Wk 2 Financial fundaments

Overview of Assessment One

• Assessment One aims to set students up for success in the unit.

• Reflection piece due in Week 10 based on Problem Sets 1-9.

• Problem Sets start from Week 2 and cover lecture content from Weeks 1-8.

• Purpose: to help build essential skills in financial decision-making.

Problem Sets

• Problem Set One introduced this week (from yesterday).

• Problem Sets are integral parts of Assessment One.

• Encourage students to complete Problem Sets during tutorials, typically providing 20-30 minutes of attempt time.

• Collaborating with peers is encouraged; tutors available for support.

Feedback and Reattempts

• Unlimited attempts allowed for quizzes; different questions each time to enhance learning.

• Importance of mini reflections: suggest writing weekly notes on challenges faced to aid in writing the final reflection report.

• Emphasis on the need for continuous learning and understanding material through feedback and revisions.

Tutorial Structure and Reflection Suggestions

• Weekly Mini Reflection: Keep track of straightforward vs. challenging problems and feedback received.

• Goals for Week 10’s reflection: maintain organized thoughts throughout the course.

• Importance of reaching out for help when difficulties arise.

Changes in Communication Channels

• Chat function on livestream disabled due to unrelated discussions.

• Students can post questions on iLearn forums instead.

Weekly Focus: Financial System

• Recap of last week's topics: players in finance (individuals, firms) and the financial system's role in fund transfers.

• Today's focus on:

  1. Types of financial institutions.

  2. Financial markets.

  3. Understanding direct and indirect financing.

  4. Differences between debt and equity financing.

  5. Structure of the Australian financial system and its regulators.

  6. Determining interest rates.

Functions of the Financial System

• Effective payment mechanisms for cash transfer.

• Risk transfer mechanisms (insurance examples).

• Liquidity allowing quick asset-to-cash conversions.

• Primary function: flow of funds from surplus (suppliers) to deficit (users).

• Suppliers of Funds: Households (primary), superannuation funds, banks.

• Users of Funds: Firms (primary users), and governments.

Intermediated vs. Direct Financing

• Direct Financing: Funds flow directly from suppliers to users without intermediaries, usually via financial markets.

• Indirect Financing: Involves intermediaries (banks) lending funds.

• Examples:

  • Direct: Large corporations issuing bonds.

  • Indirect: Individuals depositing money in banks; banks lend to users.

Understanding Debt and Equity

• Debt: A financial asset with contractual obligations to pay back principal and interest. Includes bonds provided by financial markets.

• Equity: Permanent capital raised by issuing shares; includes risks and rewards related to company performance.

Players in the Australian Financial System

• Financial Institutions: ADIs authorized by APRA to accept deposits and provide loans, such as big banks and credit unions.

• Fund Managers: Manage pooled funds for investments; examples include AMP and Vanguard.

• Investment Banks: Facilitate new share issuances and mergers, e.g., Goldman Sachs.

• Regulators:

  1. RBA: Adjusts interest rates, manages inflation.

  2. APRA: Regulation for banks and superannuation.

  3. ASIC: Oversees market dealings and compliance.

Financial Markets: Types and Functions

• Money Markets: Short-term debt instruments (maturities less than one year).

• Capital Markets: Longer-term financing needs with bonds and equities.

• Primary vs. Secondary Markets:

  • Primary: Sale of new securities (e.g., IPOs).

  • Secondary: Trading of existing securities (facilitated by brokers).

Interest Rates Dynamics

• RBA manages interest rates based on inflation objectives.

• Interest rate increase: discourages spending by consumers; decrease incentivizes borrowing and spending.

• Influences: Based on supply and demand in financial markets; more lenders reduce rates; more borrowers raise rates.

Real vs. Nominal Interest Rates

• Nominal Rate: Quoted by financial institutions; does not account for inflation.

• Real Rate: Reflects growth in purchasing power; calculated by adjusting nominal rates for inflation.

• Fisher equation: Represents relationship between nominal rates, real rates, and inflation.