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CH1 FINANCIAL SYSTEM - Money: medium of exchange solves divisibility problem. - Financial system provides investment products (shares & deposits), risk management products (insurance), alternative funding sources (loans). Transfer funds from surplus to deficit economic unit by new financial assets in primary market & trading of existing financial assets in secondary market. - Portfolio structuring is buying/selling assets/liabilities to meet savings, investments and funding needs. - Financial institutions: - Depository financial institutions (commercial banks - deposits & loans) - Investment banks (off-balance sheet, advice on merger, acquisition, portfolio restructure, risk management) - Contractual savings institutions (insurance & super) - Finance companies (borrow from market at low rate and lend out at higher) - Unit trusts (mutual funds - public buys unit of trust & money is invested specified by trust deed) - Financial instrument is broader term for financial assets and other assets where there is no secondary market to trade them. Financial assets provide future CF and if they can be traded in secondary market they are financial securities. Asset portfolio - return of yield, risk, liquidity, time period of CF. - Financial instruments (non-negotiable means ownership cannot legally be transferred) - Equity (ownership of shares, preference shares, ordinary shares/common stock) - Debt (matching principle, short term is money market instrument, long term is capital market instrument, secured debt will have asset as collateral) (banks- debentures, promissory notes, unsecured notes, govt- treasury notes, ADI- certificate of deposit) - Derivative (off-balance sheet,
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