Modern Financial System
MODERN FINANCIAL SYSTEM
Lecture objectives * Understand the functions of a modern financial system ‘ * Comprises the interplay between interconnected financial institutions, markets and instruments. * Adjustment of current and future time periods Effective flow of funds through enabling modification of consumption between time periods “transfer today’s income for future consumption.” * Provides financial/economic information to participants generally reflects the state of the broader economy, integral to monetary policy (managing inflation). Rapidly absorbs and reflects new information into the price of financial instruments. * Increased flow of savings (if financial instruments have the ‘4 attributes’), important for economic growth (savings are available for investment). Ensure that savings are available/directed to the most efficient users of those funds. * Practical examples; * Integral to the allocation of scarce resources in a modern economy * Household funds into corporate sector = investment funds for firms. * Households/firms share risks * Intertemporal smoothing of consumption by households and expenditures by firms.
* Be able to classify the main types of financial institutions * Classified according to their sources and uses of funds. * Depository * Investment/merchant banks * Contractual savings * Finance companies * Unit trusts * Be able to define the main classes of financial instruments * A financial instrument establishes an entitlement to future cash flows * Expectation of the saver is to earn a positive rate of return * Four main attributes * Return/yield returns in the form of dividends paid and capital gains (selling) * Risk possibility that an actual outcome will vary from the expected outcome; uncertainty. (variability of expected returns, corporation failing) * Liquidity the ease at which can be sold in the financial
Lecture objectives * Understand the functions of a modern financial system ‘ * Comprises the interplay between interconnected financial institutions, markets and instruments. * Adjustment of current and future time periods Effective flow of funds through enabling modification of consumption between time periods “transfer today’s income for future consumption.” * Provides financial/economic information to participants generally reflects the state of the broader economy, integral to monetary policy (managing inflation). Rapidly absorbs and reflects new information into the price of financial instruments. * Increased flow of savings (if financial instruments have the ‘4 attributes’), important for economic growth (savings are available for investment). Ensure that savings are available/directed to the most efficient users of those funds. * Practical examples; * Integral to the allocation of scarce resources in a modern economy * Household funds into corporate sector = investment funds for firms. * Households/firms share risks * Intertemporal smoothing of consumption by households and expenditures by firms.
* Be able to classify the main types of financial institutions * Classified according to their sources and uses of funds. * Depository * Investment/merchant banks * Contractual savings * Finance companies * Unit trusts * Be able to define the main classes of financial instruments * A financial instrument establishes an entitlement to future cash flows * Expectation of the saver is to earn a positive rate of return * Four main attributes * Return/yield returns in the form of dividends paid and capital gains (selling) * Risk possibility that an actual outcome will vary from the expected outcome; uncertainty. (variability of expected returns, corporation failing) * Liquidity the ease at which can be sold in the financial