Financial Systems Introduction

<p>Provides access to funds</p> Signup and view all the answers

<p>Interest payments</p> Signup and view all the answers

<p>Capital gains</p> Signup and view all the answers

<p>Is cheaper than equity financing</p> Signup and view all the answers

<p>Yield</p> Signup and view all the answers

<p>Increased variability of returns</p> Signup and view all the answers

<p>To have easy access to their money</p> Signup and view all the answers

<p>A narrower spread indicates higher liquidity</p> Signup and view all the answers

<p>To compensate suppliers of funds for accepting risk</p> Signup and view all the answers

<p>r = r(risk free) + r(risk premium)</p> Signup and view all the answers

<p>The risk premium of a bond</p> Signup and view all the answers

<p>The credit spread increases</p> Signup and view all the answers

<p>To assess the creditworthiness of bond issuers</p> Signup and view all the answers

<p>Market values decrease as riskiness increases</p> Signup and view all the answers

<p>To serve as a benchmark for corporate bonds</p> Signup and view all the answers

<p>A complex network comprising financial institutions, markets, and instruments providing financial services</p> Signup and view all the answers

<p>Investment banks</p> Signup and view all the answers

<p>Managing investor’s funds</p> Signup and view all the answers

<p>Financial markets</p> Signup and view all the answers

<p>Overseeing institutions and markets to ensure fairness and stability</p> Signup and view all the answers

<p>Issuance of Loans</p> Signup and view all the answers

<p>By raising funds through financial securities for capital projects</p> Signup and view all the answers

<p>Financial institutions</p> Signup and view all the answers

<p>Regulators</p> Signup and view all the answers

<p>To provide secure and reliable payment instruments</p> Signup and view all the answers

<p>It requires compensation for the risk and forgoing immediate use of funds</p> Signup and view all the answers

<p>A settlement finalizes the exchange of money for a purchased item</p> Signup and view all the answers

<p>By providing encrypted transfer of funds</p> Signup and view all the answers

<p>It facilitates transactions between buyers and sellers</p> Signup and view all the answers

<p>They supply funds, often as bank deposits and superannuation contributions</p> Signup and view all the answers

<p>Store of risk</p> Signup and view all the answers

<p>By uniting savers and borrowers globally</p> Signup and view all the answers

<p>Receiving funding for housing loans and business operations</p> Signup and view all the answers

<p>Promoting stability in the financial system</p> Signup and view all the answers

<p>Banks</p> Signup and view all the answers

<p>Ensuring crises occur frequently</p> Signup and view all the answers

<p>Finance Companies</p> Signup and view all the answers

<p>Credit Unions and Building Societies</p> Signup and view all the answers

<p>Solvent but illiquid banks</p> Signup and view all the answers

<p>Global Financial Crisis (GFC)</p> Signup and view all the answers

<p>Offering corporate financing</p> Signup and view all the answers

<p>ANZ, CBA, NAB and Westpac</p> Signup and view all the answers

<p>The financial system facilitates the allocation of capital by channeling funds to businesses and projects that are most likely to generate a return on investment. Funds are supplied either directly through the issue of securities in the market or indirectly through deposit-taking institutions.</p> Signup and view all the answers

<p>The primary role of financial markets is to arrange direct financing between surplus units and deficit units. Financial markets contribute to wealth creation through the ownership of financial assets, reflected in share price indices.</p> Signup and view all the answers

<p>The flow of funds function facilitates the allocation of capital by directing funds from surplus units to deficit units. In Australia, the largest component of the flow of funds is indirect financing, primarily used to purchase residential property.</p> Signup and view all the answers

<p>The risk-transfer function enables investors, businesses, and financial institutions to manage risk that arises in the financial system. It is essential for them to mitigate potential losses and ensure stability.</p> Signup and view all the answers

<p>Financial institutions contribute to the flow of funds by accepting deposits and providing loans to deficit units. The primary role of intermediation is to facilitate the flow of funds between surplus units and deficit units, ensuring that funds are allocated efficiently.</p> Signup and view all the answers

<p>The two main components of the flow of funds are direct financing and indirect financing. Both components contribute to wealth creation through the ownership of financial assets and the provision of funds to deficit units.</p> Signup and view all the answers

<p>Money serves as a medium of exchange, enabling buyers and sellers to exchange goods and services for payment. By providing secure and reliable payment instruments, financial institutions help reduce the risk of fraud and provide a means for buyers and sellers to transact with confidence.</p> Signup and view all the answers

<p>Financial institutions facilitate the flow of funds by bringing together savers and borrowers, allowing surplus units to invest in deficit units. The primary benefit of efficient financial markets is that they enable the flow of funds between surplus and deficit units, thereby allocating funds to their most productive uses.</p> Signup and view all the answers

<p>Financial institutions provide infrastructure and services necessary for secure (encrypted) transfer of funds between parties, managing and clearing the settlement process. They help ensure the security of transactions by providing secure payment instruments and reducing the risk of fraud.</p> Signup and view all the answers

<p>Money performs its function as a unit of account by serving as a standard unit of measurement for the value of goods and services. This function is significant because it enables the comparison of prices and values of different goods and services.</p> Signup and view all the answers

<p>Surplus units, such as households and businesses, provide funds to the financial system, which are then allocated to deficit units. They contribute to the allocation of funds by providing the necessary funds for investment and consumption.</p> Signup and view all the answers

<p>Financial markets facilitate the globalisation of the flow of funds by bringing together savers and borrowers from different regions and countries. The primary benefit of this process is that it enables the allocation of funds to their most productive uses, regardless of geographical location.</p> Signup and view all the answers

<p>The firm's return on equity will be higher in good times and lower in bad times, making the returns more variable.</p> Signup and view all the answers

<p>They can vote on the board of directors and receive dividends, and their funds are not repayable.</p> Signup and view all the answers

<p>As leverage increases, so does the risk of insolvency and the variability of returns.</p> Signup and view all the answers

<p>It indicates fair market value access to their money and the level of access lenders have to their money once it is invested.</p> Signup and view all the answers

<p>A minimal profit corresponds to an average ROE, a good profit corresponds to an increased ROE, and a break-even point corresponds to a bad ROE.</p> Signup and view all the answers

<p>Leverage increases risk and return to owners because of the cost represented by the interest payments.</p> Signup and view all the answers

<p>To facilitate the flow of funds between deficit units and surplus units.</p> Signup and view all the answers

<p>It enables suppliers of funds to easily convert their assets into cash without affecting their market price.</p> Signup and view all the answers

<p>Challenging the idea of rational expectations in investors' decisions</p> Signup and view all the answers

<p>Self-Attribution</p> Signup and view all the answers

<p>Degree of movement in a variable</p> Signup and view all the answers

<p>Market prices may not be traded at fair value</p> Signup and view all the answers

<p>Volatility</p> Signup and view all the answers

<p>To recognise investor behaviour is not always based on rational expectations</p> Signup and view all the answers

<p>Behavioural Finance</p> Signup and view all the answers

<p>Prices exceeding fair values followed by a sharp correction</p> Signup and view all the answers

<p>Higher returns if investments are made in January</p> Signup and view all the answers

<p>A period of generally rising prices</p> Signup and view all the answers

<p>Anchoring</p> Signup and view all the answers

<p>Price Bubble</p> Signup and view all the answers

<p>Bull and Bear Markets</p> Signup and view all the answers

<p>Price Bubble</p> Signup and view all the answers

<p>All relevant information is already incorporated in security prices, making excess returns impossible.</p> Signup and view all the answers

<p>They are based on uncertain future payments and are difficult to determine</p> Signup and view all the answers

<p>It states that price movements are random and unpredictable in response to new information</p> Signup and view all the answers

<p>It suggests that markets are sometimes inefficient and anomalies can be exploited</p> Signup and view all the answers

<p>Because prices are fair and reflect all available information</p> Signup and view all the answers

<p>It is used to adjust prices to reflect fair value</p> Signup and view all the answers

<p>Traders are unable to achieve excess returns due to the efficient nature of markets</p> Signup and view all the answers

<p>A broker transacts on behalf of clients, while a dealer trades on their own behalf</p> Signup and view all the answers

<p>Spread</p> Signup and view all the answers

<p>To quote bid and offer prices to facilitate trading</p> Signup and view all the answers

<p>Trading spread</p> Signup and view all the answers

<p>To manage their position and risk</p> Signup and view all the answers

<p>Transaction immediacy</p> Signup and view all the answers

<p>To quote bid and offer prices to facilitate trading</p> Signup and view all the answers

<p>To act as agents through whom clients can access the market</p> Signup and view all the answers

<p>Trading is based on orders from traders</p> Signup and view all the answers

<p>To display and match orders</p> Signup and view all the answers

<p>Enhanced trading opportunities</p> Signup and view all the answers

<p>To record and monitor all trades</p> Signup and view all the answers

<p>The specified price of the security</p> Signup and view all the answers

<p>To store and display orders that have not yet resulted in a trade</p> Signup and view all the answers

<p>Cheaper and more efficient trading</p> Signup and view all the answers

<p>To trade securities on their own behalf</p> Signup and view all the answers

<p>Trading is conducted on an over-the-counter basis</p> Signup and view all the answers

<p>Weak Form Efficiency</p> Signup and view all the answers

<p>Semi-Strong Form Efficiency</p> Signup and view all the answers

<p>Strong-Form Efficiency</p> Signup and view all the answers

<p>Random Walk Theory</p> Signup and view all the answers

<p>Adjust quickly in response to price-sensitive information</p> Signup and view all the answers

<p>All relevant information is fully reflected in stock prices</p> Signup and view all the answers

<p>No possibility of consistent excess returns</p> Signup and view all the answers

<p>Random walk theory suggests that stock price movements are unpredictable and random, which is supported by the weak-form efficiency hypothesis that past prices and returns cannot be used to predict future prices.</p> Signup and view all the answers

<p>Fair value prices imply that the current market price of an asset reflects all available information, and that neither buyer nor seller has an advantage, which is a fundamental assumption of the efficient market hypothesis.</p> Signup and view all the answers

<p>According to EMH, all relevant information is already incorporated into security prices, making it impossible for investors to consistently achieve excess returns through analysis or forecasting.</p> Signup and view all the answers

<p>Anomalies refer to abnormal or excess returns that cannot be explained by the efficient market hypothesis, suggesting that markets may not always be efficient.</p> Signup and view all the answers

<p>The random arrival of new information leads to changes in fair value prices, which are then reflected in security prices.</p> Signup and view all the answers

<p>The efficient market hypothesis implies that forecasting is impossible, and excess returns are unsustainable, making it futile to try to achieve excess returns through investment selections and timing decisions.</p> Signup and view all the answers

<p>The Weak Form Efficiency implies that prices reflect all past market data, and thus, studying past prices and patterns will not identify opportunities for abnormally profitable trades. This suggests that it is impossible to consistently achieve returns in excess of the market's average.</p> Signup and view all the answers

<p>The Random Walk Theory suggests that security prices move randomly and unpredictably, and that past price movements are not indicative of future price movements. This is consistent with the Efficient Market Hypothesis, which suggests that security prices reflect all available information and are thus fair and unpredictable.</p> Signup and view all the answers

<p>Fair value refers to the idea that security prices reflect all available information and are thus fair and unbiased. This means that security prices reflect the true value of the underlying asset, and that there are no opportunities for abnormal profits or losses.</p> Signup and view all the answers

<p>The Efficient Market Hypothesis suggests that security prices are best forecasted by today's market price, and that there are no opportunities for abnormal profits or losses. This means that investors and traders should not attempt to forecast prices based on past data or other information.</p> Signup and view all the answers

<p>Anomalies in the Efficient Market Hypothesis refer to instances where security prices do not reflect all available information, or where there are opportunities for abnormal profits or losses. Examples of anomalies include the January effect and the small-firm effect. These anomalies challenge the idea of efficient markets and suggest that there may be opportunities for investors and traders to achieve abnormal returns.</p> Signup and view all the answers

<p>The Efficient Market Hypothesis suggests that excess returns are impossible to achieve consistently, and that any attempts to do so are likely to be unsuccessful. This challenges traditional investment strategies that rely on forecasting and attempting to beat the market, and suggests that investors should instead focus on diversification and indexing.</p> Signup and view all the answers

<p>To channel funds to businesses and projects with the highest potential return</p> Signup and view all the answers

<p>The presence or absence of an intermediary</p> Signup and view all the answers

<p>It provides a means for investors to manage risk</p> Signup and view all the answers

<p>Residential property</p> Signup and view all the answers

<p>To facilitate the exchange of funds between surplus and deficit units</p> Signup and view all the answers

<p>By channeling funds to businesses and projects with the highest potential return</p> Signup and view all the answers

<p>To facilitate the exchange of funds between surplus and deficit units</p> Signup and view all the answers

<p>The firm size effect is an anomaly where investing in smaller stocks tends to earn consistently higher returns, whereas larger stocks do not earn as consistent, higher returns.</p> Signup and view all the answers

<p>The January effect is an anomaly where buying stock in January tends to result in higher returns.</p> Signup and view all the answers

<p>A price bubble is a period where prices exceed fair values and are followed by a sharp correction, often due to traders' sentiment such as 'irrational exuberance' that distorts their expectations.</p> Signup and view all the answers

<p>A bull market refers to a long period of generally rising prices, while a bear market refers to a period of generally falling prices, both reflecting conditions in the economy, such as the business cycle.</p> Signup and view all the answers

<p>Anchoring is a tendency for individuals to rely too heavily on one piece of information when making decisions, leading to biased judgments.</p> Signup and view all the answers

<p>A bubble occurs when prices no longer reflect fundamental factors, whereas a fair value price reflects the intrinsic value of an asset.</p> Signup and view all the answers

<p>Overconfidence is an individual's subjective confidence in their judgments being greater than the objective accuracy of those judgments, leading to biased decision-making.</p> Signup and view all the answers

<p>Irrationality in the dollar auction refers to the tendency for individuals to continue bidding on an asset even when it becomes overvalued, leading to market bubbles.</p> Signup and view all the answers

<p>Alignment of incentives with fiduciary duties</p> Signup and view all the answers

<p>To accept small deposits and make large-value loans</p> Signup and view all the answers

<p>By increasing efficiency and competitiveness</p> Signup and view all the answers

<p>To enable efficient allocation of funds</p> Signup and view all the answers

<p>To ensure adherence to code of ethics</p> Signup and view all the answers

<p>Increase in efficiency and competitiveness</p> Signup and view all the answers

<p>To have a fiduciary duty to their customers</p> Signup and view all the answers

<p>To minimize risk</p> Signup and view all the answers

<p>Risk premium</p> Signup and view all the answers

<p>Greater liquidity</p> Signup and view all the answers

<p>To determine the risk premium</p> Signup and view all the answers

<p>By providing credit ratings</p> Signup and view all the answers

<p>To reflect the relative riskiness of an investment</p> Signup and view all the answers

<p>Increased risk</p> Signup and view all the answers

<p>To compensate for increased risk</p> Signup and view all the answers

<p>Narrower bid-ask spreads</p> Signup and view all the answers

<p>Increased credit spreads</p> Signup and view all the answers

<p>Market risk</p> Signup and view all the answers

<p>To transfer risk between parties</p> Signup and view all the answers

<p>Mutual decision making</p> Signup and view all the answers

<p>Information asymmetry</p> Signup and view all the answers

<p>Hedging</p> Signup and view all the answers

<p>Purchasing insurance coverage</p> Signup and view all the answers

<p>Information asymmetry</p> Signup and view all the answers

<p>Increased financial leverage and risk</p> Signup and view all the answers

<p>Facilitating the conversion of assets to cash without significantly affecting market prices</p> Signup and view all the answers

<p>Absence of expiration date</p> Signup and view all the answers

<p>Can potentially increase ROE, given that debt is cheaper than equity</p> Signup and view all the answers

<p>Increases variability</p> Signup and view all the answers

<p>Bonds</p> Signup and view all the answers

<p>It ensures access to their money at fair market value</p> Signup and view all the answers

<p>Supplying funds primarily as bank deposits and superannuation contributions</p> Signup and view all the answers

<p>Its stability and uniformity in value measurement</p> Signup and view all the answers

<p>Through providing compensation for forgoing immediate use of funds and potential default risk</p> Signup and view all the answers

<p>Flow of funds function</p> Signup and view all the answers

<p>The final exchange of money for a purchased item</p> Signup and view all the answers

<p>Servicing as a medium of exchange</p> Signup and view all the answers

<p>It maintains the purchasing power of money over time.</p> Signup and view all the answers

<p>Secured bonds are backed by collateral, while unsecured bonds are not. Secured bonds provide a higher level of security to investors, but reduce the bank's liquidity, whereas unsecured bonds increase the bank's liquidity, but provide less security to investors.</p> Signup and view all the answers

<p>MBS allow banks to convert illiquid assets into liquid securities, increasing their liquidity. SPVs issue MBS to investors, which enables banks to sell off large bundles of housing loans and increase their liquidity.</p> Signup and view all the answers

<p>Holding cash and liquid securities provides a store of liquidity, enabling banks to manage outflows and trade in markets, while earning income on low-risk investments.</p> Signup and view all the answers

<p>Equity financing provides a permanent source of funds, while debt financing increases a bank's leverage and risk. Equity strengthens a bank's financial position and protects depositors, while debt financing increases a bank's financial leverage.</p> Signup and view all the answers

<p>Securitization enables banks to convert illiquid assets into liquid securities, managing their risk and increasing their liquidity. Investors benefit from access to new investment opportunities and diversified portfolios.</p> Signup and view all the answers

<p>Equity provides a permanent source of funds, strengthening a bank's financial position and protecting depositors. It also enables banks to meet regulatory capital requirements and maintain their financial stability.</p> Signup and view all the answers

<p>Major banks tend not to borrow a lot of equity because they are seen as too big to fail, have higher credit ratings, and can raise large amounts to achieve economies of scale in relation to their issuing costs. This gives them a funding advantage over smaller competitors.</p> Signup and view all the answers

<p>The primary difference is that an NCD is a wholesale deposit with a fixed term and an agreed interest rate that can be traded in the money market, whereas a traditional savings deposit is typically smaller and can be withdrawn at any time.</p> Signup and view all the answers

<p>The main reason is to reduce their funding risk.</p> Signup and view all the answers

<p>The key benefit is that short-term debt securities allow banks to raise additional funds that can be lent out, and they typically issue these securities domestically as negotiable certificates of deposits (NCDs) and offshore as commercial paper, mostly in US dollars.</p> Signup and view all the answers

<p>Banks' funding decisions influence their ability to lend to customers by determining the availability of funds and the cost of these funds. Banks consider factors such as the relative cost of funds, the reliability of funding sources, and regulatory requirements when making funding decisions.</p> Signup and view all the answers

<p>The key characteristic of short-term debt securities is that they are usually unsecured promises by the issuer to pay the face value on maturity, with the interest embedded into the face value. They differ from traditional debt securities in that they typically have no interest payments and are issued for shorter periods.</p> Signup and view all the answers

<p>The three main characteristics of retail deposits are that they are very safe, liquid, and pay interest. These characteristics make them an attractive source of funding for banks because they provide a stable and reliable source of funds.</p> Signup and view all the answers

<p>The GFC led to a decline in the reliance on financial markets for funding, and banks have shifted towards relying more on retail deposits, which are seen as a more reliable source of funding. Banks have also increased interest rates to attract more deposits.</p> Signup and view all the answers

<p>Deposit insurance increases the stability and attractiveness of retail deposits by providing a guarantee that deposits up to a certain amount are insured by the government, making them a safer option for depositors.</p> Signup and view all the answers

<p>Short-term debt securities, such as NCDs, provide a source of short-term funding for banks, which can be used to meet their short-term liquidity needs. The benefits of these securities for banks include lower costs and greater flexibility.</p> Signup and view all the answers

<p>Securitisation and term funding facilities provide an alternative source of funding for banks, allowing them to access longer-term funding and manage their risk. These facilities contribute to the stability of the financial system by providing a more diverse range of funding sources.</p> Signup and view all the answers

<p>Banks use equity funding by issuing shares to raise capital, which can be used to meet regulatory requirements and support lending activities. The benefits of equity funding include increased flexibility and lower debt levels, while the drawbacks include higher costs and potential dilution of shareholder value.</p> Signup and view all the answers

<p>Short-term debt securities, such as NCDs, have a shorter maturity and are used to meet short-term liquidity needs, while long-term debt securities, such as bonds, have a longer maturity and are used to raise longer-term funding. The differences between these securities impact the funding mix of banks by providing a range of options for managing liquidity and risk.</p> Signup and view all the answers

<p>The GFC led to a decline in the reliance on financial markets for funding, and banks have shifted towards relying more on retail deposits and other sources of funding. This shift has implications for the stability of the financial system, as it reduces the reliance on volatile short-term funding markets.</p> Signup and view all the answers

<p>Managing and clearing of settlement process</p> Signup and view all the answers

<p>Supplying funds to deficit units</p> Signup and view all the answers

<p>Enabling the measurement of value</p> Signup and view all the answers

<p>Bringinging together savers and borrowers</p> Signup and view all the answers

<p>Enabling the exchange of goods and services</p> Signup and view all the answers

<p>Demanding funds from surplus units</p> Signup and view all the answers

<p>Facilitating the flow of funds between surplus and deficit units</p> Signup and view all the answers

<p>Hedging price increases</p> Signup and view all the answers

<p>Information asymmetry</p> Signup and view all the answers

<p>Decision making that is mutually beneficial</p> Signup and view all the answers

<p>To transfer risk</p> Signup and view all the answers

<p>To hedge against price increases</p> Signup and view all the answers

<p>To facilitate the allocation of capital</p> Signup and view all the answers

<p>To reduce risk exposure</p> Signup and view all the answers

<p>To achieve economies of scale</p> Signup and view all the answers

<p>To ensure fair and efficient decision making</p> Signup and view all the answers

<p>To increase everyone's access to financial services and decrease the cost of services</p> Signup and view all the answers

<p>To prevent fraud and ensure fair and efficient decision making</p> Signup and view all the answers

<p>To facilitate the allocation of capital and increase efficiency</p> Signup and view all the answers

<p>Difficulty in pooling funds and allocating them to different borrowers or investments</p> Signup and view all the answers

<p>To ensure fair and efficient decision making</p> Signup and view all the answers

<p>Because it allows for easy conversion of assets into cash</p> Signup and view all the answers

<p>The risk premium for different securities</p> Signup and view all the answers

<p>To provide credit ratings for bonds</p> Signup and view all the answers

<p>To serve as a risk-free benchmark</p> Signup and view all the answers

<p>Increased risk of bankruptcy</p> Signup and view all the answers

<p>The liquidity of the investment</p> Signup and view all the answers

<p>To facilitate the allocation of capital</p> Signup and view all the answers

<p>The transfer of ownership</p> Signup and view all the answers

<p>To facilitate the allocation of capital</p> Signup and view all the answers

<p>Increased leverage</p> Signup and view all the answers

<p>Insolvency risk</p> Signup and view all the answers

<p>Higher return on equity</p> Signup and view all the answers

<p>Source of permanent capital</p> Signup and view all the answers

<p>Break-even profits</p> Signup and view all the answers

<p>Ease of converting assets to cash</p> Signup and view all the answers

<p>Enhances variability of returns</p> Signup and view all the answers

<p>Vote on the board of directors</p> Signup and view all the answers

<p>Direct financing</p> Signup and view all the answers

<p>Collateral</p> Signup and view all the answers

<p>Residential property</p> Signup and view all the answers

<p>Through issuing securities</p> Signup and view all the answers

<p>Risk-transfer function</p> Signup and view all the answers

<p>They provide funds for deficit units</p> Signup and view all the answers

<p>Indirect financing</p> Signup and view all the answers

<p>A bill facility is an agreement where an acceptor agrees to roll over bills on maturity date for an agreed period. This allows borrowers to raise funds for longer periods than the bill term and manage their cash flow by estimating their funding needs for shorter periods, such as 90 days, rather than the total period.</p> Signup and view all the answers

<p>Treasury notes are issued through competitive tender, where bids are invited from money market dealers and the lowest bidders are successful. They are considered risk-free because it is highly unlikely that the Australian government will fail on its debt obligations.</p> Signup and view all the answers

<p>Commercial paper is a promissory note issued by low-risk, non-financial companies, while asset-backed commercial paper is a promissory note issued by special purpose vehicles and secured by specified assets, mainly residential mortgages. They trade at yields around or above the Bank Bill Swap Rate, depending on the issuer's risk, with commercial paper having a higher yield and potentially affecting the creditworthiness of the issuing company.</p> Signup and view all the answers

<p>As a registered market participant, such as a financial institution, one would go online and submit a bid. The bid that pays the highest yield is successful, with the lowest bidders being awarded the treasury notes.</p> Signup and view all the answers

<p>Bill facilities allow borrowers to raise funds for longer periods than the bill term and manage their cash flow by estimating their funding needs for shorter periods. Interest payments are required at each rollover date, equal to the face value less the proceeds from the replacement bill or the face value of the previous bill.</p> Signup and view all the answers

<p>Bank acceptance bills are guaranteed by a bank, while commercial paper is not. Commercial paper has a higher yield and can affect the creditworthiness of the issuing company, making it a riskier investment compared to bank acceptance bills.</p> Signup and view all the answers

<p>$9,426,571.80</p> Signup and view all the answers

<p>$9,869,885</p> Signup and view all the answers

<p>Parcel 1: $4,993,888; Parcel 2: $4,963,515; Parcel 3: $4,933,050</p> Signup and view all the answers

<p>PV = FV / (1 + yt), where FV is the face value, y is the yield, and t is the time to maturity.</p> Signup and view all the answers

<p>$98.54</p> Signup and view all the answers

<p>P = FV / (1 + yt), where FV is the face value, y is the yield, and t is the time to maturity.</p> Signup and view all the answers

<p>$31,486</p> Signup and view all the answers

<p>A bill facility is an arrangement between a company and a bank, where the bank agrees to establish a series of bank accepted bills over a specified period.</p> Signup and view all the answers

<p>BABs serve as an alternative source of funds for borrowers to a bank loan, providing a way for borrowers to access short-term funds with the benefit of endorsement from an established bank, reducing credit risk for investors and offering a lower cost loan option.</p> Signup and view all the answers

<p>BABs differ from traditional bank loans as the accepting bank guarantees the bill's face value at maturity, allowing the bill to be traded in the money market, whereas traditional bank loans are not tradable; the accepting bank assumes the credit risk of the borrower, reducing the risk for investors.</p> Signup and view all the answers

<p>The acceptance fee is a payment made by the borrower to the accepting bank for guaranteeing the BAB, and it is typically added to the face value of the bill; the acceptance fee does not affect the yield on the BAB, which is determined by the market forces of supply and demand.</p> Signup and view all the answers

<p>NCDs facilitate short-term financing by providing a tradable certificate stating the amount to be repaid on the maturity date, enabling wholesale buyers to sell or trade the NCDs in the second market, enhancing liquidity and serving as a source of bank funds.</p> Signup and view all the answers

<p>The bank facilitates the trading of BABs and NCDs by guaranteeing the BABs and issuing NCDs, enabling the bank to earn fees and commissions from these transactions; these instruments also serve as a source of bank funds, providing an alternative to traditional deposits.</p> Signup and view all the answers

<p>BABs and NCDs contribute to the efficiency of the money market by providing a means for short-term financing, enabling borrowers to access funds and investors to earn returns; their liquidity is significant as it enables buyers to sell or trade these instruments, facilitating the flow of funds in the money market.</p> Signup and view all the answers

<p>To provide infrastructure and services necessary for secure transfer of funds between parties</p> Signup and view all the answers

<p>It allows for the efficient allocation of capital between surplus and deficit units</p> Signup and view all the answers

<p>Provide permanent capital</p> Signup and view all the answers

<p>To provide a standard unit of measurement for the value of goods and services</p> Signup and view all the answers

<p>Increase in debt financing</p> Signup and view all the answers

<p>To enable individuals and businesses to save for future use</p> Signup and view all the answers

<p>To enable easy conversion to cash without affecting market price</p> Signup and view all the answers

<p>To increase returns on investment</p> Signup and view all the answers

<p>It facilitates the exchange of goods and services</p> Signup and view all the answers

<p>To supply funds to deficit units</p> Signup and view all the answers

<p>To provide a permanent source of capital</p> Signup and view all the answers

<p>It facilitates the efficient allocation of capital between surplus and deficit units</p> Signup and view all the answers

<p>Increased risk of insolvency</p> Signup and view all the answers

<p>To provide a source of permanent capital</p> Signup and view all the answers

<p>To channel funds to deficit units through direct financing</p> Signup and view all the answers

<p>Through deposits to financial institutions, which then supply loans to deficit units</p> Signup and view all the answers

<p>They contribute to wealth creation through the ownership of financial assets</p> Signup and view all the answers

<p>To act as an intermediary between lenders and borrowers</p> Signup and view all the answers

<p>Residential property</p> Signup and view all the answers

<p>To act as intermediaries between lenders and borrowers</p> Signup and view all the answers

<p>Managing risk that arises in the financial system</p> Signup and view all the answers

<p>Low liquidity</p> Signup and view all the answers

<p>High liquidity</p> Signup and view all the answers

<p>Quarterly earnings reports</p> Signup and view all the answers

<p>They demand higher expected returns</p> Signup and view all the answers

<p>Risk premium difference</p> Signup and view all the answers

<p>Promotes liquidation</p> Signup and view all the answers

<p>They prefer stable returns over potentially higher but uncertain returns</p> Signup and view all the answers

<p>The added return required to compensate for risk</p> Signup and view all the answers

<p>It is usually higher</p> Signup and view all the answers

<p>To determine the risk premium for different rated securities</p> Signup and view all the answers

<p>Information asymmetry</p> Signup and view all the answers

<p>Price increases can escalate costs significantly.</p> Signup and view all the answers

<p>Market risk is concerned with economic fluctuations, default risk with repayment capability.</p> Signup and view all the answers

<p>Derivatives</p> Signup and view all the answers

<p>To manage and mitigate potential financial losses</p> Signup and view all the answers

<p>Reluctance of uninformed parties to enter contracts.</p> Signup and view all the answers

<p>Borrowers failing to repay loans on time</p> Signup and view all the answers

<p>All parties in the financial system</p> Signup and view all the answers

<p>They accept many small deposits and make fewer larger value loans</p> Signup and view all the answers

<p>It helps achieve economies of scale</p> Signup and view all the answers

<p>To increase efficiency and competitiveness</p> Signup and view all the answers

<p>By pooling funds through financial intermediaries</p> Signup and view all the answers

<p>They offer higher efficiency and security</p> Signup and view all the answers

<p>They improve access to financial services and decrease costs</p> Signup and view all the answers

<p>The bond will trade at a discount, i.e., less than its face value.</p> Signup and view all the answers

<p>The process involves an announcement of the bond series on offer, submission of electronic bids, and notification of successful bids based on the lowest yield or highest price.</p> Signup and view all the answers

<p>They are medium or long-term bonds with fixed or floating coupon rates, and their yields exceed those of Treasury bonds due to varying credit risks and liquidity.</p> Signup and view all the answers

<p>Non-Resident Bonds are issued by highly rated foreign institutions in the Australian market, whereas Financial Bonds are issued by major banks and other financial institutions.</p> Signup and view all the answers

<p>Treasury bonds generally have lower yields compared to Semi-Government Bonds due to their lower credit risk and higher liquidity.</p> Signup and view all the answers

<p>The credit spread represents the additional return required by investors to compensate for the credit risk of a bond issuer.</p> Signup and view all the answers

<p>Treasury Bonds are considered 'default free' because they are issued by the government, which is assumed to not default on coupon interest and face value payments. This characteristic makes them a benchmark for pricing other bonds, as they are considered to be risk-free.</p> Signup and view all the answers

<p>The credit risk premium is the additional yield that borrowers with lower credit ratings must pay to compensate for the higher risk of default. This premium is reflected in the yields of non-government and semi-government bonds, which trade at higher yields than Treasury Bonds.</p> Signup and view all the answers

<p>The primary purpose of the government issuing Treasury Bonds is to benefit the financial system, regardless of whether funding is required. This benefits the financial system by enhancing price discovery and providing a benchmark for pricing other bonds.</p> Signup and view all the answers

<p>Dealers act as market makers, providing liquidity to the market by buying and selling bonds. They operate according to the Australian Financial Markets Association protocols, quoting bid-offer yields on a semi-annual compound basis and trading with wholesale clients and each other.</p> Signup and view all the answers

<p>The mechanism for settling transactions in the Australian bond market is facilitated by Austraclear, which arranges settlement on a T+2 basis, meaning that settlement occurs two days after the transaction.</p> Signup and view all the answers

<p>The primary difference between Treasury Bonds and non-government bonds is the credit risk associated with the issuer. Treasury Bonds are considered 'default free' due to the government guarantee, while non-government bonds carry a higher credit risk, resulting in higher yields.</p> Signup and view all the answers

<p>The primary contribution of the bond market to the flow of funds is that it enables wholesale borrowers to raise large sums for long periods by being a defensive asset class for wholesale investors. This is achieved through the issuance of bonds, which provides a fixed income stream to investors.</p> Signup and view all the answers

<p>Treasury Bonds are issued by the government, whereas Non-Government Bonds are issued by state governments, companies, and foreign entities. Treasury Bonds are generally considered to be lower risk and have a higher credit rating than Non-Government Bonds.</p> Signup and view all the answers

<p>The coupon rate is dependent on market conditions and is fixed at the time of the bond's issuance. It determines the fixed interest payments made to investors.</p> Signup and view all the answers

<p>Credit rating agencies assess the creditworthiness of bond issuers and assign a rating based on their ability to meet their debt obligations. This rating affects the interest rate and attractiveness of the bond to investors.</p> Signup and view all the answers

<p>Changes in market yields affect the price of existing bonds, as investors can earn a higher return from newly issued bonds with higher yields, making existing bonds with lower yields less attractive.</p> Signup and view all the answers

<p>Treasury Bonds are issued by the federal government, whereas Semi-Government Bonds are issued by state governments. Treasury Bonds are generally considered to be lower risk and have a higher credit rating than Semi-Government Bonds.</p> Signup and view all the answers

<p>Non-financial corporate bonds are issued by companies and are a form of fixed income investment for investors. They typically offer a higher return than government bonds but carry a higher level of credit risk.</p> Signup and view all the answers

<p>Australian bonds generally have lower credit risk and higher yields than US Government bonds, due to differences in economic conditions and monetary policy.</p> Signup and view all the answers

<p>The advantages of FRAs are that they can be customised to meet specific needs of the parties involved, convenient to arrange, and pose low default risk. They meet client requirements as they are made to measure.</p> Signup and view all the answers

<p>The cash settlement amount is calculated using the equation: Settlement = (V agreed - V market) / (1 + (V market / 100)).</p> Signup and view all the answers

<p>The key terms specified in a FRA contract include the settlement date, term of the rate, amount to which the rate applies, whether it's a borrowing or lending rate, and the cash settlement equation.</p> Signup and view all the answers

<p>The FRA market is a primary, wholesale market conducted on an over-the-counter (OTC) basis, with major dealers being the Big 4 banks and some international banks.</p> Signup and view all the answers

<p>The main disadvantage of FRAs is that they do not have a secondary market.</p> Signup and view all the answers

<p>FRAs help in calculating the expected forward rate, and the benefit of this calculation is that it allows for the determination of future interest rates.</p> Signup and view all the answers

<p>The approximate method is based on the premise that multiperiod spot rates are approximately the average of single period spot rates, whereas the exact method takes into account the compounding effect of interest rates.</p> Signup and view all the answers

<p>An FRA is a forward rate agreement that allows companies to lock in a fixed interest rate for a specific period, thereby hedging against interest rate risk.</p> Signup and view all the answers

<p>The cash settlement amount is calculated as the difference between the fixed rate agreed upon and the prevailing market rate at the time of settlement, multiplied by the notional amount. This calculation has significant implications for the company's risk management strategy.</p> Signup and view all the answers

<p>The advantages of FRAs include hedging against interest rate risk, reducing uncertainty, and achieving greater financial planning certainty. However, FRAs can also impose significant costs, limit flexibility, and create new risks if not managed properly.</p> Signup and view all the answers

<p>Key terms of an FRA contract include the fixed rate, notional amount, settlement date, and tenor. These terms significantly impact the effectiveness of the FRA in managing interest rate risk.</p> Signup and view all the answers

<p>FRAs help to reduce systemic risk by allowing companies to manage interest rate risk, which in turn contributes to greater financial stability and facilitates economic growth.</p> Signup and view all the answers

<p>Changes in market conditions can significantly impact the valuation of FRAs, and companies must respond by adjusting their risk management strategies to maintain an effective hedge.</p> Signup and view all the answers

<p>Market structures and regulations can significantly impact the FRA market, affecting liquidity, pricing, and availability, with implications for companies and financial institutions.</p> Signup and view all the answers

<p>A Forward Rate Agreement (FRA) achieves a forward interest rate through the payment (+ or -) of a cash settlement calculated as the difference between a future spot rate and the agreed forward rate. The underlying principle is that when spot rates are higher than expected, the borrower is compensated by being paid the cash settlement, and when spot rates are lower than expected, the lender is compensated by being paid the cash settlement.</p> Signup and view all the answers

<p>The advantages of using a FRA include hedging the risk of higher or lower than expected interest rates, while the disadvantages include eliminating the chance of benefiting from a lower or higher than expected rate. For a borrower, a FRA hedges the risk of higher than expected rates but eliminates the chance of benefiting from a lower than expected rate. For a lender, a FRA hedges the risk of lower than expected rates but eliminates the chance of benefiting from a higher than expected rate.</p> Signup and view all the answers

<p>When spot rates increase, the borrower receives a cash settlement, and when spot rates decrease, the lender receives a cash settlement. This means that if rates increase, the borrower's expected interest payments also increase, while if rates decrease, the lender's expected return decreases.</p> Signup and view all the answers

<p>FRAs facilitate the management of interest rate risk by allowing entities to lock in a forward interest rate, thereby reducing uncertainty about future interest rates. Entities such as banks, businesses, and governments that have interest rate exposures, such as borrowing or lending at a floating rate, typically use FRAs to hedge their risk exposure.</p> Signup and view all the answers

<p>The key terms of a FRA contract include the forward rate, nominal principal, and specified future date. The FRA contract defines the obligations of the borrower and lender, including the payment of a cash settlement based on the difference between the forward rate and the future spot rate.</p> Signup and view all the answers

<p>The market for derivatives, including FRAs, facilitates the management of interest rate risk by allowing hedgers to manage their risk exposure and speculators to profit from accepting risk. Hedgers, such as banks and businesses, use FRAs to manage their interest rate risk, while speculators, such as fund managers, seek to profit from accepting risk.</p> Signup and view all the answers

<p>The expected return on long-term bonds is equal to the average return on short-term bonds.</p> Signup and view all the answers

<p>Investors are compensated for potential loss of liquidity when holding long-term bonds.</p> Signup and view all the answers

<p>Market expects spot rates to decrease in the future.</p> Signup and view all the answers

<p>Investors are indifferent between securities with different terms.</p> Signup and view all the answers

<p>Market expects spot rates to increase in the future.</p> Signup and view all the answers

<p>It is a premium for taking on liquidity risk.</p> Signup and view all the answers

<p>Long-term securities will have a higher yield to compensate for higher liquidity risk</p> Signup and view all the answers

<p>Investors are biased by price risk in the choice between investment strategies.</p> Signup and view all the answers

<p>Downside risk - where rates turn out higher than expected</p> Signup and view all the answers

<p>To reduce the risk of interest rate fluctuations</p> Signup and view all the answers

<p>Upward sloping</p> Signup and view all the answers

<p>To reduce the risk of interest rate fluctuations</p> Signup and view all the answers

<p>The yield curve will be upward sloping due to the expectation of higher interest rates in the future</p> Signup and view all the answers

<p>Downside risk - where interest rates turn out higher than expected</p> Signup and view all the answers

<p>To transform the spot interest rate into the forward rate</p> Signup and view all the answers

<p>Positive sloping</p> Signup and view all the answers

<p>Risk of interest rates falling below expected levels</p> Signup and view all the answers

<p>To manage risk exposure by transferring risk</p> Signup and view all the answers

<p>Interest rate risk</p> Signup and view all the answers

<p>Customizability</p> Signup and view all the answers

<p>To establish a cash settlement</p> Signup and view all the answers

<p>Economic growth is expected</p> Signup and view all the answers

<p>Aligns the yield with risk-free securities</p> Signup and view all the answers

<p>Inflation rate expectations</p> Signup and view all the answers

<p>Decreased risk associated with government securities</p> Signup and view all the answers

<p>It increases short-term interest rates</p> Signup and view all the answers

<p>To provide rates for risk-free securities</p> Signup and view all the answers

<p>Inverted</p> Signup and view all the answers

<p>An agreement between two parties to exchange an asset at a future date at a determined price</p> Signup and view all the answers

<p>The market’s expected future rate movements without any risk premium</p> Signup and view all the answers

<p>To enable investors and traders to hedge against future interest rate risk</p> Signup and view all the answers

<p>Providing a benchmark for comparing investments</p> Signup and view all the answers

<p>By adding a premium for the risk of liquidity to longer-term bonds</p> Signup and view all the answers

<p>The agreed-upon forward interest rate remains unchanged</p> Signup and view all the answers

<p>They pay no interest until maturity</p> Signup and view all the answers

<p>Expectations of economic slowdown</p> Signup and view all the answers

<p>Monetary or economic uncertainty causing similar rates across maturities</p> Signup and view all the answers

<p>From the yields on traded securities with minimal credit and liquidity risks</p> Signup and view all the answers

<p>To simplify calculation by avoiding multiple cash flows</p> Signup and view all the answers

<p>Slopes downward due to lower short-term rates</p> Signup and view all the answers

<p>To isolate the principal payment for accurate yield calculation</p> Signup and view all the answers