11 Econonomics - Topic 5 - Financial Markets - 01 Financial Markets

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Topic 5 Financial Markets Year 11 Economics (Preliminary) http://www.shiftfrequency.com/susanne-posel-morgan-stanley-is-insolvent-only-a-matter-of-time-before-total-financial-collapse/
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Slides on financial markets for Year 11 Economics (NSW).

Transcript of 11 Econonomics - Topic 5 - Financial Markets - 01 Financial Markets

  • 1. Topic 5 Financial Markets Year 11 Economics (Preliminary) http://www.shiftfrequency.com/susanne-posel-morgan-stanley-is-insolvent-only-a-matter-of-time-before-total-financial-collapse/
  • 2. 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.
  • 3. 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
  • 4. 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)
  • 5. 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.
  • 6. 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.
  • 7. 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 countrys currency are exchanged for assets defined in another countrys currency. Products Consumer Credit Housing Loans Business Loans Short Term Money Market Bonds Financial Futures/Options Foreign Exchange (Forex) Share Market Products
  • 8. 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 doesnt 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 years 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 days 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
  • 9. Bonds!
  • 10. 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.
  • 11. 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.
  • 12. 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