Financial Market
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Topic 1 Introduction to financial markets
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Essay questions 1. Direct finance: Surplus economic units lend their funds “direct” to deficit economic units which are the ultimate borrowers. Financial institutions may facilitate this process by providing financial services in return for fees and commissions. The financial assets issued by the deficit units are held by the surplus units.
Indirect finance: Surplus economic units lend their funds to financial institutions (intermediaries) which in turn lend funds to the deficit units which are the ultimate borrowers. Financial intermediaries earn income by way of net interest margin. The financial assets issued by the deficit units are held by the financial intermediaries that issue separate financial assets to the surplus units.
2. (a) Borrowers and (b) Lenders: 0 Asset value transformation - the creation of secondary securities that differ in value from the primary securities. 1 Maturity transformation – meets the needs of lenders (who would prefer to lend short term) and borrowers (who would prefer to borrow long term). 2 Credit risk reduction and diversification - the spread and control of credit risk through risk management techniques and expertise. 3 Liquidity provision - the provision of a range of services with a high degree of liquidity e.g. Cheques, ATMs, EFTPOS.
(c) National Economy: 4 Increased quantity of national savings. 5 Greater access to savings by investors. 6 Economic development and growth. Disadvantages: 7 Increased cost of borrowing. 8 Reduced return from lending. 9 Financial assets issued by financial intermediaries are less likely to be securitised: ie. Able to be sold in a secondary market.
3. Financial assets represent claims which surplus units hold against deficit units in direct financing, or in the case of indirect financing, over financial
Topic 1 Introduction to financial markets
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Essay questions 1. Direct finance: Surplus economic units lend their funds “direct” to deficit economic units which are the ultimate borrowers. Financial institutions may facilitate this process by providing financial services in return for fees and commissions. The financial assets issued by the deficit units are held by the surplus units.
Indirect finance: Surplus economic units lend their funds to financial institutions (intermediaries) which in turn lend funds to the deficit units which are the ultimate borrowers. Financial intermediaries earn income by way of net interest margin. The financial assets issued by the deficit units are held by the financial intermediaries that issue separate financial assets to the surplus units.
2. (a) Borrowers and (b) Lenders: 0 Asset value transformation - the creation of secondary securities that differ in value from the primary securities. 1 Maturity transformation – meets the needs of lenders (who would prefer to lend short term) and borrowers (who would prefer to borrow long term). 2 Credit risk reduction and diversification - the spread and control of credit risk through risk management techniques and expertise. 3 Liquidity provision - the provision of a range of services with a high degree of liquidity e.g. Cheques, ATMs, EFTPOS.
(c) National Economy: 4 Increased quantity of national savings. 5 Greater access to savings by investors. 6 Economic development and growth. Disadvantages: 7 Increased cost of borrowing. 8 Reduced return from lending. 9 Financial assets issued by financial intermediaries are less likely to be securitised: ie. Able to be sold in a secondary market.
3. Financial assets represent claims which surplus units hold against deficit units in direct financing, or in the case of indirect financing, over financial