Fins1612 Notes
FINS1612 CAPITAL MARKETS & INSTITUTIONS SEMESTER 1 2009 COURSE NOTES
Version 1.0.1 (15th June 2009) kaheiyeh.web.officelive.com
Contents
Contents
Page 3: Introduction to the Financial System Page 7: Commercial Banks Page 12: The Share Market and the Corporation Page 15: Corporations Issuing Equity into the Share Market Page 19: Investors in the Share Market Page 24: Short-term Debt Page 28: Medium- to Long-term Debt Page 32: Interest Rate Determination and Forecasting Page 37: The Foreign Exchange Market Page 40: Factors that Influence the Exchange Rate Page 42: Futures Contracts and Forward Rate Agreements Page 47: Options
Capital Markets & Institutions – Course Notes – Semester 1 2009
2
Introduction to the Financial System
Introduction to the Financial System
Medium of Exchange The world’s current medium of exchange is money. Money solves the divisibility problem divisibility (How do you sell you half a cow? Etc.) facilitates saving (You can keep money indefinitely, but what Etc.), about foods?) and represents wealth. The Five Sector Economy The economy can be divided up into five different sectors.
Household Sector
Firms Sector
Financial Sector
Government Sector
Overseas Sector
The household and firms sectors can either be in surplus or deficit in terms of money. The ld financial sector’s purpose is to redistribute that money by taking surplus sector’s savings and lending that to the deficit sector. The financial sector makes money in this way by charging a sum for lending and also giving a small bonus to those that save. The financial sector is not in the middle of the diagram without reason. It is considered the lifeblood of the economy as it redistributes money to keep the flow of money goi The flow of going. money between sectors is what moves the economy. The Financial System The financial system’s function is to provide: • • • Investment products – such as shares and bank deposits. Risk management products – such
Version 1.0.1 (15th June 2009) kaheiyeh.web.officelive.com
Contents
Contents
Page 3: Introduction to the Financial System Page 7: Commercial Banks Page 12: The Share Market and the Corporation Page 15: Corporations Issuing Equity into the Share Market Page 19: Investors in the Share Market Page 24: Short-term Debt Page 28: Medium- to Long-term Debt Page 32: Interest Rate Determination and Forecasting Page 37: The Foreign Exchange Market Page 40: Factors that Influence the Exchange Rate Page 42: Futures Contracts and Forward Rate Agreements Page 47: Options
Capital Markets & Institutions – Course Notes – Semester 1 2009
2
Introduction to the Financial System
Introduction to the Financial System
Medium of Exchange The world’s current medium of exchange is money. Money solves the divisibility problem divisibility (How do you sell you half a cow? Etc.) facilitates saving (You can keep money indefinitely, but what Etc.), about foods?) and represents wealth. The Five Sector Economy The economy can be divided up into five different sectors.
Household Sector
Firms Sector
Financial Sector
Government Sector
Overseas Sector
The household and firms sectors can either be in surplus or deficit in terms of money. The ld financial sector’s purpose is to redistribute that money by taking surplus sector’s savings and lending that to the deficit sector. The financial sector makes money in this way by charging a sum for lending and also giving a small bonus to those that save. The financial sector is not in the middle of the diagram without reason. It is considered the lifeblood of the economy as it redistributes money to keep the flow of money goi The flow of going. money between sectors is what moves the economy. The Financial System The financial system’s function is to provide: • • • Investment products – such as shares and bank deposits. Risk management products – such