Econ1102
1. The main components of a financial system include financial institutions, instruments and markets. The above statement is true in which efficiency is required for ongoing economic growth where there is an increase in the flow of savings in which flow of savings is more likely to be directed to the most efficient users of those funds. 2. The role of information in financial system allows users to decide which types of investments they should invest it. These investments can differ on four main attributes, the yield, risk liquidity and time-pattern of cash flows. With knowledge of these attributes, the investors can then decide which investments to invest in. 3. An investor should consider time pattern of cash flows
4. Depository financial institutions – accept deposits and provide loans to customers e.g commercial banks
Investment banks and merchant banks – focus on provision of advisory service to corporate and government clients.
Contractual savings institutions – offers financial contracts such as insurance and superannuation.
Finance companies and general financiers – borrow funds directly from markets to provide loans and lease finance to customers.
Unit trusts – investors buy units issued by the trust 5. .
6. Equity is the ownership interest in an asset or the ownership of shares issued by a corporation. Debt is a loan that must be repaid. It entitles the holder to a claim to the income stream produced by the borrower and to the assets of the borrower if the borrower defaults on loan repayments. Derivatives are synthetic securities that derives its price from a physical market commodity or security: mainly used to manage risk exposures. 7. The matching principle states that short term assets should be funded with short term liabilities while long term assets should be funded with long term liabilities. During the GFC, long term assets were funded by short term liabilities and when the finance ran out, there was a
4. Depository financial institutions – accept deposits and provide loans to customers e.g commercial banks
Investment banks and merchant banks – focus on provision of advisory service to corporate and government clients.
Contractual savings institutions – offers financial contracts such as insurance and superannuation.
Finance companies and general financiers – borrow funds directly from markets to provide loans and lease finance to customers.
Unit trusts – investors buy units issued by the trust 5. .
6. Equity is the ownership interest in an asset or the ownership of shares issued by a corporation. Debt is a loan that must be repaid. It entitles the holder to a claim to the income stream produced by the borrower and to the assets of the borrower if the borrower defaults on loan repayments. Derivatives are synthetic securities that derives its price from a physical market commodity or security: mainly used to manage risk exposures. 7. The matching principle states that short term assets should be funded with short term liabilities while long term assets should be funded with long term liabilities. During the GFC, long term assets were funded by short term liabilities and when the finance ran out, there was a