Professional Documents
Culture Documents
Introduction
Role of Money
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Buyers of financial instruments are lenders that have excess funds today
o Invest and transfer purchasing power to future
Sellers of financial instruments are those deficit units short of funds
o Expect surplus amount in future to repay current borrowing
Return or yield
Risk (measured by the variability of expected returns)
Liquidity (ease at which it can be sold)
Time-Pattern of Cash Flows
Financial Institutions
1. Depository Financial Institutions
5. Unit Trusts
Examples: equity trusts, property trusts, fixed-interest trusts and mortgage trusts
Financial Instruments
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1. Equity
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Hybrid security
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Preference shares
2. Debt
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Secured debt
Non-negotiable instruments:
Contracts that manage exposure to identified risk for both equity and
debt
Related to both commodities (e.g. gold and oil) and financial
instruments (e.g. interest-rate sensitive debt currencies, equity)
Do not provide actual funds for issuer funds need to be raised in either
equity or debt markets
Examples:
3. Option Contract:
4. Swap Contract:
Examples:
Financial Markets
Matching Principle: short-term assets should be funded with short-term liabilities,
longer-term assets funded with equity and long-term liabilities
1. Primary Market Transaction
Example:
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Market Terminology
Disadvantages:
2. Intermediated Finance
Advantages:
Functions of Intermediaries:
1. Asset Transformation
Reasons of capability:
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Reasons of capability:
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4. Liquidity Transformation
5. Economies of Scale
Capable due to size and volume of business transacted
o Resources to develop cost-efficient distribution systems
Cost advantages include:
o Effective knowledge management
o Accumulation of financial, economic, legal expertise
o Reduction in search costs for savers and borrowers
Example: standardised documentation used for deposit and lending products
Types of Markets
1. Wholesale Markets
2. Retail Markets
3. Money Markets
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5. Derivatives Market
Provides risk management products available to borrowers to manage
risks in capital market transactions
Risks include interest rate risk, foreign exchange risk and price risk
Business sector generally is deficit sector and household sector is a surplus
sector (net saver of funds)