FINC203: Topic 1 - The Financial System

The financial system consists of:

Financial markets and institutions

True/ false: the financial system is competitive

True

The financial system consists of:

Financial markets and institutions

True/ false: the financial system is competitive

True

what does the bank do with the small dollar amounts it collects from its customers

aggregates it and makes loans in larger dollar amounts

where is money directed ?

to the best investment opportunities

Financial risk is managed and/or transferred to…

other parties

The system moves money from lender-savers to..

borrower-spenders

lender-savers

surplus spending units (SSU)

borrower-spenders

deficit spending units (DSU)

example of SSU

households

Example of DSU

most businesses, the govt

Direct financing

The lender‐savers and the borrower‐spenders deal ‘directly’ with one another

Borrower‐spenders sell securities, such as shares and bonds, to..

lender-savers in exchange for money

what are securities ?

financial instruments and financial claims.

Typical minimum direct transaction size is

$1million

the major buyers in direct financial markets are

financial institutions

what are financial institutions

institutions, such as commercial banks and insurance companies, that invest in financial assets and provide financial services

what are financial markets

any place or system that provides buyers and sellers the means to trade financial instruments

who are the major buyers in in direct financial markets?

financial institutions

2 Types of direct financing:

using the market and not using the market

Direct financing without using the market flow of funds:

the flow of funds is from the superannuation fund to the company, the company is then in debt to the fund.

what is a superannuation fund?

a fund that pays out pensions

direct financing without using the market:

businesses issue long -term bonds privately with a single investor to raise finance

direct financing with using the market:

businesses issue long-term bonds in the bond market which are publicly available for purchase by multiple investors

Investment banks specialise in

helping companies sell new debt or equity

what is equity ?

equity represents the ownership interest in a company or asset after all debts and liabilities have been deducted. It reflects the value that would be returned to shareholders if all the company’s assets were liquidated and its debts paid off.

how to calculate equity:

Total assets - total liabilities

Origination:

the process of preparing a security issue for sale.

Underwriting:

guarantees that the company will raise the funds it expects from its new security issue

indirect financing

Securities are repackaged by financial intermediaries, and flow between the lender‐savers and the borrower-spenders