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what is the primary role of financial markets?
to facilitate the purchase and sale of financial instruments including equity, debt instruments, derivatives and foreign currencies.
what are the three principal sets of players that interact in the financial markets?
the time value of money
arbitrage
diversification
what does the time value of money entail
it forms the basis for all asset valuations and is broke into financial mathematics and return calculations, valuing bonds, and making investment decisions
what does diversification entail
it displays the reduction of risk done by market participants to make as much money as possible. so instead of putting in money in one company alone, market participants will put money into multiple companies.
what does arbitrage entail
this is the ability to take advantage of different prices in different markets to make the most effective purchase. it is used in the valuation of future contracts, option contracts and forward contracts.
what is a financial market
a mechanism that facilitates the purchase and sale (trade) of financial instruments including equity, debt instruments, derivatives and foreign currencies.
it:
brings together of lenders (savers) and borrowers, aiding in the transfer of funds from people who wish to lend them to people who wish to borrow them (capital raising)
allows the transference of funds between parties
allows international trade between individuals, companies, and governments
what are characteristics of lenders
lenders have more than they wish to consume. therefore:
they loan funds that are excess to their consumption to other market participants (borrowers).
In exchange they receive a positive rate of return on these funds from the people they lend to.
what are characteristics of borrowers
borrowers have less than they want to invest. therefore:
they borrow funds that are required to meet their current consumption or investment requirements.
In exchange, they pay a positive rate of return on these funds to the people they lend from.
what is a financial intermediary?
this is an institution such a bank that holds funds from lenders in order to make loans to borrowers
list and describe the principal types of financial intermediaries in the Australian financial markets
commercial banks
building societies
credit unions
insurance companies
superannuation funds
describe the flow of fund within the financial system
lenders who have surplus funds lend these funds to others (borrowers) through financial markets. this can be done on individual, company, and government level.
what are the types of financial markets
money market
capital market
derivatives market
foreign exchange markets
discuss the main differences between money markets and capital markets.
the money market is a market that facilitate short-term borrowing and lending. this is usually a time frame of less than a year. the capital market is a market is a market that facilities medium to long-term borrowing. this is usually longer than a year.
describe the money market and some instruments that are traded there
the short-term government debt market - this includes treasury bills and treasury notes.
the interbank market
the bills market
the commercial paper market
the negotiable certificates of deposit (CD) market
describe the capital market and some instruments that are traded there
medium to long-term debt instruments like
corporate debt
government debt
equity - this considered at medium to long term borrowing as businesses can technically exist forever.
what is the corporate debt market
Short-term debt instruments issued by corporations are classified as forming part of the money markets, while company issued medium-to-long term instruments are traded in the capital markets.
these instruments include:
loans
debentures
unsecured notes
subordinated debt.
what is the government debt market
While these bonds have varying maturities, they are invariably in excess of 1 year, meaning they are traded in the capital markets.
these instruments include:
budget expenditures
what is the equity market
Providers of equity finance receive a share in the ownership of the business in which they have purchased shares, providing the businesses with a source of long-term funding for use across a number of activities.
This includes both ordinary and preference shares which are sought by both public and private companies.
what is the derivatives market
They allow you to lock in the price of an asset in advance.
They are available over a wide range of assets including shares and debt instruments
Examples of derivatives include forwards contracts, futures contracts and options contracts.
what does a forwards contract do
locks in the price for a good and can be a good or bad thing depending on how prices rise and fall respectively
what does a futures contract do
locks in the price for a good and can be a good or bad thing depending on how prices rise and fall respectively
what does a options contract do
allows an individual choose whether they use their locked in price or the market price
what is the foreign exchange market
Foreign exchange markets allow market participants to convert their money between currencies. Market participants can convert their money from currency A to currency B at the exchange rate.
describe the difference between the primary and the secondary market
both the money and capital market can be further split in the the primary and the secondary market.
the primary market consists of transactions with newly issued instruments and therefore raise funds for issuers.
the secondary market transactions represent transferring from one holder to another, therefore not raising any additional funds for the issuer.
what is an inter-company market? is it regarded as a money market or a capital market?
This is the direct lending between companies. This is considered to be in the money market.
find the future value of $5000 invested for 10 years at 10% compounded annually
formula
Compound - FV = PV (1+r)^n
Simple = FV = PV + PV*r*n
Answer = 12968.71
find the future value of $8000 invested for 7 years at 8% compounded annually
formula
Compound - FV = PV (1+r)^n
Simple = FV = PV + PV*r*n
Answer = 13710.59
find the future value of $775 invested for 12 years at 12% compounded annually
formula
Compound - FV = PV (1+r)^n
Simple = FV = PV + PV*r*n
Answer = 3019.38
find the future value of $21000 invested for 5 years at 5% compounded annually.
formula
Compound - FV = PV (1+r)^n
Simple = FV = PV + PV*r*n
Answer = 26801.91
If you deposit $10000 today into an account earning an 11% annual rate of return, in the third year how much interest would be earned? How much of the total is simple interest and how much results from compounding of interest? (future value)
formula
Compound - FV = PV (1+r)^n
Simple = FV = PV + PV*r*n
Simple Answer = 13300
Compound Answer = 13676.31
find the present value of $800 to be received 10 years from now discounted to the present at 10%
formula
simple - PV = FV/(1+R*N)
compound - PV = FV/ (1+r)^n
Simple Answer = 400
Compound Answer = 308.43
find the present value of $300 to be received five years from now discounted to the present at 5%
formula
simple - PV = FV/(1+R*N)
compound - PV = FV/ (1+r)^n
Simple Answer = 240
Compound Answer = 235.06
find the present value of $1000 to be received eight years from now discounted to the present at 3%
formula
simple - PV = FV/(1+R*N)
compound - PV = FV/ (1+r)^n
Simple Answer = 806.45
Compound Answer = 789.40
find the present value of $1000 to be received eight years from now discounted to the present at 20%.
formula
simple - PV = FV/(1+R*N)
compound - PV = FV/ (1+r)^n
Simple Answer = 384.62
Compound Answer = 232.57
what are annuities
they are a finite number of cash flows that are equal in value and are evenly spaced.
what are the three types of annuities
ordinary annuities
deferred annuities
annuities due
what is an ordinary annuity
this is one where the time between now and the first cash flow is the same as the time separating the subsequent cash flow`
what is an example of an ordinary annuity
a bank loan
what us an annuity due
this is where the first cash flow occurs immediately.
Note 
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