Learning Objectives
Explain the functions of a financial system
Describe the main classes of financial
Chapter Organization
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalization
Financial Institutions
Summary
1.1 Introduction
Money
Medium of exchange
Allows specialization in production
Solves the divisibility problem, i.e. where medium
of exchange does not represent equal value for
the parties to the transaction
Facilitates saving
Store of wealth
Surplus units
Savers of funds available for lending
Deficit units
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
10
Risk
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
11
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
12
portfolio restructuring
13
14
Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
15
Dividend
Liquidation
Types
Ordinary share
Preference shares or Equity Hybrid (or quasiequity) security
Preference shares
Convertible notes
16
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
17
Financial security
Interest rate-sensitive debt instruments,
currencies and equities
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
18
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
19
Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
20
transactions
Direct and intermediated financial flow
markets
Wholesale and retail markets
Money markets
Capital markets
Copyright 2003 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney
Slides prepared by Anthony Stanger
21
Matching principle
Short-term assets should be funded
22
Businesses
Company shares or debentures
Governments
Treasury notes or bonds
Individuals
Mortgage
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
23
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
24
Advantages
Avoids costs of intermediation
Increases range of securities and markets
Disadvantages
Matching of preferences
Liquidity and marketability of a security
Search and transaction costs
Assessment of risk, especially default risk
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
25
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
26
Advantages
Asset transformation
Maturity transformation
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
27
Advantages (cont.)
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
28
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
29
Retail markets
Transactions conducted primarily with
financial intermediaries by the household
and small- medium business sectors
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
30
Money markets
Wholesale markets in which short-
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
31
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
32
Banks
Finance companies
Funds managers
Building societies
Credit unions
Companies
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
33
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
34
Capital markets
Markets in which longer-term
Equity markets
Corporate debt markets
Government debt markets
Foreign exchange markets
Derivatives markets
year
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
35
Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
36
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
37
Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
38
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
39
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
40
Categories of
financial institutions
Depository financial institutions
Attract savings from depositors and
investors to provide loan facilities to
borrowers
Commercial banks
Building societies
Credit unions
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
41
Categories of
financial institutions (cont.)
Investment banks and merchant banks
(money market corporations)
Mainly provide off-balance-sheet (OBS)
42
Categories of financial
institutions (cont.)
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
43
Categories of
financial institutions (cont.)
Finance companies
Funds are raised by issuing financial
ultimate borrowers
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
44
Categories of financial
institutions (cont)
Unit trusts
Investors purchase units in the trust
Trust manager invests funds in a range
of investments specified by trust deed
Types of unit trusts
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
45
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
46
Chapter Organisation
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Introduction
Functions of the Financial System
Financial Instruments
Financial Markets
Impact of Globalisation
Financial Institutions
Summary
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
47
1.7 Summary
The financial system is composed of
debt or hybrid
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
48
according to
Copyright
Copyright
2003
2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger
49