topic 5-financial markets

Question 1

why do financial markets exist

Answer 1

they are important in providing a pool of money which entices investments which sees the economy growing

Question 2

what are the sources of saving

Answer 2

businesses
-banks
government
individuals
whole countries

Question 3

what is the primary financial market

Answer 3

new financial products(securities) which are sole for the firttime

Question 4

what is consumer credit

Answer 4

consumer credit allows consumers to purchase goods and services in advance of payment
i.e credit card

Question 4

what is the secondary financial market

Answer 4

existing goods are created in the primary financial markets that are forever traded

Question 5

what are housing loans

Answer 5

long term loans to purchase a property, requires interest payments

banks offer these loans aswell as Morgage companies

Question 6

what are business loans

Answer 6

forms of debt that allows businesses to invest for growth (more expensive)

Question 7

what is the short term money market

Answer 7

for businesses with temporary shortage of cash/people with surplus of funds

have to be paid back within 6 months

low risk and low reward market for lenders

Question 8

what are financial futures and options

Answer 8

contracts to buy a financial product at a later date for a particular price

you can lock in the prices and pay at a later date for loans, shares

a futures contract means your are obligated to transact while the option means no obligations to transact, however is more expensive

Question 8

what is a bond

Answer 8

financial security(fixed income security) giving owners fixed payments

a form of debt –> borrowers sell a bond in exchange for a loan –> mainly governments and large companies use them

Question 9

what is the foreign exchange

Answer 9

where the buying and selling of different currencies around the world occurs, open 24/7

Question 10

what is share market

Answer 10

a share is a financial asset that provides an individual with ownership over a part of a company

so a share market is a specific financial market where investors buy and sell certain types of shares, which are only between public companies

Question 11

what is the role of the sharemarket

Question 12

what is the function and effect of the share market

Answer 12

investors/shareholders
-purchase shares to gain a stake in any company profits and to make capital gains from increases in share prices(dividend is the profit)

when a company issues shares publicly through the initial public offering(IPO) its called a float to raise new funds

Question 13

how does the share market work

Answer 13

share transactions take place through the stock exchange, traded through the internet.

the australian share market is the Australian Securities Exchange (ASX)

The ASX matches sellers desired selling price with buyers desired buying price, within a regulated environment, must be done through a broke

Question 14

what is the All ordinaries index

Answer 14

it measures overall change value of companies listened on the ASX

Question 15

what are the global financial markets

Answer 15

1. foreign exchange markets
   A market where people can trade one currency for another
   -
2. global debt markets
   -where the international, buying and selling of debt securities(bonds) occurs
3. what is global equity markets
   -where the buying and selling of equities(share) occurs
   -mostly national markets

Question 16

what are the advantaged and disadvantages of equity markets

Answer 16

there is access to foreign capital for cheaper borrowing costs

however overseas volatility is more quicky transmitted to Australia

Question 17

who is involved in the regulation of the global financial market

Answer 17

1. the bank of international settlements (BIS)
   -helps central banks promote financial stability

helped with the Basel committee
-which sets uniform standards for banking regulations with the broad objective of promoting effective and uniform regulatory systems

the International monetary fund
-oversees the general stability of the international financial system, and assists coutries in need of meeting financial obligations

Question 18

who is the Reserve bank of australia(RBA)

Answer 18

the RBA is different to commercial banks, as it does not deal with ordinary customers or make a profit(acts like a teacher)

3 broad objectives it aims to do
1. provide stability of the Australian currency
2.the maintenance of full employment
3. economic prosperity and welfare of australians

achieved through the target inflation rate of 2-3%

Question 19

what are the other 4 regulators

Answer 19

1. APRA (Australian prudential regulatory authority
   - they regulate all banks, superannuation funds, insurance companies, credit unions and building societies

APRA regulates institutions to ensure that they meet their obligations

also when financial institutions face financial problems(sinking boat) APRA intervenes to ensure people can receive as much money owed as possible

2.ASIC (the Australian securities and investments commission)
-responsible for corporate regulation, consumer protection and improving the performance of the financial system
-they can intervene through investigating illegal acts of individuals or unethical investments

ASIC has grown to regulate consumer credit, aswell as securities on the ASX

Does not help failed businesses but rather enforces rules regarding corporate behaviour

3.the australian treasury
-plays an important role in updating the govnerment with emerging developments

main source of economic advice
-government budgets
-expenditure allocation
-tax rates

4.council of financial regulators
-encourages cooperation and collaboration, the sharing of information and coordinating policies among the four members

Question 19

whats the 7 main functions of the RBA

Answer 19

1. monetary policy
   -the policy that influences the cost and availability of money through influencing interest rates
2. stability
   overall stability of the financial system through issuing bank rules to institutions
3. control of bank note issues
   RBA has sole issuing authority of Australian Currency
4. regulation of the payments system
   regulates all payment systems in Australia; credit cards, electronic cash, travellers cheques and stored value cards
5. banker of banks
   allow banks to settle debts between themselves and the RBA through exchange settlement accounts

6.holding reserves
holds and manages australia’s foreign currency reserves and operates in the Foreign exchange market

7.advise governments
provide banking and financial services to the govnerment, both federal and state.

the RBA can print new money to aid the government through issuing treasury bills aswell as a financial agent for long and short term loans

Question 20

what is the money market

Answer 20

it consists of the financial institutions who deal with money or credit through borrowing or lending to
-individuals
-businesses
-governments
-each other

Question 20

what are the three borrowers

Answer 20

individuals
-borrow funds in the market primarily for person reasons

businesses
-mostly borrow in the money market to access funds in order to expand production, improve research and development and reform production processes through raising equity, raising debt, or borrowing money from financial institutions

government
-to raise economic activity
-to fund infrastructure investment

Question 21

what is the money market

Answer 21

it consists of borrowers and lenders

borrowers are the consumers
lenders are the producers

which then both negotiate on a rate of interest

Question 22

what are the factors affecting demand for funds

Answer 22

individuals have two choices with left over savings, keep savings as money, or purchase financial products

there are three motives that influence this choice
1. transaction motive
-where you keep your savings in cash form, you can easily use your funds when necessary

(liquidity) : ease in which financial assets can be transformed into cash

2. precautionary motive
   -in the case of emergency, people need liquid funds on hand
3. speculative motive
   -trade-off between the return on liquid and illiquid funds

Question 23

who are the lenders in the supply of funds in the money market

Answer 23

individuals who place deposits in financial institutions are lending to gain a return

Question 24

who are the international sector in the supply of funds in the money market

Answer 24

we have relied on overseas savings to finance domestic consumption and investment

Question 25

who are the businesses in the supply of funds in the money market

Answer 25

successful businesses may deposit funds with a financial institution rather than expand in the short term

Question 26

who are the government in the supply of funds in the money market

Answer 26

governments can become lenders by maintain positive financial balances(government surplus)
where tax revenue > government spending

Question 27

what is money

Answer 27

money represents the value of all final goods and services in product markets and resources in factor markets

there are 4 characteristics
1. money is a medium of exchange used to purchase goods and service

2. compares the relative value of different goods, services and resources
3. measures the value of the same goods, services and resources over time

4.develops a system of lending and borrowing, due to its transferability

Question 28

what is the total amount of funds in an economy

Answer 28

the money supply

Question 29

how is the money supply measured

Answer 29

three financial aggregates

money base
-all currency in circulation, physical notes and coins, and private bank deposits
- a measure of the most liquid financial assets (can be used immediately)

m3
-money base combined with bank deposits external to the RBA

M3 = currency + bank deposits(external)
(the rba relies on m3)
broad money
-broad money = M3 + deposits in non-bank financial intermediaries (NFBI) - NBFI deposits in banks

broad money is more accurate as a measure of moeny supply, but this is a complicated process for the RBA when calculating relevant statistics

credit
-allows for payments foor goods and services can be deffered and paid back at a later date(not used to measure money supply)

Question 30

what is the order of the 3 financial aggregates from smallest to largest

Answer 30

money base

m3

broad money

Question 31

what are interest rates

Answer 31

the cost of borrowing money is expressed as a percentage of the total money borrowed

Question 32

how can equilibrium in the financial market occur

Answer 32

equilibrium occurs when the quantity of funds supplied by lenders equals the quantity demanded by borrowers

Question 33

how can interest rates differ

Answer 33

it depends on whether we look from a bank perspective or a government perspective

1. banks
   banks can use both borrowing and lending rates
   the borrowing rate is how much the bank pays its lenders while the lending rate is the amount that borrows have to pay back

2.governments

short term securities
-treasury notes issues for 13 or 26 weeks

long term securities
-treasury bonds issued for 5,7, 10 years

long term securities have a higher interest rate due to higher risk and less liquidity \

governments face a tradeoff when intending to borrow funds

long term securities
-dont have to back pack moeny for a long time
-higher interest rate or

short term securities
-must pay the loan back in a shorter period of time
-lower interest rates

Question 34

what are the 5 factors affecting interest rates

Answer 34

1. investment demand
   -if there is an increase in investment demand for capital goods where the business wants to buy inputs but doesn’t have enough money causing pressure on the equilibrium for higher interest rates
2. increase in level of savings
   -if an individual saves for a trip, this increase in savings means there is an increase in supply of funds available to banks to lend in the money market putting downward pressure for interest rates
3. liquid funds
   -liquidity refers to the ease with which you can convert an asset or loan into cash or money
   -if there is an increase in demand for highly liquid funds cash as opposed to illiquid funds such as bonds this restricts the supply of global funds in the money market and increases the rate of interest
4. government budget
   -if the government is spending more than it receives in revenue it has a budget deficict, which means the government is a borrower in the financial market which reduces the supplied funds and ultimately pushes interest rates higher alternatively

if the government spends less than it recieves in revenue it has a budget surplus meaning the government has a net lender in the financial market this increases the supply of funds in the financial market and puts downwards pressure on interest rates

5.international interest rates
-increased integration means funds can move overseas quicker than ever before governments and buisnesses need to find the best rate whether they are lending or borrowing if domesic rates < international rates, domestic lender will lend overseas, and domestic borrowers will borrow domestically which simultaneously reduce the supply of global funds domestically and increase the demand for domestic source of borrowing pushing interest rates higher vice versa