Week 1 Slides PDF - FINS2618 Capital Markets & Institutions T3 2024

Summary

These slides cover a university course on financial markets and institutions in the third trimester of 2024. Information like financial systems, institutions, instruments and different types of markets are covered.

Full Transcript

FINS2618: Capital Markets and Institutions T3 2024 Dr Natalie OH Roadmap for TODAY’s lecture 1. Course Requirements & Expectations 2. Introduction to Financial System (Chapter 1) 3. Banking (Chapter 2) – continuing in week 2 FINS2618 Course Expectations...

FINS2618: Capital Markets and Institutions T3 2024 Dr Natalie OH Roadmap for TODAY’s lecture 1. Course Requirements & Expectations 2. Introduction to Financial System (Chapter 1) 3. Banking (Chapter 2) – continuing in week 2 FINS2618 Course Expectations T3 2024 Course outline Moodle site FINS2618 Time Planning  What is the expected number of hours that you dedicate to 6 UOC?  15 hours per week (150 hours for 10 weeks)  2 hours lecture  1.5 hours tutorial Expectations  Pre-assigned readings (1-2 hours)  Pre-assigned tutorial question (attempt) ( 1 hour)  McGrawHill SMART BOOK Questions (1-2 hour) Roughly 8 hours per week  The rest of 7 hours per week ?  iLab, group assignment, exam preparation SLIDO Question SLIDO Questions Introduction to Finance Viney Chapter 1 Explain Explain the functions of a financial system Learning Objectives Categorise Categorise the main types of financial institutions Learning Objectives – Chapter chapter 1 1 Describe Describe the main classes of financial instruments issued in a financial system Distinguish between various types of financial markets Distinguish according to function Financial LO1: The function System of financial System The financial system is part of a country’s economic system A financial system comprises a range of financial institutions, financial instruments and financial markets which interact to facilitate the flow of funds between deficit and surplus unit, under the supervision of the central bank and the prudential supervisor Financial institutions permit the flow of funds between borrowers (deficit unit) and lenders (surplus unit) by facilitating financial transactions Finance and Financial markets and flow of funds relationship the real economy What is Finance? Why is it so important? Finance is essentially the study of how we allocate capital in an economy toward its most productive use. 1. Financial LO2: Financial Institutions Institutions Financial institutions are classified into five categories based on the differences between the institutions’ sources and uses of funds 1.Depository financial institutions 2.Investment banks and merchant banks 3.Contractual savings institutions 4.Finance companies 5.Unit trust 1a:Depository financial institutions Commercial banks obtains a large proportion of their funds from deposits lodged by savers. A principal business of these institutions is the provision of loans to borrowers in the household and business sectors E.g. 1b: Investment banks  Major function is to provide off-balance sheet advisory services to support their corporate and government clients  Off balance sheet business includes advising clients on mergers and acquisitions, portfolio restructuring, underwriting new debt and equity issues (IPO/SEO) and risk management  These institutions may provide some loans to clients but are more likely to advise and assist a client to raise funds directly in the capital markets 1c: Contractual savings institutions Financial institutions such as life insurance offices, general insurers and superannuation funds Their liabilities are mainly contracts which specify that, in return for periodic payments to the institution, the institution will make specified payouts to the holder of the contract if and when the event specified in the contract occurs. The periodic cash receipts received by these institution provide them with a large pool of funds that they invest. 1d: Finance companies These institutions raise funds by issuing financial securities such as commercial paper, medium term notes and bonds in the money markets and the capital markets They use those funds to make loans and provide lease finance to their customers in the household sector and the business sector 1e: Unit trusts  A unit trust is formed under a trust deed and is controlled and managed by a trustee or responsible entity  Unit trusts attract funds by inviting the public to purchase units in a trust.  The funds obtained from the sale of units are pooled and then invested by funds managers in asset classes specified in the trust deed.  There is a wide range of unit trusts, including equity trusts, property trusts, fixed interest trusts and mortgage trust. Financial Institutions 2. Financial Instruments/Assets Assets can be divided into: 1. Real assets-Assets that can be put to productive use to generate a return 2. Financial assets-Assets that represent a claim to a series of cash flows against an economic unit. There is an entitlement to future cashflows 2. Difference between Financial Asset vs Financial Security LO3: Financial A financial Assets asset is defined as Know the entitlement difference to future financial asset cashflows vs financial security A financial security is a financial asset that can be traded in secondary market. 2. Attributes of financial assets Return-Total financial compensation received from an investment expressed as a percentage of the amount invested Risk -Probability that actual return on an investment will vary from the expected return Liquidity-Ability to sell an asset within reasonable time at current market prices and for reasonable transaction costs Time pattern of Cash flows-When the expected cash flows from a financial asset are to be received by the investor or lender. Not maturity! 2. Different Types of Financial Instruments Equity Ownership interest in an asset Residual claim on earnings and assets Dividend liquidation Debt Contractual claim to: periodic interest payments repayment of principal. Ranks ahead of equity Derivatives A synthetic security providing specific future rights that derives its price from another asset Used mainly to manage price risk exposure and to speculate Hybrid Features both equity & debt characteristics What is a market? Why do we need it? SLIDO Questions 3. Markets Matching principle Primary vs secondary market transactions LO4: Financial markets Direct vs intermediated finance Money markets vs Capital markets Wholesale vs Retail Matching Principle Short-term assets should be funded with short-term (money market) liabilities; Matching e.g. seasonal inventory needs funded by overdraft. principle Longer term assets should be funded with equity or longer term (capital market) liabilities; e.g. equipment funded by bonds lack of adherence to this principle accentuated effects of frozen money markets with the ‘sub-prime’ market collapse. Primary vs Secondary market transactions Primary Market Secondary Market Direct Financing Intermediated finance Intermediated financial flow markets A financing arrangement involving two separate contractual agreements whereby the saver provides funds to an intermediary and the intermediary provides funding to the ultimate user of the funds (cont.) Direct financial flow transactions Wholesale between institutional investors and borrowers markets Wholesale vs Involves larger transactions retail markets Transactions conducted primarily with financial intermediaries by Retail the household and small- to markets medium-sized business sectors Involves smaller transactions Money Wholesale markets Money markets in which Short-term vs securities are issued Capital markets Wholesale markets Capital in which Long-term markets securities are issued SLIDO Quiz

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