Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

zMoney and Capital Markets > Topic 1 - Financial System Overview > Flashcards

Topic 1 - Financial System Overview Flashcards

1
Q

financial system

A

organized structure that facilitates the flow of funds.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

The financial system comprises of

A

Financial institutions
Financial markets
Financial instruments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Flow of funds from

A

surplus units (savers) to deficit units (borrowers).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Financial Institutions and markets facilitate

A

flow of funds resulting in financial transactions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Financial instruments are created to

A

recognise financial transactions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Savers reason for investing:

A

to trade off current consumption for a larger future consumption.
Invest savings to improve their overall wealth.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

The financial asset has 4 main attributes

A

Return or Yield
Risk
Liquidity
Time pattern of cashflows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

There are five broad categories of financial institutions based on how they source and use their funds:

A 
Depository financial institutions 
Contractual savings institutions
Investment Banks
Finance companies and general financiers
Unit Trusts
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Financial instruments

A

legal documents issued by parties raising funds, acknowledging a financial commitment and entitling the holder to specified future cash flows.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Three broad categories for financial instruments

A

Equity
Debt
Derivatives

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Equity

A

The sum of the financial interest an investor has in an asset; an ownership allocation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

2 types of equity

A

Ordinary Shares

Hybrid Securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

ordinary shares

A

represents an ownership positions

shareholders are entitled to share in the profits of the business in the form of dividend payments.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Hybrid Security

A

incorporates characteristics of both debt and equity

Example: an instrument issued which makes periodic interest payments, but offers a future ownership entitlement (e.g. convertible notes and preference shares).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Debt

A

Contractual claim against an issuer and require the borrower to make specific payments such as coupon or interest payments and the repayment of principal amount at the end of the maturity period.

Ranks ahead of equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Features of Debt

A

can be short term or medium to long term.
secured or unsecured.
negotiable debt instrument (ownership transferable) or non-negotiable (e.g. term loan obtained from a bank).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Derivatives

A

Derivative security is a financial instrument whose value depends (derives from) on another (fundamental) security such as stocks/bonds or commodity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Primary use of Derivatives

A

Primarily used not to raise funds but to manage risk.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Types of Derivatives Contracts

A

Futures contract
Forwards contract
Option contract
Swap contract

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

matching principles

A

Short-term assets financed by short-term liabilities

Medium-to-long-term assets financed with equity and/or medium-to-long-term liabilities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Categorization of financial markets based on the type of transactions that occur within each market:

A

Primary and secondary markets
Direct and intermediated markets
Money and capital markets
Wholesale and retail markets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Primary Market Transactions

A

Markets where new instruments are sold and the money raised goes directly to the issuing entity.
eg - bonds, preferred stocks, common stocks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Secondary Market Transactions

A

Provides liquidity
Without a proper secondary market primary market issuers would have to provide a much higher return to compensate investors for the substantial liquidity risk.
A deep and liquid secondary market strengthens the primary market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Direct Finance

A

Funding obtained direct from the money and capital markets;
Contractual agreement is between the provider of funds and the user of funds. use of agents
Funds are not provided by the financial institutions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Agents

A

through which the instructions of providers and users of the funds are carried out.
Do not provide finance, but receives a fee or commission for arranging transaction between two parties.

26
Q

Advantages of Direct Finance

A

Removes cost of intermediary
allows the borrower to diversify funding
Greater flexibility in types of funding instruments used for different financing needs
Enhance international profile by carrying out transactions in international financial markets

27
Q

Disadvantages of Direct Finance

A

Matching preferneces of lenders and borrowers
Liquidity and marketability of securities
Search and transaction costs
Difficult to assess risk, especially default risk

28
Q

Intermediated Finance

A

Supplier of funds (investor) contracts with a financial intermediary such as a bank (e.g. term deposit);
User of funds (borrower) also contracts with the intermediary (e.g. housing loan)
Claims of each party are with the intermediary; i.e. the investor has no claim against the borrower

29
Q

Benefits of Intermediation

A 
Asset transformation
Maturity transformation
Credit risk diversification
Liquidity transformation
Economies of Scale/Distribution of costs:
30
Q

Asset Transformation

A

Ability to prove a range of products that meet customers portfolio preferences

31
Q

Maturity Transformation

A

Products offerred with a range of terms to maturity

32
Q

Liquidity Management

A

Banks actively manage their sources of funds (liabilities )in order to meet future loan demands (assets)

33
Q

Credit Risk Diversification

A

A savers credit risk is limited to the intermediary, the intermediary is exposed to the credit risk of the borrower

34
Q

Economies of Scale

A

Financial and operational beenfits gained from organisational size, expertise and volume of business.

35
Q

Wholesale Markets

A

Direct financial flow transactions between institutional investors and borrowers;
Involves larger transactions;

36
Q

Institutional investors include:

A 
Commercial banks; 
Insurance offices; 
Superannuation funds; 
Investment banks; 
Fund managers; 
Finance companies.
37
Q

Retail markets

A

Transactions conducted primarily with financial intermediaries by the household and small- to medium-sized business sectors;
Involves smaller transactions.

38
Q

Money Markets

A

wholesale markets in which short-term securities (less than 12 months) are issued (primary market)and traded (secondary market).
Bring together institutional investors that have surplus funds and those with a short-term shortage of funds.

39
Q

Characteristics of Money Markets

A 
Term to maturity of one year or less
Highly standardised form
Deep secondary market
No specific infrastructure or trading place
Enable participants to manage liquidity
40
Q

Money Market Participants

A 
Central Bank
Commercial Banks
Superannuation Funds
Investment banks
Finance Companies
Insurance Offices
Funds managers
Building Societies
Cash Management Trusts
Corporations
41
Q

Types of Money Market Instruments

A 
Exchange Settlement Accounts
Treasury Notes
Commercial Bills
Promissory Notes
Deposits
Negotiable Certificates of Deposits
Inter-bank loans
Repurchase Agreements
42
Q

Capital Markets

A

Markets in which longer term securities are issued and traded with original term-to-maturity in excess of one year.
Encompass both the domestic and international markets.

43
Q

Examples of Capital Markets

A 
Equity market
Corporate debt market
Government debt market
Foreign exchange market
Derivatives market:
44
Q

The principal function of a financial system

A

is to facilitate the efficient flow of fund between deficit (users)and surplus (suppliers) units contributing to economic growth.

45
Q

Domestic economy can be divided into 4 sectors

A

business corporations
financial sectors
government sector
household sector

and the rest of the world.

46
Q

Depository Financial Institutions

A

Accept Deposits and provide loans to customers

eg - commercial banks

47
Q

Investment Banks

A

Specialist providers of financial and advisory services to corporatationsm high net worth inviduals and government

48
Q

Contractual savings institutions

A

Offer financial contacts such as insurance and supperannuation
large investors

49
Q

Finance Companies and general financiers

A

Borrow funds directly from markets to provide loans and lease finance to customers

50
Q

Unit Trusts

A

Investors buy units issued by the trust; pooled funds invested
eg - property and equity trusts

51
Q

Secured Debt

A

A debt instrument that provides the lender with a claim over specified assets if borrower defaults

52
Q

Negotiable Debt Instruments

A

A debt instrument can be sold by the orginal lender through a financial market

53
Q

Futures Contract

A

Exchange traded agreement to buy or sell a specific commodity or financial instrument at a specific price at a predetermined future date

54
Q

Forward Contract

A

OTC agreement that locks in a price (IR or ER) that will apply at a future date

55
Q

Option Contract

A

The right, but not an obligation to buy or sell a commodity or security at a predetermined exercise price the option buyer pays a premium to the option writer

56
Q

Swap Contract

A

An agreement between two parties to swap future cash flows (IR or Currency Swaps)

57
Q

What are the differences between primary market and secondary market financial
transactions?

A

• Primary market transactions relate to the creation of a new financial asset—for example,
a company issues new shares or the government issues Treasury bonds; new funds being
raised.
• Secondary market transactions relate to the sale and transfer of existing financial assets;
for example, a shareholder sells their shares to another investor and receives value—
transfer of ownership; no new funds raised.

58
Q

Why is the existence of well-developed secondary markets important to the functioning of
the primary markets within the financial system?

A

• Investors will purchase primary market securities if they know that there is a deep and
liquid secondary market in which they are able to sell the securities at a later date, if
necessary.
• Secondary market transactions provide price discovery in that the securities will be sold at
the current market value.

59
Q

financial assets

A

represents an entitlement to future cash flows.

60
Q

financial instruments

A

financial asset whose value is represented in paper or electronic form;

for example, Treasury bond, term deposit.

61
Q

securities

A

financial asset where there is a formal secondary market where the asset may be bought or sold;

for example, shares, money market securities such as bills
of exchange and commercial paper.

zMoney and Capital Markets (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions