Semi-Finals Flashcards
A market is a venue where goods and services are exchanged.
Financial market
It is a broad term describing any marketplace where buyers and sellers participates in the trade of assets such as equities, bonds, currencies and derivatives.
Financial market
Benefits of a Financial Market/The operation of financial markets offer advantages which covers the following:
1.Funds are directed to DSUs that can use them most efficiently;
2. Liquidity is provided to savers.
•Financial markets, just like any market, operate in the demand and supply of funds. DSUs that can use borrowed funds in the most productive manner can afford to pay lighter interest rates. Because of this, they have an edge in the bidding for loanable funds
Higher interest rates will then motivate savers to save more so they will have more funds for lending.
•An additional benefits provided by financial markets is liquidity. Without the intervention of financial markets, savers will directly lend to borrowers. This arrangement forces the lenders to wait for maturity date of the loan before he gets his money back.
•The lender will be at a great disadvantage if he happens to need the loaned before maturity. This problem is eliminated when financial markets are lapped. This happens because financial instruments are issued to lenders, which in turn, can be converted to cash even before maturity, by endorsement or sale.
Ways to stimulate savings
Denomination (size) intermediation Maturity intermediation Credit-risk intermediation Interest-rate sensitivity intermediation Foreign currency intermediation Higher interest rates
Secondary securities can be made available in a wide range of denominations from a few hundred peso to many million of peso.
Denomination (size) Intermediation
To open an account with a savings bank for instance, will only require an amount as low as one hundred pesos. Some intermediaries, however, specialize in issuing large denomination securities.
Denomination (size) intermediation
Savers are concerned about the length of time their savings will be invested.
Maturity Intermediation
Dealing with financial intermediaries, however, eliminates the problem because the savers can choose from secondary securities issued by the intermediaries in maturities of from one year to more than a hundred years.
Maturity intermediation
Securities such as stock have no maturity and their life is co-terminus with the life of the issuing DSU. Banks accept deposits that many be withdrawn in one or a few days. Educational plan companies sell contract that mature when the beneficiaries of the SSUs reach college age.
Maturity intermediation
When primary securities are offered for sale, individual SSUs may not be too eager to buy because of their limited access to credit information.
Credit-risk Intermediation
Financial intermediaries, however, have better ways of identifying and later screen out poor credit risk.
Credit-risk Intermediation
These intermediaries will then issue secondary securities that are based on primary securities bought and previously identified at good risk.
Credit-risk Intermediation
This form of intervention minimizes the effects of SSUs in credits screening.
Credit-risk Intermediation
Some types of primary securities are subject to change in market interest rate.
Interest rate sensitivity intermediation
Many SSUs are averse to such interest rate risk. This is remedied by the issuance of secondary security by financial intermediaries.
Interest rate risk intermediation
The SSUs are given a choice of secondary securities of a given maturity with a wide range of interest sensitivities.
Interest rate risk intermediation
When SSUs buy primary securities stated in foreign currencies, they assume the risk that the value of the foreign currency may change through time.
Foreign currency intermediation
This risk is transferred to the financial intermediary Which buys foreign currency denominated primary securities and then sells secondary securities stated in local currency.
Foreign currency intermediation
When SSUs undertake actual search for DSUs issuing primary securities, they do so with higher search and transaction costs.
Higher net interest rate
This is so because of the difficulties involved in identifying DSUs, determining the credits quality of securities offered, and locating the offers where the DSUs are located.
Higher net interest rate
When SSUs buy secondary securities from financial intermediaries, the search and transaction costs are much lower. When deducted from the gross interest rates, the lower costs will yield higher net interest rates
Higher net interest rate
It is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.
Interest rate
The are typically noted on an annual basis, known as the annual percentage rate (APR).
Interest rate
The assets borrowed could include, ___.
cash, consumer goods, large assets, such as a vehicle or building
