of at least $1 million from the same business in the last three years, and profit from continuing operations of at least $400 000 in the last 12 months) or an assets test (net tangible assets of at least $2 million – or market capitalisation of at least $10 million, with less than half of net tangible assets being held in cash). The ASX also requires the company to have at least 500 shareholders each holding a parcel of shares worth at least $2000. A lower threshold of 400 shareholders applies if at least 25 per cent of the shares are in public hands. In either case, the practical implication is that a company can’t raise capital solely from institutions, but requires substantial support from retail investors.
