Post on 18-Nov-2014
description
Topic 5Financial Markets
Year 11 Economics (Preliminary)
http://www.shiftfrequency.com/susanne-posel-morgan-stanley-is-insolvent-only-a-matter-of-time-before-total-financial-collapse/
Syllabus: Students Learn To
Examine economic issues
examine the contribution of financial markets to the economic welfare of individuals and firms
investigate the extent of competition in financial markets
discuss the need for regulation in financial markets
Apply economic skills
compare and contrast financial markets with product markets
explain the role of institutions in the operation of financial markets
analyse the impact of financial innovations on individuals and the economy
work in groups to investigate the economic role of the superannuation industry
analyse the factors that influence the level of interest rates
predict trends in interest rates in hypothetical situations.
Financial markets in Australia
Types of financial markets
primary and secondary markets
consumer credit, housing loans, business loans, short term money market, bond market, financial futures, foreign exchange
the share market – its role, function and effect on the economy
domestic and global markets
Regulation of financial markets – the role and functions of current institutions
Reserve Bank of Australia
Australian Prudential Regulation Authority
Australian Securities and Investments Commission
Australian Treasury
Council of Financial Regulators
Financial aggregates measured by the Reserve Bank of Australia
currency
broad money
credit
Interest rates
types of rates in the short term and long term
lending rates
borrowing rates
role of the Reserve Bank of Australia in determining the cash rate
influence of the cash rate on interest rates.
Syllabus: Students Learn About
Borrowers
individuals
business
government
Factors affecting the demand for funds
transactions and speculative motives
financial innovations
Lenders
individuals
business
government
international
The Role of Financial Markets
Financial markets are the factor market for capital.
Financial Markets provide a way for those with excess funds to earn interest on their asset by lending to those with a shortage of funds.
Finance plays a key role in the economy, allowing firms, individuals and governments to access additional funds.
The significant influence that financial markets have mean that they need to be more highly regulated than some other markets.
Financial markets provides an efficient way to connect lenders and borrowers – through financial intermediaries.
Our five sector model sees “households” as savers and businesses as “borrowers” in the economy… but in reality savings and investment come from all parts of the economy…
Examples? (textbook p171)
Sources of Funds (Savings):
Uses of Funds (Borrowings)
Financial Intermediaries connect those with excess funds (savers) to those who a shortage of funds for their wants (borrowers).
These have traditionally been broken into banks and non-bank financial intermediaries (NBFIs), with banks being considered the more significant (although this distinction is less relevant today).
Non Bank Financial Institutions
Credit Unions
Building Societies
Finance Companies
eg GE Money
Investment (Merchant) Banks
eg Macquarie Bank
Mortgage Originators
eg Aussie; RAMS
Superannuation Funds
Financial Intermediaries
Banks
Authorised deposit taking institutions.
Specially regulated and backed by government guarantee.
Securities
Any form of financial instrument, including shares and bonds, that provide the holder of that instrument with a claim over real assets or a future income stream.
WTF?
Secondary Financial Market
Where already existing financial securities are bought and sold (traded).
This is where investors trade with each other using previously purchased securities.
Think secondary market = second hand goods.
Primary vs Secondary
Primary Financial Market
Where newly formed financial securities/assets are bought and sold.
Typically the sale of shares, such as when a company sells new shares, could also be new government or corporate bonds.
Securities sold in the primary financial market lead to the company directly receiving the money. This is not the case when shares are bought and sold on the stock exchange.
Main Financial Markets & Products
Share/Equity Markets
Where ownership shares in companies are issued or exchanged. Mostly done in ASX in Australia.
Debt Market
Where debt securities are exchanged or cash is lent or 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’s currency are exchanged for assets defined in another country’s currency.
Products
Consumer Credit
Housing Loans
Business Loans
Short Term Money Market
Bonds
Financial Futures/Options
Foreign Exchange (Forex)
Share Market Products
Examples of Financial Market Products
Identify the financial market product the following examples represent and the financial market they exist in.
Tim wants to buy Christmas presents but doesn’t have enough cash.
Telstra needs to borrow $10m for 72 hours.
Nic, a small businessman, wants finance to purchase new factory equipment.
Farmer Damien has sold this year’s crop to a Chinese company.
Big Johnny D needs money to purchase a new car.
Wesfarmers needs to finance the acquisition of Coles.
Finn wants to lock in an $AUD price for his products over the coming months.
Banker Sahil has surplus funds at the end of the day’s trading.
Gina Rinehart wants to invest $10m in Fairfax.
Which Product? Which Market?
Consumer Credit
Housing Loans
Business Loans
Short Term Money Market
Bonds
Financial Futures/Options
Foreign Exchange (Forex)
Share Market Products
Bonds!
What is a bond?
A bond is a special type of loan taken out by governments and large companies.
Also known as a debt security, it is a written financial document issued by the borrower to the lender, who is known as a bondholder.
The initial price (the loan amount) is known as the face value of the bond.
The bondholder is entitled to a fixed stream of payments (known as coupon payments), which are like interest payments.
The bondholder is also entitled to repayment of the original loan amount when the bond matures.
Trading bonds?
Bonds can be bought and sold in a secondary market (the bond market).
The rate of financial return is known as the yield. This is calculated by dividing the coupon payment by the bond price.
After the bond has been issued, the price on the secondary market will fluctuate according to changes in the level of interest rates.
Yield
Example: a $1,000,000 bond with annual coupons of $50,000 has a yield of 5%.
If interest rates increases, the value of the bond (in the secondary market) will go down, because buyers will want higher return.
Because the annual coupon payment is fixed, a lower price increases the yield.
If you buy a bond with a 10% coupon at its $1,000 face value, the yield is 10% ($100/$1,000). Pretty simple stuff.
If the price falls to $800, the yield increases to 12.5% ($100 payment/$800 value).
Conversely, if the price increases to $1,200, the yield shrinks to 8.33% ($100/$1,200).
http://www.investopedia.com/university/bonds/bonds3.asp