The Role of Financial Markets Flashcards
What are financial markets?
Markets that create products that bring borrowers and lenders together. They provide returns for those with excess funds, and make these funds available to those who need additional funds for consumption or investment.
What are financial intermediaries?
Firms that hold the accumulated funds of lenders as deposits, then make loans to other firms or individuals who can use them.
How are households a source of saving, and why do they borrow?
Households generate savings through the portion of their incomes not spent. They borrow if their demand for goods and services exceeds their income (car, house)
How are businesses a source of saving, and why do they borrow?
Business save by not distributing all their profits to owners. They borrow to fund their operations or expand their business.
How are governments a source of saving, and why do they borrow?
Governments generate savings through budget surplus’ (revenue greater than taxation). They borrow to fund budget deficits.
How is the overseas sector a source of saving, and why does it borrow?
Foreign pools of savings from individuals and firms in other nations to borrow from. The overseas sector may borrow from Australia to gain access to cheaper funds.
How are financial markets factor markets for capital in the economy?
Financial markets allow income not expended immediately to be used to contribute to AG by being borrowed for immediate consumption. Savings can be used for investment in capital, increasing productive capacity.
What is direct finance?
Funds go directly from the lender to the borrower, usually through financial markets, who provide the financial instrument.
What are securities?
Any financial instrument (shares, bonds) that provides the holder a claim over real assets or a future income stream.
What is a primary financial market?
Facilitate the creation of securities. Money received from investors goes straight to firm. If a business wants to raise funds, it can borrow by issuing debt securities, or issuing new shares. (Instrument sold for first time)
What is a secondary financial market?
Transactions with financial assets that have already been issued on a primary market. These compose most financial interactions. Companies whose securities are traded on secondary financial markets do not receive any funds.
What are the four main types of financial markets?
Equity market, debt market, derivates market, foreign exchange market.
What is the equity market?
Ownership in firms are exchanged or issued
What is the debt market?
Where debt securities are exchanged, or cash is lent and borrowed
What is the derivatives market?
Where people exchange financial assets that are based on the value of other financial assets.
