yr 11 eco topic 5 - financial markets

financial markets act as financial intermediaries between ____ and _____

savers and borrowers

sources of savings

• household income

• businesses (when they don’t distribute all profits to owners)

• government - when surplus

• foreign pools of savings

primary financial financial markets

facilitate the creation of financial assets, known as securities, that can be sold into the economy

secondary financial markets

involve transactions with financial assets that have already been issued on a primary market some time in the past

share/equity market

where ownership shares in companies are issued or exchanged

debt market

where debt securities (e.g bonds) are exchanged, or cash is lent and borrowed

derivatives market

where people buy and sell financial assets that are based on the value of other financial assets

foreign exchange market

where financial assets defined in one country are exchanged with another country

financial products: consumer credit

• allows consumers to purchase consumer goods, and services before actual payment

• e.g credit cards, personal loans

financial products: housing loans

• offered by financial institutions

• long term loans used to purchase property, requiring periodic repayments w/ interest

• housing loan rates usually 2-3% higher than RBA cash rate

financial products: business loans

• form of debt allowing businesses to invest in business operations

• rates on small/medium size businesses typically higher than rates of housing loans

financial products: short term money markets

• brings people and businesses with temporary shortages or surpluses of funds

• those w/ surplus funds issue various forms of debt securities to those in need

financial products: financial futures + options

• contracts to trade in financial instruments (e.g shares) at a later date for a certain price

• allow investors to protect themselves against adverse movements in interest rates, currency fluctuations or share prices

financial products: foreign exchange

• market for buying + selling of foreign currencies

  • as investors and businesses require foreign currencies when they do business overseas

reasons financial markets are important

• provide an efficient process by which income that is not spend immediately can still contribute to present level of AD by allowing others to borrow the surplus for immediate consumption/investment

• influences the whole economy - direct capital to where it is most needed

securities

any form of financial instrument, including shares and bonds, that provides the holder of that instrument with a claim over real assets or a future income stream

how is the market price of securities on the secondary financial market determined?

by interaction of S and D and they are traded on ASX

futures contracts

• e.g swaps, futures, options

• obligation to buy or sell a specific quantity of a commodity on a specific date in the future

  • price is determined by the futures market when entering into a contract

• allows to buyers to secure a buying price and sellers to secure a selling price for a commodity

• traded on stock exchange (ASX)

bonds

a loan made by an investor to a borrower

unlike a regular loan, once a bond is issues it can be traded in the ____ market

secondary, i.e a bond has a market price

bond yield

• the return an investor expects

• coupon payment / bond price

what do higher bond prices result in?

lower bond yields

what happens to bond yield when interest rates increase?

bond yield will increase as bond prices fall as newly issues bonds offer better returns

why do people invest in bonds

• stable and predictable income

• lower risk than shares

• portfolio diversification

superannuation

form of saving individuals cannot access until they reach retirement age

how does superannuation reduce pressure on the government?

growth of super reduces pressure on the government to provide income for retired australians